$900,000,000 (Approximate) Federal Home Loan Mortgage Corporation Multifamily Aggregation Risk Transfer Certificates, Series 2017–KT01 FMPRE 2017–KT01 Multifamily Aggregation Risk Transfer Trust We, the Federal Home Loan Mortgage Corporation (“Freddie Mac”), intend to establish a trust to act as an issuing entity (the “Trust”) and transfer a pool of mortgage loans (collectively, the “Mortgage Loans”) secured by multifamily properties (collectively, the “Mortgaged Properties”) to the Trust on the Closing Date and from time to time after the Closing Date primarily for purposes of securitizing such Mortgage Loans in one of our securitization programs. The Trust will purchase and sell such Mortgage Loans from us and issue four classes of certificates designated as the “Class A Certificates”, the “Class B Certificates”, the “Class C Certificates” and the “Class D Certificates” (collectively, the “Certificates”), as set forth in the table below, in accordance with the terms of the Mortgage Loan Purchase, Trust and Servicing Agreement, dated as of February 1, 2017 (the “Trust and Servicing Agreement”), among Freddie Mac, as the mortgage loan seller (in such capacity, the “Mortgage Loan Seller”), the guarantor of the Class A Certificates (in such capacity, the “Guarantor”), the master servicer (in such capacity, the “Master Servicer”), the special servicer (in such capacity, the “Special Servicer”), the trustee (in such capacity, the “Trustee”) and the custodian (in such capacity, the “Custodian”), and U.S. Bank National Association, as the certificate administrator (the “Certificate Administrator”). The Class A Certificates are also referred in this offering circular as the “Offered Certificates”. Investing in the Offered Certificates involves risks. See “Risk Factors” beginning on page 30 of this offering circular. Class Designation: Original Class Principal Balance Approximate Initial Credit Support Interest Rate Assumed Weighted Average Life (years) (2) Assumed Principal Window (payments) (2) Assumed Final Certificate Maturity Date (2) Offered Certificates (1) Class A $ 900,000,000 10.000% One-month LIBOR plus 0.3200% (3) 3.02 33-36 February 25, 2020 Non-offered Certificates (4) Class B $ 50,000,000 5.000% 4.5660% (5) 3.03 36-36 February 25, 2020 Class C $ 30,000,000 2.000% 6.2220% (5) 3.03 36-36 February 25, 2020 Class D $ 20,000,000 0.000% N/A (6) 3.03 36-36 February 25, 2020 Footnotes appear on page 7. The Offered Certificates are the only securities offered by this offering circular. The Certificates will represent beneficial ownership interests in the assets of the Trust, which will primarily consist of the Mortgage Loans acquired from us. The assets of the Trust are the sole source of payments on the Certificates, except that the Offered Certificates are guaranteed by Freddie Mac as described in this offering circular. On each Payment Date after the end of the Revolving Period, the Class A Certificates will be entitled to receive a distribution of 75% of Available Principal Collections, and the remaining portion of Available Principal Collections will be deposited into a reserve account and will not be available for distribution on the Certificates until the Final Remaining Term Payment Date, except in certain limited circumstances described in this offering circular. Credit support will be provided by the Class D Certificates, the Class C Certificates and the Class B Certificates to the Class A Certificates, each to the extent of their respective Class Principal Balances (or in the case of the Class D Certificates, their Class Principal Balance less $1,000), as described in this offering circular. It is a condition to the issuance of the Offered Certificates that they be guaranteed by Freddie Mac as described in this offering circular. Freddie Mac guarantees the timely payment of interest on and the ultimate payment of principal of the Offered Certificates and the reimbursement of Realized Losses allocated to the Offered Certificates. Freddie Mac will not guarantee any Class of Certificates other than the Offered Certificates. The Offered Certificates are not guaranteed by the United States of America (“United States”) and do not constitute debts or obligations of the United States or any agency or instrumentality of the United States other than Freddie Mac. Income on the Offered Certificates has no exemption under federal law from federal, state or local taxation. Because of applicable securities law exemptions, we have not registered the Offered Certificates with any federal or state securities commission. No securities commission has reviewed this offering circular. The Offered Certificates are being placed by Barclays Capital Inc. (“Barclays”), Wells Fargo Securities, LLC (“Wells Fargo Securities”), Academy Securities, Inc. (“Academy”) and J.P. Morgan Securities LLC (“JPMS” and together with Barclays, Wells Fargo Securities and Academy, the “Placement Agents”). Barclays and Wells Fargo Securities will act as co-lead managers and joint bookrunners. Academy and JPMS will act as co-managers. Each Placement Agent has agreed to use commercially reasonable efforts to solicit offers to purchase the Offered Certificates. Each Placement Agent may also purchase Offered Certificates as principal. Any Offered Certificates so purchased by a Placement Agent will be resold in a manner similar to those Offered Certificates offered through the Placement Agents as agents. We reserve the right to withdraw, cancel or modify the offer made by this offering circular without notice, and we may reject any offer to purchase the Offered Certificates, in whole or in part. The Placement Agents will offer the Offered Certificates to prospective investors from time to time in negotiated transactions or otherwise at varying prices determined at the time of sale. It is expected that delivery of the Offered Certificates will be made in book-entry form on or about February 16, 2017 (the “Closing Date”). The Trust will be relying on an exclusion from the definition of “investment company” under the Investment Company Act of 1940, as amended (the “Investment Company Act”), contained in Section 3(c)(5) of the Investment Company Act, although there may be additional exclusions or exemptions available to the Trust. The Trust is being structured so as not to constitute a “covered fund” for purposes of the Volcker Rule under the Dodd-Frank Act. Barclays Wells Fargo Securities Co-Lead Manager and Joint Bookrunner Co-Lead Manager and Joint Bookrunner Academy Securities J.P. Morgan Co-Manager Co-Manager Offering Circular Dated January 31, 2017.
Transcript
$900,000,000 (Approximate)
Federal Home Loan Mortgage Corporation Multifamily Aggregation Risk Transfer Certificates,
Series 2017–KT01
FMPRE 2017–KT01 Multifamily Aggregation Risk Transfer Trust We, the Federal Home Loan Mortgage Corporation (“Freddie Mac”), intend to establish a trust to act as an issuing entity (the “Trust”) and transfer
a pool of mortgage loans (collectively, the “Mortgage Loans”) secured by multifamily properties (collectively, the “Mortgaged Properties”) to the Trust on the Closing Date and from time to time after the Closing Date primarily for purposes of securitizing such Mortgage Loans in one of our securitization programs. The Trust will purchase and sell such Mortgage Loans from us and issue four classes of certificates designated as the “Class A Certificates”, the “Class B Certificates”, the “Class C Certificates” and the “Class D Certificates” (collectively, the “Certificates”), as set forth in the table below, in accordance with the terms of the Mortgage Loan Purchase, Trust and Servicing Agreement, dated as of February 1, 2017 (the “Trust and Servicing Agreement”), among Freddie Mac, as the mortgage loan seller (in such capacity, the “Mortgage Loan Seller”), the guarantor of the Class A Certificates (in such capacity, the “Guarantor”), the master servicer (in such capacity, the “Master Servicer”), the special servicer (in such capacity, the “Special Servicer”), the trustee (in such capacity, the “Trustee”) and the custodian (in such capacity, the “Custodian”), and U.S. Bank National Association, as the certificate administrator (the “Certificate Administrator”). The Class A Certificates are also referred in this offering circular as the “Offered Certificates”.
Investing in the Offered Certificates involves risks. See “Risk Factors” beginning on page 30 of this offering circular.
Class Designation: Original Class
Principal Balance
Approximate Initial Credit
Support Interest Rate
Assumed Weighted
Average Life (years)(2)
Assumed Principal Window
(payments)(2)
Assumed Final Certificate Maturity
Date(2) Offered Certificates(1)
Class A $ 900,000,000 10.000% One-month LIBOR plus 0.3200%(3) 3.02 33-36 February 25, 2020 Non-offered Certificates(4)
Class B $ 50,000,000 5.000% 4.5660%(5) 3.03 36-36 February 25, 2020 Class C $ 30,000,000 2.000% 6.2220%(5) 3.03 36-36 February 25, 2020 Class D $ 20,000,000 0.000% N/A(6) 3.03 36-36 February 25, 2020
Footnotes appear on page 7.
The Offered Certificates are the only securities offered by this offering circular. The Certificates will represent beneficial ownership interests in the assets of the Trust, which will primarily consist of the Mortgage Loans acquired from us. The assets of the Trust are the sole source of payments on the Certificates, except that the Offered Certificates are guaranteed by Freddie Mac as described in this offering circular. On each Payment Date after the end of the Revolving Period, the Class A Certificates will be entitled to receive a distribution of 75% of Available Principal Collections, and the remaining portion of Available Principal Collections will be deposited into a reserve account and will not be available for distribution on the Certificates until the Final Remaining Term Payment Date, except in certain limited circumstances described in this offering circular. Credit support will be provided by the Class D Certificates, the Class C Certificates and the Class B Certificates to the Class A Certificates, each to the extent of their respective Class Principal Balances (or in the case of the Class D Certificates, their Class Principal Balance less $1,000), as described in this offering circular.
It is a condition to the issuance of the Offered Certificates that they be guaranteed by Freddie Mac as described in this offering circular. Freddie Mac guarantees the timely payment of interest on and the ultimate payment of principal of the Offered Certificates and the reimbursement of Realized Losses allocated to the Offered Certificates. Freddie Mac will not guarantee any Class of Certificates other than the Offered Certificates. The Offered Certificates are not guaranteed by the United States of America (“United States”) and do not constitute debts or obligations of the United States or any agency or instrumentality of the United States other than Freddie Mac. Income on the Offered Certificates has no exemption under federal law from federal, state or local taxation. Because of applicable securities law exemptions, we have not registered the Offered Certificates with any federal or state securities commission. No securities commission has reviewed this offering circular.
The Offered Certificates are being placed by Barclays Capital Inc. (“Barclays”), Wells Fargo Securities, LLC (“Wells Fargo Securities”), Academy Securities, Inc. (“Academy”) and J.P. Morgan Securities LLC (“JPMS” and together with Barclays, Wells Fargo Securities and Academy, the “Placement Agents”). Barclays and Wells Fargo Securities will act as co-lead managers and joint bookrunners. Academy and JPMS will act as co-managers. Each Placement Agent has agreed to use commercially reasonable efforts to solicit offers to purchase the Offered Certificates. Each Placement Agent may also purchase Offered Certificates as principal. Any Offered Certificates so purchased by a Placement Agent will be resold in a manner similar to those Offered Certificates offered through the Placement Agents as agents. We reserve the right to withdraw, cancel or modify the offer made by this offering circular without notice, and we may reject any offer to purchase the Offered Certificates, in whole or in part. The Placement Agents will offer the Offered Certificates to prospective investors from time to time in negotiated transactions or otherwise at varying prices determined at the time of sale. It is expected that delivery of the Offered Certificates will be made in book-entry form on or about February 16, 2017 (the “Closing Date”).
The Trust will be relying on an exclusion from the definition of “investment company” under the Investment Company Act of 1940, as amended (the “Investment Company Act”), contained in Section 3(c)(5) of the Investment Company Act, although there may be additional exclusions or exemptions available to the Trust. The Trust is being structured so as not to constitute a “covered fund” for purposes of the Volcker Rule under the Dodd-Frank Act.
Barclays Wells Fargo SecuritiesCo-Lead Manager and Joint Bookrunner Co-Lead Manager and Joint Bookrunner
Academy Securities J.P. Morgan Co-Manager Co-Manager
Offering Circular Dated January 31, 2017.
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TABLE OF CONTENTS Page Page
TABLE OF CONTENTS ......................................................... 2 IMPORTANT NOTICE REGARDING THE CERTIFICATES ........ 3 NOTICE TO FLORIDA RESIDENTS ....................................... 3 NOTICE TO CANADA RESIDENTS ....................................... 3 NOTICE TO RESIDENTS OF THE UNITED KINGDOM ............. 4 EUROPEAN ECONOMIC AREA ............................................. 4 IMPORTANT NOTICE ABOUT INFORMATION
CONTAINED IN THIS OFFERING CIRCULAR ................. 5 FORWARD-LOOKING STATEMENTS .................................... 5 SUMMARY .......................................................................... 7 RISK FACTORS ................................................................. 30 DESCRIPTION OF THE TRUST ............................................ 74 FREDDIE MAC .................................................................. 75 MORTGAGE LOAN PURCHASE AND SERVICING ................ 77
DESCRIPTION OF THE MORTGAGE LOANS ........................ 87 DESCRIPTION OF THE CERTIFICATES ................................ 97 YIELD AND MATURITY CONSIDERATIONS ..................... 111 THE MORTGAGE LOAN PURCHASE, TRUST AND
SERVICING AGREEMENT ......................................... 114 REMOVAL OF A SUB-SERVICER ..................................... 120 CERTAIN FEDERAL INCOME TAX CONSEQUENCES ......... 135 CERTAIN ERISA CONSIDERATIONS ............................... 142 LEGAL INVESTMENT ...................................................... 143 PLAN OF DISTRIBUTION ................................................. 143 LEGAL MATTERS ........................................................... 145 GLOSSARY ..................................................................... 146 INDEX OF DEFINED TERMS ............................................ 162
SCHEDULES
EXHIBIT A Mortgage Loan Schedule
EXHIBIT B Certain Initial Pool Information
EXHIBIT C Form of Statement to Certificateholders
EXHIBIT D Representations and Warranties of the Mortgage Loan Seller Regarding the Mortgage Loan
EXHIBIT E Exceptions to Representations and Warranties
EXHIBIT F Auction Procedures
You should rely only on the information contained in this document or to which have been referred to you. No one has been authorized to provide you with information that is different. This document may only be used where it is legal to sell these securities. The information in this document may only be accurate on the date of this document.
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IMPORTANT NOTICE REGARDING THE CERTIFICATES
NEITHER FREDDIE MAC NOR ANY OTHER PERSON INTENDS TO RETAIN A 5% NET ECONOMIC INTEREST WITH RESPECT TO THE CERTIFICATES IN ANY OF THE FORMS PRESCRIBED BY ARTICLE 405(1) OF EUROPEAN UNION REGULATION 575/2013 OR BY ANY OTHER EUROPEAN UNION LEGISLATION THAT REQUIRES THAT THERE BE SUCH A RETENTION AS A CONDITION TO AN INVESTMENT IN THE CERTIFICATES BY A EUROPEAN INVESTOR SUBJECT TO SUCH LEGISLATION. FOR ADDITIONAL INFORMATION IN THIS REGARD, SEE “RISK FACTORS—RISKS RELATED TO THE CERTIFICATES—LEGAL AND REGULATORY PROVISIONS AFFECTING INVESTORS COULD ADVERSELY AFFECT THE LIQUIDITY OF YOUR INVESTMENT” IN THIS OFFERING CIRCULAR.
THE PLACEMENT AGENTS DESCRIBED IN THIS OFFERING CIRCULAR MAY FROM TIME TO TIME PERFORM INVESTMENT BANKING SERVICES FOR, OR SOLICIT INVESTMENT BANKING BUSINESS FROM, ANY COMPANY NAMED IN THIS OFFERING CIRCULAR. THE PLACEMENT AGENTS AND/OR THEIR RESPECTIVE EMPLOYEES MAY FROM TIME TO TIME HAVE A LONG OR SHORT POSITION IN ANY SECURITY OR CONTRACT DISCUSSED IN THIS OFFERING CIRCULAR.
THE INFORMATION CONTAINED IN THIS OFFERING CIRCULAR SUPERSEDES ANY PREVIOUS SUCH INFORMATION DELIVERED TO ANY INVESTOR.
NOTICE TO FLORIDA RESIDENTS
WHERE SALES ARE MADE TO FIVE OR MORE PERSONS IN FLORIDA (EXCLUDING “QUALIFIED INSTITUTIONAL BUYERS” WITHIN THE MEANING OF SEC RULE 144A AND CERTAIN OTHER INSTITUTIONAL PURCHASERS DESCRIBED IN SECTION 517.061(7) OF THE FLORIDA SECURITIES AND INVESTOR PROTECTION ACT (THE “FLORIDA ACT”)), ANY SUCH SALE MADE PURSUANT TO SECTION 517.061(11) OF THE FLORIDA ACT SHALL BE VOIDABLE BY THE PURCHASER WITHIN THREE DAYS AFTER (A) RECEIPT OF THIS OFFERING CIRCULAR, OR (B) THE FIRST PAYMENT OF MONEY OR OTHER CONSIDERATION TO THE TRUST, AN AGENT OF THE TRUST, OR AN ESCROW AGENT, WHICHEVER OCCURS LATER.
NOTICE TO CANADA RESIDENTS
THE CERTIFICATES MAY BE SOLD ONLY TO PURCHASERS PURCHASING, OR DEEMED TO BE PURCHASING, AS PRINCIPAL THAT ARE ACCREDITED INVESTORS, AS DEFINED IN NATIONAL INSTRUMENT 45-106 PROSPECTUS EXEMPTIONS OR SUBSECTION 73.3(1) OF THE SECURITIES ACT (ONTARIO), AND ARE PERMITTED CLIENTS, AS DEFINED IN NATIONAL S-33 INSTRUMENT 31-103 REGISTRATION REQUIREMENTS, EXEMPTIONS AND ONGOING REGISTRANT OBLIGATIONS. ANY RESALE OF THE CERTIFICATES MUST BE MADE IN ACCORDANCE WITH AN EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE PROSPECTUS REQUIREMENTS OF APPLICABLE SECURITIES LAWS.
SECURITIES LEGISLATION IN CERTAIN PROVINCES OR TERRITORIES OF CANADA MAY PROVIDE A PURCHASER WITH REMEDIES OF RESCISSION OR DAMAGES IF THIS OFFERING CIRCULAR (INCLUDING ANY AMENDMENT THERETO) CONTAINS A MISREPRESENTATION, PROVIDED THAT THE REMEDIES OF RESCISSION OR DAMAGES ARE EXERCISED BY THE PURCHASER WITHIN THE TIME LIMIT PRESCRIBED BY THE SECURITIES LEGISLATION OF THE PURCHASER’S PROVINCE OR TERRITORY. THE PURCHASER SHOULD REFER TO ANY APPLICABLE PROVISIONS OF THE SECURITIES LEGISLATION OF THE PURCHASER’S PROVINCE OR TERRITORY FOR PARTICULARS OF THESE RIGHTS OR CONSULT WITH A LEGAL ADVISOR.
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PURSUANT TO SECTION 3A.3 OF NATIONAL INSTRUMENT 33-105 UNDERWRITING CONFLICTS (“NI 33-105”), THE UNDERWRITERS ARE NOT REQUIRED TO COMPLY WITH THE DISCLOSURE REQUIREMENTS OF NI 33-105 REGARDING UNDERWRITER CONFLICTS OF INTEREST IN CONNECTION WITH THIS OFFERING.
NOTICE TO RESIDENTS OF THE UNITED KINGDOM
THE TRUST MAY CONSTITUTE A “COLLECTIVE INVESTMENT SCHEME” AS DEFINED BY SECTION 235 OF THE FINANCIAL SERVICES AND MARKETS ACT 2000 (THE “FSMA”) THAT IS NOT A “RECOGNISED COLLECTIVE INVESTMENT SCHEME” FOR THE PURPOSES OF THE FSMA AND THAT HAS NOT BEEN AUTHORIZED OR OTHERWISE APPROVED. AS AN UNREGULATED SCHEME, THE OFFERED CERTIFICATES CANNOT BE MARKETED IN THE UNITED KINGDOM TO THE GENERAL PUBLIC, EXCEPT IN ACCORDANCE WITH THE FSMA.
THE DISTRIBUTION OF THIS OFFERING CIRCULAR:
(A) IF MADE BY A PERSON WHO IS NOT AN AUTHORIZED PERSON UNDER THE FSMA, IS BEING MADE ONLY TO, OR DIRECTED ONLY AT, PERSONS WHO (I) ARE OUTSIDE THE UNITED KINGDOM, OR (II) HAVE PROFESSIONAL EXPERIENCE IN MATTERS RELATING TO INVESTMENTS AND QUALIFY AS INVESTMENT PROFESSIONALS IN ACCORDANCE WITH ARTICLE 19(5) OF THE FINANCIAL SERVICES AND MARKETS ACT 2000 (FINANCIAL PROMOTION) ORDER 2005 (THE “FINANCIAL PROMOTION ORDER”), OR (III) ARE PERSONS FALLING WITHIN ARTICLE 49(2)(A) THROUGH (D) (“HIGH NET WORTH COMPANIES, UNINCORPORATED ASSOCIATIONS, ETC.”) OF THE FINANCIAL PROMOTION ORDER (ALL SUCH PERSONS TOGETHER BEING REFERRED TO AS “FPO PERSONS”); AND
(B) IF MADE BY A PERSON WHO IS AN AUTHORIZED PERSON UNDER THE FSMA, IS BEING MADE ONLY TO, OR DIRECTED ONLY AT, PERSONS WHO (I) ARE OUTSIDE THE UNITED KINGDOM, OR (II) HAVE PROFESSIONAL EXPERIENCE IN MATTERS RELATING TO INVESTMENTS AND QUALIFY AS INVESTMENT PROFESSIONALS IN ACCORDANCE WITH ARTICLE 14(5) OF THE FINANCIAL SERVICES AND MARKETS ACT 2000 (PROMOTION OF COLLECTIVE INVESTMENT SCHEMES) (EXEMPTIONS) ORDER 2001 (THE “PROMOTION OF COLLECTIVE INVESTMENT SCHEMES EXEMPTIONS ORDER”), OR (III) ARE PERSONS FALLING WITHIN ARTICLE 22(2)(A) THROUGH (D) (“HIGH NET WORTH COMPANIES, UNINCORPORATED ASSOCIATIONS, ETC.”) OF THE PROMOTION OF COLLECTIVE INVESTMENT SCHEMES EXEMPTIONS ORDER (ALL SUCH PERSONS TOGETHER BEING REFERRED TO AS “PCIS PERSONS” AND, TOGETHER WITH THE FPO PERSONS, THE “RELEVANT PERSONS”).
THIS OFFERING CIRCULAR MUST NOT BE ACTED ON OR RELIED ON BY PERSONS WHO ARE NOT RELEVANT PERSONS. ANY INVESTMENT OR INVESTMENT ACTIVITY TO WHICH THIS OFFERING CIRCULAR RELATES, INCLUDING THE OFFERED CERTIFICATES, IS AVAILABLE ONLY TO RELEVANT PERSONS AND WILL BE ENGAGED IN ONLY WITH RELEVANT PERSONS. ANY PERSONS OTHER THAN RELEVANT PERSONS SHOULD NOT ACT OR RELY ON THIS OFFERING CIRCULAR.
POTENTIAL INVESTORS IN THE UNITED KINGDOM ARE ADVISED THAT ALL, OR MOST OF THE PROTECTIONS AFFORDED BY THE UNITED KINGDOM REGULATORY SYSTEM WILL NOT APPLY TO AN INVESTMENT IN THE OFFERED CERTIFICATES AND THAT COMPENSATION WILL NOT BE AVAILABLE UNDER THE UNITED KINGDOM FINANCIAL SERVICES COMPENSATION SCHEME.
EUROPEAN ECONOMIC AREA
THIS OFFERING CIRCULAR HAS BEEN PREPARED ON THE BASIS THAT ANY OFFER OF OFFERED CERTIFICATES IN ANY MEMBER STATE OF THE EUROPEAN ECONOMIC AREA WHICH HAS IMPLEMENTED THE PROSPECTUS DIRECTIVE (EACH, A “RELEVANT MEMBER STATE”) WILL BE MADE PURSUANT TO AN EXEMPTION UNDER THE PROSPECTUS DIRECTIVE FROM THE
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REQUIREMENT TO PUBLISH A PROSPECTUS FOR OFFERS OF OFFERED CERTIFICATES. ACCORDINGLY ANY PERSON MAKING OR INTENDING TO MAKE AN OFFER IN THAT RELEVANT MEMBER STATE OF OFFERED CERTIFICATES WHICH ARE THE SUBJECT OF THE OFFERING CONTEMPLATED IN THIS OFFERING CIRCULAR MAY ONLY DO SO IN CIRCUMSTANCES IN WHICH NO OBLIGATION ARISES FOR FREDDIE MAC, THE TRUST OR EITHER OF THE PLACEMENT AGENTS TO PUBLISH A PROSPECTUS PURSUANT TO ARTICLE 3 OF THE PROSPECTUS DIRECTIVE IN RELATION TO SUCH OFFER. NEITHER FREDDIE MAC, THE TRUST NOR THE PLACEMENT AGENTS HAVE AUTHORISED, NOR DO THEY AUTHORISE, THE MAKING OF ANY OFFER OF OFFERED CERTIFICATES IN CIRCUMSTANCES IN WHICH AN OBLIGATION ARISES FOR FREDDIE MAC, THE TRUST OR THE PLACEMENT AGENTS TO PUBLISH A PROSPECTUS FOR SUCH OFFER. THE EXPRESSION “PROSPECTUS DIRECTIVE” MEANS DIRECTIVE 2003/71/EC (AS AMENDED, INCLUDING BY DIRECTIVE 2010/73/EU), AND INCLUDES ANY RELEVANT IMPLEMENTING MEASURE IN THE RELEVANT MEMBER STATE.
IMPORTANT NOTICE ABOUT INFORMATION CONTAINED IN THIS OFFERING CIRCULAR
The obligations of the parties to the transactions described in this offering circular are set forth in and will be governed by certain documents referred to in this offering circular. This offering circular contains summaries of those documents. Those summaries are not complete, and are subject to, and qualified in their entirety by reference to, all of the provisions of those documents. For a complete description of the rights and obligations summarized in this offering circular, copies of the actual documents are available from upon request.
This offering circular includes cross-references to sections in this offering circular where you can find further related discussions. The Table of Contents in this offering circular identifies the pages where these sections are located. In this offering circular, as the context may require, the terms “we”, “us” and “our” refer to Freddie Mac.
When deciding whether to invest in any of the Offered Certificates, you should only rely on the information contained in this offering circular or as provided in “Freddie Mac” in this offering circular. We have not authorized any dealer, salesman or other person to give any information or to make any representation that is different. In addition, information in this offering circular is current only as of the date on its cover. By delivery of this offering circular, we are not offering to sell any securities, and are not soliciting an offer to buy any securities, in any state or other jurisdiction where the offer and sale is not permitted. Notwithstanding anything to the contrary contained in this offering circular, any person may disclose to any and all persons, without limitation of any kind, the federal, state and local income tax treatment and tax structure of the Offered Certificates and the Trust, any fact that may be relevant to understanding the federal, state and local income tax treatment and tax structure of the Offered Certificates and the Trust, and all materials of any kind (including opinions or other tax analyses) relating to such federal, state and local income tax treatment and tax structure of the Offered Certificates and the Trust, other than the names of the parties and any other persons named in this offering circular or information that would permit the identification of the parties or such other persons.
FORWARD-LOOKING STATEMENTS
This offering circular includes words such as “expects,” “intends,” “anticipates,” “likely,” “estimates” and similar words and expressions. Those words and expressions are intended to identify forward-looking statements. Any forward-looking statements are made subject to risks and uncertainties which could cause actual results to differ materially from those stated. Those risks and uncertainties include, among other things, declines in general economic and business conditions, increased competition, changes in demographics, changes in political and social conditions, regulatory initiatives and changes in customer preferences, many of which are beyond the Trust’s control and the control of any other person or entity related to this offering. The forward-looking statements made in this offering circular are made as of the date stated on the cover. No one has any obligation to update or revise any forward-looking statement.
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AVAILABLE INFORMATION
Each offeree of the Offered Certificates and its representatives and beneficial owners, if any, are invited to—
ask questions concerning the terms, conditions and other aspects of the offering contemplated by this offering circular, and
obtain any additional information with respect to the Offered Certificates, us and the other parties to the transactions discussed in this offering circular.
As of the date of this offering circular, questions and requests for information may be directed to us as follows:
Barclays Capital Inc. Attn: MBS Syndicate Operations
70 Hudson Street Jersey City, New Jersey 07302
(201) 499-2051
Wells Fargo Securities, LLC Customer Support MAC N9303-054
608 2nd Avenue South, Suite 500 Minneapolis, Minnesota 55479
Additional information (including, without limitation, any financial information) regarding Freddie Mac is available in the annual reports on Form 10-K, quarterly reports on Form 10-Q and other reports filed with the SEC by Freddie Mac. You should review such reports in connection with your decision to invest in the Senior Certificates.
Neither we nor the Placement Agents make any representation regarding the accuracy or completeness of the information prepared and/or delivered by or on behalf of the other parties to the transaction or any other person or entity. Neither we nor the Placement Agents have independently verified such information. Accordingly, prospective purchasers must make their own evaluation regarding the extent to which they will or should rely on such information in making an investment decision.
After the Closing Date, the registered Holders and beneficial owners of the Offered Certificates will be entitled to receive substantially the same statements and reports, and have access to substantially the same information, as are to be forwarded or made available to the registered Holders and beneficial owners, respectively, of the Guaranteed Certificates as described under “Description of the Certificates—Reports to Certificateholders; Available Information” in this offering circular.
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SUMMARY
This summary contains selected information regarding the offering being made by this offering circular. It does not contain all of the information you need to consider in making your investment decision. Prior to investing in the Offered Certificates, you should read carefully, in its entirety, this offering circular. See the Index of Defined Terms and the Glossary to this offering circular for the definitions of certain capitalized terms.
Transaction Overview
The Multifamily Aggregation Risk Transfer Certificates, Series 2017–KT01 will consist of four classes (each, a “Class”). The table below identifies, and specifies various characteristics for, all of those Classes.
Class Designation:
Original Class Principal Balance
Approximate Initial Credit
Support Interest Rate
Assumed Weighted Average
Life (years)(2)
Assumed Principal Window
(payments)(2)
Assumed Final Certificate
Maturity Date(2) Offered Certificates(1)
Class A $900,000,000 10.000% One-month LIBOR
plus 0.3200%(3) 3.02 33-36 February 25, 2020Non-offered Certificates(4)
Class B $ 50,000,000 5.000% 4.5660%(5) 3.03 36-36 February 25, 2020Class C $ 30,000,000 2.000% 6.2220%(5) 3.03 36-36 February 25, 2020Class D $ 20,000,000 0.000% N/A(6) 3.03 36-36 February 25, 2020
(1) Only the Offered Certificates are offered by this offering circular.
(2) The assumed weighted average life, assumed principal window and assumed final certificate maturity date shown in this table have been calculated based the assumptions that (i) there are no defaults with respect to the Mortgage Loans held by the Trust, (ii) there are no voluntary or involuntary prepayments with respect to the Mortgage Loans held by the Trust, (iii) no Termination Event (as defined below) occurs, (iv) no mandatory prepayment of the Certificates is made and (v) after the Revolving Period, the assets of the Trust consist entirely of Mortgage Loans and all such Mortgage Loans are sold by the Trust to Freddie Mac at the Par Purchase Price on the final certificate maturity date shown in this table.
(3) The Class A Certificates will bear interest at a floating rate and such interest will accrue on the basis of a 360-day year and the actual number of days elapsed in the applicable Interest Accrual Period. The timely payment of interest on and the ultimate payment of principal of the Offered Certificates and the reimbursement of Realized Losses allocated to the Offered Certificates will be guaranteed by Freddie Mac, as described in this offering circular.
(4) The Mezzanine Certificates or Class D Certificates are not being offered by this offering circular.
(5) The Mezzanine Certificates will bear interest at a fixed rate and such interest will accrue based on the assumption that each year is 360 days long and consists of 12 months each consisting of 30 days. Any accrued and unpaid interest on the Mezzanine Certificates will be deferred until such Payment Date on which funds become available for a payment of such interest, and no interest will accrue on any unpaid interest on the Mezzanine Certificates.
(6) No interest will accrue on the Class D Certificates.
The Offered Certificates, the Class B Certificates, the Class C Certificates and the Class D Certificates are collectively referred as the “Certificates”. The Class B Certificates and the Class C Certificates are collectively referred as the “Mezzanine Certificates”.
The Certificates will evidence the entire beneficial ownership of the Trust. The Trust will be formed at or prior to the time of initial issuance of the Certificates. The assets of the Trust will primarily consist of Mortgage Loans.
The governing document for purposes of issuing the Certificates and forming the Trust will be a Mortgage Loan Purchase, Trust and Servicing Agreement, to be dated as of February 1, 2017 (the “Trust and Servicing Agreement”). The Trust and Servicing Agreement will also govern the purchase, sale, servicing and administration of the Mortgage Loans and the other assets that back the Certificates. The Trust and Servicing Agreement will be entered into among Freddie Mac, in its capacities as mortgage loan seller (in such capacity, the “Mortgage Loan Seller”), guarantor (in such capacity, the “Guarantor”), master servicer (in such capacity, the “Master Servicer”), special servicer (in such capacity, the “Special Servicer”), trustee (in such capacity, the “Trustee”) and custodian (in
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such capacity, the “Custodian”), and U.S. Bank National Association, as certificate administrator (the “Certificate Administrator”).
Relevant Parties
Trust .......................................................... FMPRE 2017–KT01 Multifamily Aggregation Risk Transfer Trust, a New York common law trust, will be formed on the Closing Date pursuant to the Trust and Servicing Agreement. See “Description of the Trust” in this offering circular.
Mortgage Loan Seller, Guarantor, Master Servicer, Special Servicer, Trustee and Custodian ................................................ Freddie Mac, a corporate instrumentality of the United States created
and existing under Title III of the Emergency Home Finance Act of 1970, as amended, or any successor to it, will act as the Mortgage Loan Seller, Guarantor, Master Servicer, Special Servicer, Trustee and Custodian with respect to the Trust. Freddie Mac, in its servicing capacities, maintains an office at 8100 Jones Branch Drive, McLean, Virginia 22102. Freddie Mac, in its capacity as Trustee, maintains an office at 8200 Jones Branch Drive, McLean, Virginia 22102. Freddie Mac, in its capacities as Custodian, Mortgage Loan Seller and Guarantor, maintains an office at 1551 Park Run Drive, McLean, Virginia 22102. See “Freddie Mac” in this offering circular.
All of the Mortgage Loans are expected to be sub-serviced by various servicers in accordance with the Trust and Servicing Agreement. Subject to meeting certain requirements, each seller or originator from which we purchase Mortgage Loans has the right to, and may, appoint itself or its affiliate as a servicer for any of the Mortgage Loans it originated.
Certificate Administrator ........................ U.S. Bank National Association, a national banking association (the “Certificate Administrator”) will act as the Certificate Administrator and the certificate registrar. The address at which the Certificate Administrator will administer the Trust and Servicing Agreement is One Federal Street, 3rd Floor, Mail Code EX-MA-FED, Boston, Massachusetts 02110, and for certificate transfer purposes is 111 East Fillmore Avenue, St. Paul, Minnesota 55107, Attention: Bondholder Services – FMPRE 2017–KT01. As consideration for acting as Certificate Administrator and certificate registrar, the Certificate Administrator will receive a certificate administrator fee of 0.00650% per annum, on the Stated Principal Balance of each Mortgage Loan and, during the Revolving Period, the balance of the Principal Collections on deposit in the Collection Account, in each case, as of the first day of the applicable Loan Interest Accrual Period (the “Certificate Administrator Fee”). The Certificate Administrator Fee is a component of the “Administration Fee Rate” set forth on Exhibit B to this offering circular. Such fee will be calculated on the same basis as interest on such Mortgage Loan. See “The Mortgage Loan Purchase, Trust and Servicing Agreement—Servicing and Other Compensation and Payment of Expenses” in this offering circular.
Directing Investor and Directing Third Party ............................................. As and to the extent described under “The Mortgage Loan Purchase,
Trust and Servicing Agreement—Directing Investor and Directing
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Third Party” in this offering circular, the Directing Investor will have the right to consent to a Workout of a Defaulted Loan in accordance with the Trust and Servicing Agreement. However, so long as an Affiliated Borrower Loan Event exists with respect to any Mortgage Loan, the Directing Investor will not have any consent right with respect to any matters related to the related Affiliated Borrower Loan and the Directing Investor’s right to access certain information relating to the related Affiliated Borrower Loan will be restricted, as described under “Description of the Certificates” in this offering circular.
The Directing Investor will be the Holder or Holders of a majority (by Certificate Principal Balance) of the most subordinate Class of Certificates or their designee so long as the Class Principal Balance of such Class is equal to at least 25% of the Original Class Principal Balance of such Class; provided that for purposes of determining the Directing Investor, any Certificates held by Freddie Mac (other than the Class D Certificates) will not be taken into account in determining the Holders of a majority of the applicable Class of Certificates (other than the Class D Certificates); provided, further, that if the Class Principal Balance of the Class B Certificates is less than 25% of the Original Class Principal Balance of such Class, Freddie Mac will be the Directing Investor.
Notwithstanding the foregoing, if Freddie Mac is the sole Holder of the Class C Certificates and such Class is the most subordinate Class that has the Class Principal Balance equal to at least 25% of the Original Class Principal Balance of such Class, Freddie Mac will be the Directing Investor. If Freddie Mac is the sole Holder of the Class B Certificates and such Class is the most subordinate Class that has the Class Principal Balance equal to at least 25% of the Original Class Principal Balance of such Class, Freddie Mac will be the Directing Investor.
The initial Directing Investor will be Freddie Mac. As of the Closing Date, no Affiliated Borrower Loan Event is expected to exist with respect to the initial Directing Investor.
The Directing Investor will be the Directing Third Party, provided that if Freddie Mac is the Directing Investor, the Directing Third Party will be the Holder or Holders of a majority of the most subordinate Class of the Mezzanine Certificates (excluding any Certificates held by Freddie Mac) or their designee until the Class Principal Balance of such Class is less than 25% of the Original Class Principal Balance of such Class; provided, further, that if the Class Principal Balance of the Class B Certificates is less than 25% of the Original Class Principal Balance of such Class, Freddie Mac will be the Directing Third Party.
The Directing Third Party will have certain rights under the Trust and Servicing Agreement, including the right to require the Mortgage Loan Seller to repurchase or substitute any Permitted Kick Out Loan, Ineligible Loan or Defective Loan, subject to the right of the Directing Investor to determine whether any Mortgage Loan is an Ineligible Loan, as described in “The Mortgage Loan Purchase, Trust and Servicing Agreement—Repurchase and Substitution of Mortgage Loans by the Mortgage Loan Seller” in this offering circular.
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It is expected that the initial Directing Third Party will be a fund affiliated with Cerberus Capital Management.
See “The Mortgage Loan Purchase, Trust and Servicing Agreement—Transfer of Servicing Between Master Servicer and Special Servicer” and “—Directing Investor and Directing Third Party” in this offering circular.
Placement Agents ...................................... Barclays Capital Inc. (“Barclays”), Wells Fargo Securities, LLC (“Wells Fargo Securities”), Academy Securities, Inc. (“Academy”) and J.P. Morgan Securities LLC (“JPMS”) will place the Offered Certificates on behalf of the Trust, subject to the satisfaction of various conditions. Barclays and Wells Fargo Securities will act as co-lead managers and joint bookrunners. Academy and JPMS will act as co-managers.
Significant Dates and Periods
Cut-off Date ............................................... Each Mortgage Loan will be considered an asset of the Trust as of its respective Cut-off Date. The Mortgage Loans acquired by the Trust on the Closing Date (the “Initial Mortgage Loans”) will have a Cut-off Date of February 1, 2017 (the “Initial Cut-off Date”). All payments and collections received on a Mortgage Loan after their applicable Cut-off Date, excluding any payments or collections that represent amounts due on or before such Cut-off Date, will belong to the Trust.
“Cut-off Date” means (a) with respect to any Mortgage Loans transferred to the Trust on the Closing Date, individually and collectively, the Initial Cut-off Date, and (b) with respect to any Mortgage Loans transferred to the Trust or repurchased or substituted by the Mortgage Loan Seller after the Closing Date, the applicable Cut-off Date set forth in the related Supplement to Mortgage Loan Schedule delivered in connection with such transfer.
Closing Date and Transfer Date .............. The date of initial issuance of the Certificates will be on or about February 16, 2017 (the “Closing Date”).
The Mortgage Loan Seller will transfer the Mortgage Loans to the Trust on each Transfer Date during the Revolving Period.
Due Date .................................................... Monthly installments of principal and/or interest will be due on the Due Date of each month with respect to each of the Mortgage Loans.
“Due Date” means, with respect to any Mortgage Loan, (a) on or prior to its Maturity Date, the day of the month set forth in the related Mortgage Note on which each Monthly Payment thereon is scheduled to be first due (without giving effect to any grace period with respect to late Monthly Payments) and (b) after its Maturity Date, the day of the month set forth in the related Mortgage Note on which each Monthly Payment on such Mortgage Loan had been scheduled to be first due (without giving effect to any grace period).
Determination Date .................................. The Determination Date immediately prior to any Payment Date is generally the monthly cut off for collections on the Mortgage Loans that are to be distributed on such Payment Date. In addition, information regarding the Mortgage Loans that is to be reported to the Holders of the Certificates with respect to any Payment Date will be
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generally determined as of the Determination Date immediately prior to such Payment Date. With respect to any Mortgage Loan transferred to the Trust by the Mortgage Loan Seller after the Closing Date during any period commencing on the 1st day of the month in which any Payment Date occurs and ending on and including the Determination Date relating to such Payment Date (an “Excluded Loan”), any collections received with respect to such Excluded Loan during such period will be available for distribution on the Payment Date immediately following such Payment Date, and information with respect to such Excluded Loan will be first included in the reports delivered with respect to the Payment Date immediately following such Payment Date.
“Determination Date” means, with respect to any Payment Date, the close of business on the 11th day of the month in which such Payment Date occurs, or if such 11th day is not a Business Day, the Business Day immediately following such 11th day.
Collection Period ....................................... Amounts available for distribution on the Certificates (to the extent permitted for distribution under the Trust and Servicing Agreement) on any Payment Date will depend on the payments and other collections received on or with respect to the Mortgage Loans during the related Collection Period.
With respect to each Payment Date, the Collection Period will commence immediately following the Determination Date in the month preceding the month in which such Payment Date occurs and ending on and including the Determination Date in the month in which such Payment Date occurs; provided that the Collection Period with respect to the first Payment Date for the Certificates will be the period commencing on the Initial Cut-off Date and ending on and including the Determination Date in March 2017; provided, further, that the Collection Period with respect to any Excluded Loan will be the period commencing on the related Cut-off Date for such Excluded Loan and ending on and including the Determination Date in the month immediately following the month in which such transfer occurs.
Payment Date ............................................ Distributions of principal and/or interest on the Certificates are scheduled to occur monthly on each Payment Date, commencing in March 2017.
“Payment Date” means, with respect to any month, the 25th day of such month, or, if the 25th day of such month is not a Business Day, the immediately succeeding Business Day, commencing with the First Payment Date.
Record Date ............................................... The registered Holders of the Certificates at the close of business on each Record Date will be entitled to receive any distributions on their respective Certificates on the following Payment Date, except that the final distribution of principal and/or interest on any Certificate will be made only upon presentation and surrender of that Certificate at a designated location.
Interest Accrual Period ............................ The amount of interest payable with respect to the Class A Certificates on any Payment Date will be a function of the interest accrued during the related Interest Accrual Period.
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Final Certificate Maturity Date ............... The earlier of (a) the Payment Date in February 2020 and (b) the Final Termination Payment Date (the “Final Certificate Maturity Date”). “Final Termination Payment Date” means the Payment Date immediately following the sale of all of the Mortgage Loans (including the Defaulted Loans) in the Trust and receipt of all of the sales proceeds by the Master Servicer or the Special Servicer on behalf of the Trust.
Description of the Offered Certificates
General ...................................................... The Certificates offered by this offering circular are the Class A Certificates (the “Offered Certificates”). The Certificates will have the initial principal balances and, if applicable, interest rates set forth or described in the table on page 7. The Certificates will represent beneficial ownership interests in the assets of the Trust, which will primarily consist of the Mortgage Loans acquired from the Mortgage Loan Seller on the Closing Date and from time to time after the Closing Date and sales proceeds of such Mortgage Loans, as further described in this offering circular.
Acquisition of Mortgage Loans on the Closing Date and During the Revolving Period ......... On the Closing Date, in consideration for the Certificates, the Mortgage
Loan Seller will transfer the Mortgage Loans in the Initial Pool to the Trustee (in trust for the benefit of the Certificateholders) and deposit into the Collection Account funds in an amount equal to the excess of (i) the aggregate initial Certificate Principal Balance of the Certificates over (ii) the aggregate outstanding principal balance of the Initial Mortgage Loans (the “Initial Deposit Amount” ). After the Closing Date and during the remainder of the Revolving Period, the Master Servicer may apply the Principal Collections to purchase additional Mortgage Loans on behalf of the Trust; provided that such purchase may not cause the aggregate outstanding principal balance of the Mortgage Pool to exceed $1,000,000,000 (the “Program Size”).
In connection with each such transfer, on the applicable Transfer Date, the Mortgage Loan Seller will be required to deliver to the Master Servicer, the Special Servicer, the Trustee, the Custodian and the Certificate Administrator the Mortgage Loan Schedule or a Supplement to Mortgage Loan Schedule, and, if applicable, a list of Approved Exceptions, setting forth information relating to such Mortgage Loans that will be transferred to the Trust on such Transfer Date. In connection with each such transfer, the Mortgage Loan Seller will also be required to deliver the related mortgage file to the Custodian, and the Custodian will be required to, within 90 days after the applicable Transfer Date, review the mortgage file and deliver to the Certificate Administrator, the Master Servicer and the Special Servicer, a report setting forth any Defect in the mortgage file and the nature of such Defect.
In connection with any transfer of additional Mortgage Loans, the Certificate Administrator will post the Mortgage Loan Schedule, a Supplement to Mortgage Loan Schedule and, if applicable, a list of Approved Exceptions on the Certificate Administrator’s Reporting Website.
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See “The Mortgage Loan Purchase, Trust and Servicing Agreement—Assignment of Mortgage Loans on the Closing Date and During the Revolving Period” in this offering circular.
Mortgage Loan Seller Purchase Option ..................................... The Mortgage Loan Seller may at its option purchase all or any portion
of the Mortgage Loans from the Trust from time to time at a price equal to the Par Purchase Price (the “Mortgage Loan Seller Purchase Option”). Any principal portion of the Par Purchase Price for the Mortgage Loans paid by the Mortgage Loan Seller during the Revolving Period will not be available for distribution on the Certificates during the Revolving Period and will be applied by the Master Servicer to acquire additional Mortgage Loans on behalf of the Trust and the Certificateholders.
See “The Mortgage Loan Purchase, Trust and Servicing Agreement—Mortgage Loan Seller Purchase Option” in this offering circular.
Distributions
A. General ............................................ In general, during the Revolving Period, no Principal Collections will be available for distribution on the Certificates, and no Certificates will be entitled to receive any principal distributions. After the end of the Revolving Period and prior to the Final Remaining Term Payment Date, 75% of Available Principal Collections will be applied to pay principal on the Class A Certificates, and the remaining portion of Available Principal Collections will be deposited into the Principal Reserve Account and will not be available for distribution on the Certificates, except in certain limited circumstances to cure an Asset Mismatch and/or an Interest Mismatch, as described under “Description of the Certificates—Mandatory Principal Payment; Cleanup Call” in this offering circular. On and after the Final Remaining Term Payment Date, all available funds (including funds in the Principal Reserve Account) will be applied to make distributions on the Certificates, as further described under “Description of the Certificates—Distributions” in this offering circular.
The timely payment of interest on and the ultimate payment of principal of the Class A Certificates and the reimbursement of Realized Losses allocated to the Class A Certificates will be guaranteed by Freddie Mac, as described under “Description of the Certificates—Distributions—Freddie Mac Guarantee” in this offering circular.
Generally, the Class A Certificates will be senior to the other Classes of Certificates in right of payment, as further described in this offering circular. However, if the aggregate amount of the current interest accrued on the Mortgage Loans is less than the aggregate amount of the current interest accrued on the Class A Certificates and the Mezzanine Certificates and other payment obligations of the Trust during any Revolving Period, a Waterfall Trigger Event will occur. If a Waterfall Trigger Event occurs during the Revolving Period, the Mezzanine Certificates are entitled to receive their respective interest payments prior to any interest payment on the Class A Certificates; provided that if any interest shortfall is caused by a default under any Mortgage Loan, such shortfall amount will be allocated to the Class C Certificates first and then to the Class B Certificates to reduce the amount of interest on such Mezzanine Certificates that is payable prior to the
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payment of interest on the Class A Certificates. Any Guarantee Payment made to pay accrued and unpaid interest on the Class A Certificates during the Revolving Period solely as a result of the occurrence of a Waterfall Trigger Event will be a Waterfall Trigger Event Guarantee Payment and be reimbursable to the Guarantor after principal and/or interest distributions on the Class A Certificates and the Mezzanine Certificates are made in full in accordance with the priority of distributions described below. See “Description of the Certificates—Distributions” in this offering circular.
B. Priority of Distributions During the Revolving Period ......... On each Payment Date during the Revolving Period (each, a
“Revolving Payment Date”), the Certificate Administrator will withdraw the Available Distribution Amount in the Distribution Account for such Revolving Payment Date and apply such amount in the following order of priority:
first, (a) so long as no Waterfall Trigger Event has occurred and is continuing, to pay the Interest Distribution Amount to the Class A Certificates or (b) if a Waterfall Trigger Event has occurred and is continuing, first, to pay the Class B Certificates up to an amount equal to the Waterfall Trigger Class B Interest Distribution Amount and, then, to pay the Class C Certificates up to an amount equal to the Waterfall Trigger Class C Interest Distribution Amount;
second, (a) so long as no Waterfall Trigger Event has occurred and is continuing, first, to pay the Interest Distribution Amount to the Class B Certificates and, then, to pay the Interest Distribution Amount to the Class C Certificates or (b) if a Waterfall Trigger Event has occurred and is continuing, first, to pay the Interest Distribution Amount to the Class A Certificates and, then, to pay in respect of the Class B Certificates, any portion of the Interest Distribution Amount for such Payment Date that remains unpaid after the payment made pursuant to clause first above, and then to pay in respect of the Class C Certificates any portion of the Interest Distribution Amount for such Payment Date that that remains unpaid after the payment made pursuant to clause first above;
third, to pay to the Guarantor the portion of the Guarantor Reimbursement Interest Amount constituting interest accrued on any Waterfall Trigger Event Guarantee Payment;
fourth, to reimburse the Guarantor for any Waterfall Trigger Event Guarantee Payment that was paid by the Guarantor but not previously reimbursed to the Guarantor; and
fifth, to pay to the Class D Certificates any remaining amounts as an income distribution.
With respect to any Revolving Payment Date, the Available Distribution Amount will exclude the Principal Collections received during the applicable Collection Period.
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C. Allocation of Interest Shortfalls Resulting from Payment Default under Mortgage Loans During the Revolving Period ...................... Any interest shortfalls resulting from a payment default under the
Mortgage Loans during the Revolving Period will reduce the amount of funds available for distribution first, on the Class D Certificates, then the Class C Certificates, then the Class B Certificates, and then the Class A Certificates, in that order.
With respect to any Revolving Payment Date on which a Waterfall Trigger Event has occurred and is continuing, solely for purposes of determining the Waterfall Trigger Class B Interest Distribution Amount, the Waterfall Trigger Class C Interest Distribution Amount and the Waterfall Trigger Event Guarantee Payment, the Defaulted Loan Interest Shortfall Amount for such Revolving Payment Date will be allocated to notionally reduce the Interest Distribution Amount for each Class of Certificates in the following order of priority:
first, to notionally reduce the Interest Distribution Amount for the Class C Certificates, until such Interest Distribution Amount is notionally reduced to zero;
second, to notionally reduce the Interest Distribution Amount for the Class B Certificates, until such Interest Distribution Amount is notionally reduced to zero; and
third, to notionally reduce the Interest Distribution Amount for the Class A Certificates, until such Interest Distribution Amount is notionally reduced to zero.
D. Priority of Distributions After the Revolving Period ............ Subject to the obligation of the Trust to pay down the Class A
Certificates and/or Mezzanine Certificates in certain limited circumstances described under “Description of the Certificates—Mandatory Principal Payment; Cleanup Call” in this offering circular, the Certificate Administrator will withdraw the Available Distribution Amount (other than the aggregate Par Purchase Prices that are required to be applied to satisfy such obligation of the Trust to pay down the Class A Certificates and/or Mezzanine Certificates in certain limited circumstances) in the Distribution Account for such Remaining Term Payment Date and apply such amount in the following order of priority:
first, to pay the Interest Distribution Amount to the Class A Certificates from any collections received in respect of interest on the Mortgage Loans during the related Collection Period remaining after the payment of Program Expenses as described in “Description of the Certificates—Collection Account” in this offering circular;
second, to pay principal on the Class A Certificates in an amount equal to 75% of any Available Principal Collections received during the related Collection Period until the Class Principal Balance of the Class A Certificates is reduced to zero;
third, (A) to deposit into the Principal Reserve Account for the benefit of the Holders of the Class A Certificates, the Mezzanine Certificates and the Class D Certificates, 25% of any Available Principal Collections received during the related Collection Period until the total
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amount of funds on deposit in the Principal Reserve Account is sufficient to pay the Class Principal Balance of the Class A Certificates, the Mezzanine Certificates and the Class D Certificates in full; or (B) if the Mortgage Loan Seller delivers a Mezzanine Certificate Prepayment Direction to the Certificate Administrator under the Trust and Servicing Agreement, (x) first to pay the Holders of the Mezzanine Certificates in respect of principal of the Mezzanine Certificates on a pro rata basis, up to the lesser of (I) the Required Prepayment Amount or the Required Prepayment Shortfall Amount, as applicable, for such Remaining Term Payment Date and (II) 25% of any Available Principal Collections received during the related Collection Period, and then (y) to deposit into the Principal Reserve Account for the benefit of the Holders of the Class A Certificates, the Mezzanine Certificates and the Class D Certificates, up to any portion of Available Principal Collections received during the related Collection Period remaining after the payment of principal of the Mezzanine Certificates under clause (x) until the total amount of funds on deposit in the Principal Reserve Account is sufficient to pay the Class Principal Balance of the Class A Certificates, the Mezzanine Certificates and the Class D Certificates in full;
fourth, to pay the Interest Distribution Amount to the Class B Certificates for such Payment Date;
fifth, to pay the Interest Distribution Amount to the Class C Certificates for such Payment Date;
sixth, to pay to the Guarantor a portion of the Guarantor Reimbursement Interest Amount constituting interest accrued on any Waterfall Trigger Event Guarantee Payment;
seventh, to reimburse the Guarantor for any Waterfall Trigger Event Guarantee Payment that was paid by the Guarantor but not previously reimbursed to the Guarantor; and
eighth, to pay to the Class D Certificates any remaining amounts as an income distribution.
No Principal Collections in the Distribution Account may be applied to pay any interest due on the Class A Certificates and/or the Mezzanine Certificates on any Remaining Term Payment Date pursuant to the priority of distributions set forth above.
E. Priority of Distributions on the Final Remaining Term Payment Date and on any Subsequent Payment Date ............. On the Final Remaining Term Payment Date and any Payment Date
after the Final Remaining Term Payment Date, the Certificate Administrator will withdraw the Available Distribution Amount in the Distribution Account for such Final Remaining Term Payment Date and apply such amount in the following order of priority:
first, to pay the Interest Distribution Amount to the Class A Certificates;
second, to pay principal on the Class A Certificates until the Class Principal Balance of the Class A Certificates is reduced to zero;
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third, to reimburse the Guarantor for any Guarantee Payment (other than a Waterfall Trigger Event Guarantee Payment) made under the Freddie Mac Guarantee as a result of the amounts available to make payments pursuant to clause first or second above being insufficient to pay in full the amounts payable pursuant to such clauses;
fourth, to pay the Interest Distribution Amount to the Class B Certificates;
fifth, to pay principal on the Class B Certificates until the Class Principal Balance of the Class B Certificates is reduced to zero;
sixth, to pay the Interest Distribution Amount to the Class C Certificates;
seventh, to pay principal on the Class C Certificates until the Class Principal Balance of the Class C Certificates is reduced to zero;
eighth, to pay to the Guarantor a portion of the Guarantor Reimbursement Interest Amount constituting interest accrued on any Waterfall Trigger Event Guarantee Payment;
ninth, to reimburse the Guarantor for any Waterfall Trigger Event Guarantee Payment that was paid by the Guarantor but not previously reimbursed to the Guarantor;
tenth, to pay the Class Principal Balance of the Class D Certificates; and
eleventh, to pay to the Class D Certificates any remaining amounts as an income distribution.
See “Description of the Certificates—Distributions—Priority of Distributions” in this offering circular.
Allocation of Realized Losses ................... In the event that any Defaulted Loan is modified in connection with a Workout or is sold or otherwise disposed of under the Trust and Servicing Agreement, the Special Servicer will calculate the amount, if any, by which (a) the Stated Principal Balance of such Defaulted Loan immediately prior to such Workout or sale or disposition exceeds (b) (x) the Stated Principal Balance of such Defaulted Loan (after giving effect to such modification) or (y) the portion of the Defaulted Loan Proceeds received in respect of principal of such Defaulted Loan in connection with such sale or disposition (such excess amount, a “Realized Loss”). Any allocation of Realized Losses to a Class of Certificates will be made by the Certificate Administrator by reducing the Class Principal Balance thereof by the amount so allocated as described in the following paragraph. Any Realized Losses allocated to a Class of Certificates will be allocated by the Certificate Administrator among the respective Certificates of such Class in proportion to the Percentage Interests evidenced thereby.
Any Realized Loss incurred during any related Collection Period will be allocated by the Certificate Administrator on the related Payment Date, first, to reduce the Class Principal Balance of the Class D Certificates until the Class Principal Balance of the Class D Certificates is equal to $1,000, second, to reduce the Class Principal Balance of the
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Class C Certificates until the Class Principal Balance of the Class C Certificates is equal to $0, third, to reduce the Class Principal Balance of the Class B Certificates until the Class Principal Balance of the Class B Certificates is equal to $0 and, fourth, to reduce the Class Principal Balance of the Class A Certificates.
In the event that any Realized Losses are allocated to the Class A Certificates on any Payment Date, the Guarantor is required to make a Guarantee Payment in respect of such Realized Losses on such Payment Date under the Freddie Mac Guarantee. There will be no reimbursement of Realized Losses allocated to the Mezzanine Certificates and the Class D Certificates.
See “Description of the Certificates—Distributions—Priority of Distributions” in this offering circular.
Freddie Mac Guarantee ........................... The timely payment of interest on and the ultimate payment of principal of the Offered Certificates and the reimbursement of Realized Losses allocated to the Offered Certificates will be guaranteed by Freddie Mac (the “Freddie Mac Guarantee”), as described in this offering circular. Any Guarantee Payment (other than the Waterfall Trigger Event Guarantee Payment) will constitute Program Expenses and will be reimbursed to the Guarantor before any principal and/or interest distributions are made to the Certificateholders. See “Description of the Certificates—Distributions—Freddie Mac Guarantee” in this offering circular.
No Class of Certificates is guaranteed by the United States or constitutes debts or obligations of the United States or any agency or instrumentality of the United States, other than Freddie Mac with respect to the Class A Certificates. If the Guarantor were unable to make a Guarantee payment under the Freddie Mac Guarantee, the Class A Certificates could be subject to losses.
See “Risk Factors—Risks Related to the Certificates—Credit Support Is Limited and May Not Be Sufficient To Prevent Loss on the Certificates” and “Risk Factors—Risks Relating to the Freddie Mac” in this offering circular.
Reports to Certificateholders ................... On each Payment Date, based solely upon the information regarding the Mortgage Loans delivered to the Certificate Administrator by the Master Servicer, the Certificate Administrator will prepare and make available on the Certificate Administrator’s Reporting Website to any Privileged Person, a statement substantially in the form of Exhibit C hereto (the “Statement to Certificateholders”), detailing the distributions on such Payment Date and the performance, both in the aggregate and individually to the extent available, of the Mortgage Loans and the Mortgaged Properties; provided that the Certificate Administrator need not make available to any Privileged Person any Statement to Certificateholders that has been made available to such Person via the Certificate Administrator’s Reporting Website; and provided, further, that the Certificate Administrator has no affirmative obligation to discover the identities of Certificate Owners and need only respond to Persons claiming to be Certificate Owners in accordance with the requirements of the Trust and Servicing Agreement.
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On each Payment Date, the Certificate Administrator will make available electronically to each Privileged Person, each file and report comprising the CREFC Investor Reporting Package® and any other report at the direction of Freddie Mac, to the extent prepared by or received by the Certificate Administrator in electronic form since the prior Payment Date (or, in the case of the initial Payment Date, since the Closing Date) in accordance with the Trust and Servicing Agreement; provided, however, that the Certificate Administrator will not provide to (i) any Person that is a Borrower or an affiliate of a Borrower, unless such Person is the Directing Investor, (A) any Asset Status Report, inspection report, appraisal or internal valuation, (B) the CREFC® Special Servicer Loan File or (C) the supplemental reports listed in clause (b) of the definition of “CREFC Investor Reporting Package®” or (ii) the Directing Investor, any Asset Status Report, inspection report, appraisal or internal valuation relating to any Affiliated Borrower Loan. In addition, the Certificate Administrator will be required to make available to any Privileged Person, the Mortgage Loan Schedule, any Supplement to Mortgage Loan Schedule and, if applicable, a list of Approved Exceptions delivered by the Mortgage Loan Seller in connection with any sale or purchase of the Mortgage Loans under the Trust and Servicing Agreement.
The Master Servicer will not be required to include information relating to any Excluded Loan in any servicing reports for the Payment Date immediately following the applicable Transfer Date, and information relating to such Excluded Loan will be first included in the servicing reports for the Payment Date immediately following such Payment Date.
See “Description of the Certificates—Reports to Certificateholders; Available Information” in this offering circular.
Deal Information/Analytics ...................... Certain information concerning the Mortgage Loans and the Certificates may be available through the following services:
BlackRock Financial Management, Inc., Bloomberg, L.P., Trepp, LLC, Intex Solutions, Inc., CMBS.com and Thomson Reuters Corporation; and
the Certificate Administrator’s website initially located at www.usbank.com/abs (the “Certificate Administrator’s Reporting Website”).
Repurchase and Substitution of Mortgage Loans by the Mortgage Loan Seller
A. Ineligible Loans ................................ In the event that (i) the Directing Third Party, acting in a commercially reasonable manner, determines that any Loan transferred to the Trust does not meet the Eligibility Criteria and delivers to the Mortgage Loan Seller, the Directing Investor (if the Directing Third Party is not the Directing Investor), the Master Servicer and the Special Servicer a notice of such determination and evidence supporting such determination within 30 days after the applicable Transfer Date and (ii) the Directing Investor (if the Directing Third Party is not the Directing Investor), acting in a commercially reasonable manner, does not disagree with such determination within 5 Business Days after receipt of all evidence supporting the Directing Third Party’s determination
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(such Loan, an “Ineligible Loan”), the Mortgage Loan Seller shall repurchase such Ineligible Loan or substitute such Ineligible Loan with one or more Qualified Substitute Mortgage Loans and pay any Substitution Shortfall Amount within 30 days after receiving such notice and evidence. Upon request from the Mortgage Loan Seller and/or the Directing Investor, the Directing Third Party shall promptly deliver to the Mortgage Loan Seller and/or the Directing Investor any additional evidence supporting its determination that any particular Loan does not meet the Eligibility Criteria.
If the Directing Third Party does not request that the Mortgage Loan Seller repurchase or substitute an Ineligible Loan within 30 days after the Closing Date or the applicable Subsequent Transfer Date, as applicable, (i) such Mortgage Loan may not become an Ineligible Loan after such 30-day period, (ii) the Mortgage Loan Seller’s representation that such Mortgage Loan meets the Eligibility Criteria will be deemed to be true and correct, and (iii) the Mortgage Loan Seller will not be required to repurchase or substitute such Mortgage Loan due to any breach or alleged breach of such representation after such 30-day period.
See “Description of the Mortgage Loans—Eligibility Criteria” in this offering circular.
B. Permitted Kick Out Loans .............. During the Revolving Period, the Directing Third Party may, within 30 days after the Closing Date (in the case of the Mortgage Loans transferred to the Trust on the Closing Date) or the applicable Subsequent Transfer Date (in the case of any additional Mortgage Loans purchased by the Trust after the Closing Date), for any reason, require the Mortgage Loan Seller to repurchase any Mortgage Loans that, in the aggregate, do not equal more than 3.0% of the total number of the Mortgage Loans (excluding any Ineligible Loans) purchased by the Trust (each, a “Permitted Kick Out Loan”) by delivering such request to the Mortgage Loan Seller (with a copy of such request to the Master Servicer, the Special Servicer, the Trustee and the Custodian). The Mortgage Loan Seller will be required to repurchase such Mortgage Loans or replace such Mortgage Loans with one or more Qualified Substitute Mortgage Loans and pay any Substitution Shortfall Amount within 30 days after receipt of such request from the Directing Third Party. Notwithstanding anything to the contrary in the Trust and Servicing Agreement, if the Directing Third Party does not request that the Mortgage Loan Seller repurchase or substitute a Mortgage Loan within 30 days after the Closing Date or the applicable Subsequent Transfer Date as described above, such Mortgage Loan may not become a Permitted Kick Out Loan after such 30-day period.
C. Defective Loans ................................ If the Directing Third Party, the Master Servicer, the Special Servicer, the Trustee, the Certificate Administrator, the Custodian or the Mortgage Loan Seller (A) discovers or receives notice alleging a Defect or (B) discovers or receives notice alleging a breach of any representation or warranty made with respect to a Mortgage Loan by the Mortgage Loan Seller under the Trust and Servicing Agreement (a “Breach”), such Person will be required to give written notice of such Defect or Breach to the Directing Third Party, the Master Servicer, the Special Servicer, the Trustee, the Certificate Administrator, the Custodian and the Mortgage Loan Seller. If such Defect or Breach materially and adversely affects the value of any Mortgage Loan or the
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interests of the Holders of any Class of Certificates as determined by the Directing Third Party (any such Defect or Breach, a “Material Document Defect” or a “Material Breach”, respectively), the Mortgage Loan Seller will be required, not later than (x) 90 days after receipt by the Mortgage Loan Seller of the related Repurchase Communication or (y) with respect to any Material Document Defect arising from a missing document as to which the Custodian mistakenly certified its possession of such document on the applicable Transfer Date under the Trust and Servicing Agreement, 30 days after receipt by the Mortgage Loan Seller of a Repurchase Communication (the periods specified in clauses (x) and (y) above, as applicable, the “Initial Resolution Period”), (1) to cure such Material Document Defect or Material Breach in all material respects, (2) to repurchase the affected Mortgage Loan at the applicable Par Purchase Price or (3) to substitute one or more Qualified Substitute Mortgage Loans for such affected Mortgage Loan and pay to the Master Servicer for deposit into the Collection Account any Substitution Shortfall Amount in connection therewith.
If (A) a Material Document Defect or Material Breach is capable of being cured, but not within the Initial Resolution Period, (B) the Mortgage Loan Seller has commenced and is diligently proceeding with the cure of such Material Document Defect or Material Breach within the Initial Resolution Period, (C) such Material Document Defect or Material Breach is not with respect to any Mortgage Note (or lost note affidavit, indemnity or endorsement to the Mortgage Note), (D) the Mortgage Loan Seller has delivered to the Master Servicer, the Special Servicer, the Trustee and the Certificate Administrator, an officer’s certificate describing the reasons that the cure was not effected within the Initial Resolution Period and the actions that the Mortgage Loan Seller proposes to take to effect the cure and that states that the Mortgage Loan Seller anticipates the cure will be effected within the additional 90 day period, and (E) with respect to a Material Document Defect, such Mortgage Loan is not then a Defaulted Loan and the missing or defective document is not needed to adequately pursue the mortgagee’s rights prior to such time, then the Mortgage Loan Seller will be permitted an additional 90 days to cure such Material Document Defect or Material Breach.
The obligations of the Mortgage Loan Seller to cure, repurchase or substitute a Repurchase Loan pursuant to the terms of the Trust and Servicing Agreement will be the sole remedies available to the Certificateholders, or the Trustee on behalf of the Certificateholders, with respect to any Repurchase Loan. The Master Servicer (if such Repurchase Loan is not a Defaulted Loan) or the Special Servicer (if such Repurchase Loan is a Defaulted Loan) will be required to, at the direction of the Directing Third Party, enforce the obligations of the Mortgage Loan Seller with respect to any Repurchase Loan described above. Any reasonable costs incurred by the Master Servicer in connection with such enforcement will be reimbursable to the Master Servicer as Program Expenses.
The Custodian will be required to review the mortgage files delivered in connection with any substitution of Mortgage Loans described in this “—Repurchase and Substitution of Mortgage Loans by the Mortgage Loan Seller” section and deliver to the Certificate Administrator, the Trustee, the Master Servicer and the Special Servicer a Custodial
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Exception Report setting forth the nature of any Defect with respect to any such Mortgage Loan.
The Certificate Administrator will not monitor or be required to monitor the satisfaction of any of the requirements related to Ineligible Loans, Permitted Kick Out Loans or Defective Loans.
See “The Mortgage Loan Purchase, Trust and Servicing Agreement—Repurchase and Substitution of Mortgage Loans by the Mortgage Loan Seller” in this offering circular.
Servicing Transfer Event ......................... Upon determining that a Servicing Transfer Event has occurred with respect to any Mortgage Loan, the Master Servicer will be required to promptly give notice thereof to the Mortgage Loan Seller, the Special Servicer, the Trustee, the Certificate Administrator, Freddie Mac and the Directing Investor, and the Mortgage Loan Seller will have the right to purchase such Defaulted Loan at the Par Purchase Price within five Business Days of receipt of such notice from the Master Servicer. In the event that the Mortgage Loan Seller does not purchase such Defaulted Loan within such time period, the Special Servicer may, with the consent of the Directing Investor, implement workout procedures consistent with the Asset Status Report and the Freddie Mac Servicing Practices (each a “Workout”) or may sell such Mortgage Loan at an auction conducted in accordance with the Auction Procedures (each, a “Standard Auction”). Freddie Mac and any other Certificateholder will have the right to bid in any such Standard Auction. If (i) the Special Servicer is unable to obtain a buyer for a Defaulted Loan pursuant to a Standard Auction within 90 days after the commencement of such Standard Auction or (ii) the Directing Investor waives the requirement that the Special Servicer conduct a Standard Auction, the Special Servicer will be permitted offer to sell such Mortgage Loan to a single purchaser or may dispose of such Mortgage Loan pursuant to a process agreed upon by the Special Servicer and the Directing Investor (the “Defaulted Loan Provision”).
See “The Mortgage Loan Purchase, Trust and Servicing Agreement—Transfer of Servicing Between Master Servicer and Special Servicer” and “Description of the Trust” in this offering circular.
Mandatory Principal Payment; Cleanup Call ......................... If an Interest Mismatch will occur on any Remaining Term Payment
Date, unless the Mortgage Loan Seller elects to exercise the cleanup option to purchase all of the Mortgage Loans described below, the Mortgage Loan Seller will be required to:
(i) purchase a sufficient number of Mortgage Loans at the Par Purchase Price on the related Master Servicer Remittance Date to pay down the Class A Certificates and the Mezzanine Certificates on a pro rata basis, in respect of principal, to cure the Interest Mismatch; and/or
(ii) direct the Certificate Administrator to apply up to 25% of the Available Principal Collections received during the related Collection Period as described under “Description of the Certificates—Distributions—Priority of Distributions—Priority of Distributions After the Revolving Period” in this offering circular and, to the extent necessary, direct the Master
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Servicer to transfer any Principal Collections in the Principal Reserve Account to the Distribution Account, to pay the Mezzanine Certificates on a pro rata basis, in respect of principal, to cure the Interest Mismatch;
in each case, in an amount equal to the Required Prepayment Amount.
The Mortgage Loan Seller may exercise one of the two options set forth in clauses (i) and (ii) above or a combination of such two options in its sole discretion in order to cure an Interest Mismatch in accordance with this paragraph.
If an Asset Mismatch will occur on any Revolving Payment Date, the Mortgage Loan Seller will be required to:
(i) first, transfer one or more additional Mortgage Loans to the Trust on such Revolving Payment Date if the Mortgage Loan Seller owns any Mortgage Loan that meets the Eligibility Criteria on such Revolving Payment Date and can be transferred on such Revolving Payment Date to the Trust, but only to the extent necessary to cause such Asset Mismatch to cease to exist; and
(ii) second, if such Asset Mismatch cannot be cured pursuant to clause (i), direct the Master Servicer, by delivering notice to the Master Servicer on or prior to two Business Days prior to the related Master Servicer Remittance Date, to transfer on such related Master Servicer Remittance Date any Principal Collections in the Collection Account that were received during the related Collection Period to the Distribution Account to prepay principal on the Class A Certificates and Mezzanine Certificates on a pro rata basis on such Payment Date in an amount necessary to cause such Asset Mismatch to cease to exist.
If an Asset Mismatch will occur on any Remaining Term Payment Date, two Business Days prior to the related Master Servicer Remittance Date, the Mortgage Loan Seller will be required to direct the Master Servicer to transfer on such Master Servicer Remittance Date any Principal Collections in the Principal Reserve Account to the Certificate Administrator for deposit into the Distribution Account to prepay principal on the Class A Certificates and Mezzanine Certificates on a pro rata basis on such Payment Date (to the extent such funds are available for such prepayment) in an amount necessary to cause an Asset Mismatch to cease to exist (after giving effect to any prepayment of the Class A Certificates pursuant to paragraph second of “Description of the Certificates—Distributions—Priority of Distributions—Priority of Distributions After the Revolving Period” in this offering circular and any prepayment of the Class A Certificates and/or the Mezzanine Certificates to cure an Interest Mismatch on such Remaining Term Payment Date).
An Asset Mismatch will cease to exist on any Payment Date if the aggregate Stated Principal Balance of the Mortgage Loans as of such Payment Date (as disclosed in the CREFC® loan periodic update file delivered by the Master Servicer with respect to such Payment Date and excluding Mortgage Loans that have been defeased and taking into
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account any Mortgage Loans purchased by the Trust on such Payment Date) is at least 80% of the Total Trust Assets as of such Payment Date (as disclosed in the CREFC® loan periodic update file and the account statement delivered by the Master Servicer with respect to such Payment Date and including Mortgage Loans that have been defeased and taking into account any Mortgage Loans purchased by the Trust on such Payment Date and any prepayment of the Class A Certificates and/or Mezzanine Certificates made on such Payment Date).
If on any Remaining Term Payment Date the aggregate Stated Principal Balance of the Mortgage Loans is less than 10% of the Program Size, then the Mortgage Loan Seller will have the option to purchase all of the Mortgage Loans owned by the Trust at the Par Purchase Price and terminate the Trust (the “Cleanup Call”).
See “Description of the Certificates—Mandatory Principal Payment; Cleanup Call” and “The Mortgage Loan Purchase Trust and Servicing Agreement—Termination—Termination Upon Repurchase or Liquidation of All Mortgage Loans” in this offering circular.
Termination Event; Final Sales ............... No later than the earliest to occur of (1) the Payment Date in February 2020, (2) 30 days after the occurrence of a Termination Event or (3) 30 days following the exercise of the option to purchase the Mortgage Loans by the Mortgage Loan Seller in connection with the Cleanup Call, the Mortgage Loan Seller will be required to purchase each Mortgage Loan, other than any Defaulted Loan, from the Trust at a price equal to the respective Par Purchase Price.
“Termination Event” means any of the following events:
(i) a representation or warranty made by Freddie Mac in its capacity as the Mortgage Loan Seller or the Guarantor (excluding any representations or warranties made regarding the Mortgage Loans) as specified in the Trust and Servicing Agreement proves to have been false or misleading in any material respect as of the time when made, and which continues to be false or misleading in any material respect for a period of 60 days after the day on which written notice thereof has been given to Freddie Mac by the Directing Third Party;
(ii) the failure on the part of Freddie Mac in its capacity as the Mortgage Loan Seller to observe or perform in any material respect any of the material covenants of such party contained in the Trust and Servicing Agreement that continues unremedied for a period of 30 days after the day on which written notice thereof has been given to Freddie Mac by the Directing Third Party;
(iii) the FHFA places Freddie Mac into receivership;
(iv) an Event of Default of the Master Servicer or Special Servicer as specified in the Trust and Servicing Agreement has occurred and is continuing after giving effect to any applicable grace period; or
(v) the failure of the Guarantor to make any payment due under the Freddie Mac Guarantee;
provided that in the case of any event described in clause (i), (ii) or (iv), a Termination Event will occur only upon the delivery of a written notice by the Directing Third Party to the Certificate Administrator, the
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Trustee and the Master Servicer declaring the occurrence of a Termination Event under such clause, and after the expiration of the cure period set forth in such clause.
The Special Servicer will sell all of the Defaulted Loans pursuant to the Defaulted Loan Provision within six months after the Final Remaining Term Payment Date. If the Special Servicer is unable to sell all of the Defaulted Loans pursuant to the Defaulted Loan Provision within six months after the Final Remaining Term Payment Date, the Special Servicer will sell the remaining Defaulted Loans to Freddie Mac at fair value, as determined by a third party mutually agreed to by Freddie Mac and the Directing Third Party (if any Realized Losses resulting from such sale would be allocated to all or any portion of the Certificates held by the Directing Third Party as described in “—Allocation of Realized Losses” above).
If a Servicing Transfer Event occurs with respect to any Mortgage Loan, the Mortgage Loan Seller will have the right to purchase such Defaulted Loan at the Par Purchase Price. See “—Servicing Transfer Event” above.
See “The Mortgage Loan Purchase, Trust and Servicing Agreement—Termination” in this offering circular.
Denominations .......................................... The Offered Certificates will be issuable in book-entry form, in denominations of not less than $10,000 initial principal balance and in any whole dollar denomination in excess of $10,000. See “Description of the Certificates—Registration and Denominations” in this offering circular.
Clearance and Settlement ........................ If you purchase an Offered Certificate, then you will hold your Certificates through The Depository Trust Company (“DTC”), in the United States, or Clearstream Banking, Luxembourg or The Euroclear System, in Europe. As a result, you will not receive a fully registered physical certificate representing your interest in your Offered Certificates, except under the limited circumstances described under “Description of the Certificates—Book-Entry Registration” in this offering circular. We may elect to terminate the book-entry system through DTC with respect to all or any portion of the Offered Certificates.
Legal and Investment Considerations
Federal Income Tax Consequences ......... In the opinion of Shearman & Sterling LLP, U.S. federal tax counsel to Freddie Mac, (i) the Offered Certificates will be treated as indebtedness for U.S. federal income tax purposes and (ii) although the matter is not free from doubt, neither the Trust nor any portion thereof will be classified as an association taxable as a corporation, a publicly traded partnership taxable as a corporation or a taxable mortgage pool taxable as a corporation for U.S. federal income tax purposes. For further information regarding the U.S. federal income tax consequences of investing in the Offered Certificates, see “Certain Federal Income Tax Consequences” in this Offering Circular.
ERISA ........................................................ Subject to the considerations and conditions described under “Certain ERISA Considerations” in this offering circular, it is expected that the Class A Certificates may be acquired by Plans or persons acting on
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behalf of, using the assets of or deemed to hold the assets of a Plan. See “Certain ERISA Considerations” in this offering circular.
Legal Investment....................................... The Offered Certificates will constitute “mortgage related securities” for purposes of the Secondary Mortgage Market Enhancement Act of 1984, as amended (“SMMEA”).
We have not engaged any nationally recognized statistical rating organization (an “NRSRO”), as defined in Section 3(a)(62) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), to rate the Offered Certificates. The absence of ratings may adversely affect the ability of an investor to purchase or retain, or otherwise impact the liquidity, market value and regulatory characteristics of, the Offered Certificates.
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 offering circular.
Credit Risk Retention ............................... For information as to the compliance of this transaction with the FHFA’s Credit Risk Retention Rule (12 C.F.R. Part 1234), see “Freddie Mac—Credit Risk Retention” in this offering circular.
The Mortgage Loans
Property Type ........................................... All of the Mortgaged Properties are and will be multifamily properties. See “Risk Factors” in this offering circular for a description of some of the risks relating to multifamily properties.
Source of the Mortgage Loans ................. Neither the Trust nor the Mortgage Loan Seller originated the Mortgage Loans to be acquired by the Trust on the Closing Date and neither is expected to originate any Mortgage Loans to be acquired by the Trust after the Closing Date. Each Mortgage Loan was (or will be) originated by a third-party originator, and was or will be acquired by the Mortgage Loan Seller before its transfer to the Trust.
The Mortgage Loans will be sub-serviced by various servicers of Freddie Mac. Subject to meeting certain requirements, each originator has the right to, and may, appoint itself or its affiliate as the sub-servicer for any of the Mortgage Loans it originated.
Description of the Mortgage Loans ......... In connection with the transfer of the Mortgage Loans to the Trust on the Closing Date and from time to time after the Closing Date during the Revolving Period, the Mortgage Loan Seller will be required to make a representation and warranty that each Mortgage Loan transferred by the Mortgage Loan Seller to the Trust meets the following criteria (the “Eligibility Criteria”):
(i) Each Mortgage Loan must be eligible for securitization under Freddie Mac’s K-series securitization program or any other
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securitization program proposed by the Mortgage Loan Seller and approved by the Directing Investor.
(ii) No Mortgage Loan may have a loan-to-value (“LTV”) of greater than 80%. An LTV with respect to each Mortgage Loan will be calculated in Freddie Mac’s sole discretion and in accordance with Freddie Mac underwriting standards.
(iii) No Mortgage Loan may have a debt service coverage ratio (“DSCR”) of less than 1.25x. A DSCR with respect to each Mortgage Loan will be calculated based on (a) amortizing debt service payments (with the exception of interest-only Mortgage Loans which will be calculated based on interest-only payments) and (b) net cash flow, but otherwise the method of calculating the DSCR will be in Freddie Mac’s sole discretion and in accordance with Freddie Mac underwriting standards.
(iv) No Mortgage Loan may have more than a 50% student or military tenant concentration and no Mortgage Loan may be backed by seniors housing (including independent living and assisted living properties) or manufactured housing.
(v) No Mortgage Loan sold to the Trust may cause the weighted average LTV of the Mortgage Pool to be greater than 76%. The weighted average LTV of the Mortgage Pool will be calculated in Freddie Mac’s sole discretion and in accordance with Freddie Mac underwriting standards.
(vi) No Mortgage Loan sold to the Trust may cause the weighted average DSCR of the Mortgage Pool to be less than 1.35x. The weighted average DSCR of the Mortgage Pool will be calculated based on (a) amortizing debt service payments for each Mortgage Loan (with the exception of interest-only Mortgage Loans which will be calculated based on interest-only payments) and (b) net cash flow, but otherwise the method of calculating the DSCR will be in Freddie Mac’s sole discretion and in accordance with Freddie Mac underwriting standards.
(vii) No Mortgage Loan sold to the Trust may cause a metropolitan statistical area (MSA) to represent more than 15% of the Mortgage Pool.
(viii) On the date it is sold to the Trust, no Mortgage Loan sold to the Trust may have the Stated Principal Balance of more than 20% of the Program Size.
(ix) No Mortgage Loan may have been originated greater than six months prior to the time of sale into the Trust.
(x) Except with respect to any Junior Loan identified in the Mortgage Loan Schedule or the related Supplement to Mortgage Loan Schedule, as applicable, no Mortgage Loan is cross-collateralized or cross-defaulted with any other Mortgage Loan.
The foregoing representation with respect to each Mortgage Loan will be deemed to be true and correct and the Mortgage Loan Seller will not
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be required to repurchase or substitute such Mortgage Loan due to any breach or alleged breach of such representation if such Mortgage Loan does not become an Ineligible Loan within 30 days after the applicable Transfer Date.
In addition, in connection with each transfer of the Mortgage Loans to the Trust, the Mortgage Loan Seller will be required to make each representation and warranty set forth in Exhibit D to this offering circular, subject to, if applicable, any Approved Exceptions. The Mortgage Loan Seller will be required to cure, repurchase or substitute any Mortgage Loan that is subject to a material breach of any such representation.
See “The Mortgage Loan Purchase, Trust and Servicing Agreement—Repurchase and Substitution of Mortgage Loans by the Mortgage Loan Seller” in this offering circular.
See also “Description of the Mortgage Loans” in this offering circular for a description of certain terms and conditions of the Initial Mortgage Loans. Terms and conditions of any additional Mortgage Loans that may be transferred to the Trust may differ from those terms and conditions of the Initial Mortgage Loans described in this offering circular.
Initial Pool Information ........................... We intend to transfer 38 Initial Mortgage Loans to the Trust on the Closing Date (the “Initial Pool”) with an aggregate Cut-off Date Principal Balance as of the Initial Cut-off Date of $997,425,958. The Initial Mortgage Loans are secured by the 38 Mortgaged Properties identified on Exhibit A to this offering circular.
The Initial Pool that we intend to transfer to the Trust on the Closing Date will have the following general characteristics as of the Initial Cut-off Date.
Initial Pool Number of Mortgage Loans ........................................... 38 Number of Mortgaged Properties ................................... 38 Initial aggregate Cut-off Date Principal Balance ............ $997,425,958 Average Cut-off Date Principal Balance ........................ $26,248,052 Ten largest Mortgage Loans as a % of Cut-off
Date Principal Balance ............................................... 54.4% Weighted average Cut-off Date LTV ............................. 71.7% Weighted average annual mortgage interest rate ............ 3.916%
All of the Initial Mortgage Loans have been originated as of the date of this offering circular. Certain of the Initial Mortgage Loans have not yet been acquired by us but are expected to be acquired by us prior to the Closing Date.
For more information regarding the Mortgage Loans, you should review the following sections in this offering circular:
(i) “Risk Factors—Risks Related to the Mortgage Loans”;
(ii) “Description of the Mortgage Loans”;
(iii) Exhibit A - Certain Characteristics of the Underlying Mortgage Loans in the Initial Pool and the Related Mortgaged Real Properties; and
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(iv) Exhibit B - Certain Initial Pool Information.
When reviewing the information that we have included in this offering circular with respect to the Mortgage Loans in the Initial Pool, please note that:
(i) All numerical information provided with respect to the Mortgage Loans is provided on an approximate basis.
(ii) All weighted average information provided with respect to the Mortgage Loans reflects a weighting based on their respective Cut-off Date Principal Balances. We will transfer the Mortgage Loans with their respective Cut-off Date Principal Balances to the issuing entity. We show the Cut-off Date Principal Balance for each of the Mortgage Loans on Exhibit A to this offering circular.
In calculating the respective Cut-off Date Principal Balances of the Mortgage Loans, we have assumed that:
(i) All scheduled payments of principal and/or interest due on the Mortgage Loans on or before their respective due dates in February 2017 are timely made; and
(ii) there are no prepayments or other unscheduled collections of principal with respect to any of the Mortgage Loans during the period from its due date in January 2017 up to and including February 1, 2017.
If a Mortgage Loan is secured by a Mortgaged Property consisting of multiple parcels of real property, we treat those parcels as a single Mortgage Property.
Statistical information regarding the Mortgage Loans may change prior to the Closing Date due to changes in the composition of the Mortgage Pool prior to that date.
The Mortgage Loans that we transfer to the Trust are required to meet the Eligibility Criteria, and we will be required to make certain representations and warranties set forth on Exhibit D to this offering circular with respect to each Mortgage Loan, subject to, if applicable, any Approved Exceptions. However, certain characteristics of any additional Mortgage Loans that the Trust may acquire from us may be different from the characteristics of the Initial Pool shown in this offering circular. The Mortgage Loans in the Initial Pool may not be indicative of the composition of the Mortgage Loans in the Trust over the term of the Certificates. See “Risk Factors—Risks Related to the Mortgage Loans—The Mortgage Pool is Subject to Change” and “—Potential Conflicts of Interest in the Selection of the Mortgage Loans” in this offering circular.
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RISK FACTORS
General
The risks and uncertainties described below summarize the material risks in connection with the purchase of the Certificates. Prospective investors should consider carefully the following factors, in addition to the matters set forth elsewhere in this offering circular, prior to investing in the Certificates. We cannot assure you that the Mortgage Loans will not incur losses or that investors in the Certificates will receive a return of any or all of their invested capital.
The risks and uncertainties described below are not the only ones relating to the Certificates. Additional risks and uncertainties not presently known to or deemed immaterial by the Trust may also impair your investment. If any of the following events or circumstances identified as risks actually occur or materialize, your investment could be materially and adversely affected. This offering circular also contains forward looking statements that involve risks and uncertainties. Actual results could differ materially from those anticipated in these forward looking statements as a result of certain factors, including the risks described below and elsewhere in this offering circular.
The Certificates May Not Be a Suitable Investment for You
The Certificates are not suitable investments for all investors. Structured investment products like the Certificates are complex instruments involving a high degree of risk and are intended for sale only to sophisticated investors capable of understanding and assuming such risks. In particular, you should not purchase any Class of Certificates unless you understand and are able to bear the prepayment, credit, liquidity and market risks associated with that Class of Certificates. For those reasons and for the reasons set forth in these “Risk Factors,” the yield to maturity and the aggregate amount and timing of distributions on the Certificates are subject to material variability from period to period and give rise to the potential for significant loss over the life of the Certificates. The interaction of these factors and their effects are impossible to predict and are likely to change from time to time. As a result, an investment in the Certificates involves substantial risks and uncertainties and should be considered only by sophisticated institutional investors with substantial investment experience with similar types of securities who have conducted appropriate diligence on the Mortgage Loans and the Certificates and have consulted their own professional advisors as to the risks involved in making such a purchase.
Combination or “Layering” of Multiple Risks May Significantly Increase Risk of Loss
Although the various risks discussed in this offering circular are generally described separately, you should consider the potential effects of the interplay of multiple risk factors. Where more than one significant risk factor is present, the risk of loss to an investor in the Certificates may be significantly increased.
An Investor In the Certificates Should Seek Independent Advice
None of the Master Servicer, Special Servicer, Trustee, Custodian, Certificate Administrator, Mortgage Loan Seller, Guarantor, any Placement Agent or any affiliate of any of them is providing investment, accounting, tax or legal advice in respect of the Certificates and will not have a fiduciary relationship with any investor or prospective investor in the Certificates.
Risks Related to the Mortgage Loans
Interest and Principal Distributions on the Certificates Will Depend on the Performance of the Mortgage Loans and the Availability of Sufficient Net Sales Proceeds of the Mortgage Loans. We intend to purchase the Mortgage Loans from the Trust for securitization in one of our securitization programs. During the Revolving Period, any sales proceeds of the Mortgage Loans that constitute Principal Collections will be applied to purchase additional Mortgage Loans from us, and such Principal Collections will not be available for distribution of principal or interest on the Certificates. Accordingly, the Borrowers’ failure to make a monthly debt service payment will adversely affect your ability to receive distributions on the Certificates, subject to our obligation to make a guarantee payment with respect to the Class A Certificates.
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After the end of the Revolving Period, only the Class A Certificates will be entitled to receive principal distributions in an amount equal to 75% of Available Principal Collections received during the related Collection Period, and the remaining portion of Available Principal Collections will be deposited into the Principal Reserve Account and will not be available for distribution on the Certificates until the Final Remaining Term Payment Date, except in certain circumstances to cure an Asset Mismatch or an Interest Mismatch, as described under “Description of the Certificates—Mandatory Principal Payment; Cleanup Call” in this offering circular.
In the event that we are not able to securitize the Mortgage Loans held by the Trust, subject to the rights of the Directing Third Party to require us to repurchase a Repurchase Loan, the Trust will hold such Mortgage Loans until the Final Certificate Maturity Date, or if earlier, the date on which we are required to purchase such Mortgage Loans at the Par Purchase Price under the Trust and Servicing Agreement. In the event that any Mortgage Loan becomes a Defaulted Loan, unless such Defaulted Loan is a Repurchase Loan, we are not obligated to purchase such Defaulted Loans during the term of the Certificates, and such Defaulted Loans will be subject to a work-out or will be liquidated in accordance with the terms of the Trust and Servicing Agreement. We cannot assure you that the net sales proceeds of such Defaulted Loans will be sufficient to pay the Certificates in full at maturity. The value and performance of each Mortgage Loan will be affected by various risk factors with respect to the Mortgage Loans described below.
The Mortgage Pool is Subject to Change. On the Closing Date, we expect to transfer to the Trust 38 Initial Mortgage Loans that are identified on Exhibit A to this offering circular, collectively having an aggregate Cut-off Date Principal Balance as of the Initial Cut-off Date of approximately $997,425,958 (the “Initial Pool”). Certain characteristics of the Initial Pool are set forth in Exhibit A to this offering circular.
We intend to purchase the Mortgage Loans from the Trust after the Closing Date to securitize such Mortgage Loans in one of our securitization programs and also intend to transfer additional Mortgage Loans to the Trust from time to time after the Closing Date in accordance with the terms of the Trust and Servicing Agreement. The Mortgage Loans that we transfer to the Trust are required to meet the Eligibility Criteria, and we will be required to make certain representations and warranties set forth on Exhibit D to this offering circular with respect to each Mortgage Loan, subject to certain exceptions that were approved by Freddie Mac during the origination process of such Mortgage Loan. However, certain characteristics of any additional Mortgage Loans that the Trust may acquire from us may be different from the characteristics of the Initial Pool shown on Exhibit B to this offering circular. For example, the Mortgage Loans will amortize at different rates and mature on different dates. In addition, some of those Mortgage Loans may be prepaid or liquidated. The geographical concentration of Mortgaged Properties will also change over time. As a result, the relative composition of the Mortgage Pool will change over time. In addition, after the Revolving Period, as payments and other collections of principal are received with respect to the Mortgage Loans, the remaining Mortgage Pool backing the Certificates may exhibit an increased concentration with respect to number and affiliation of Borrowers and geographic location. The Mortgage Loans in the Initial Pool, therefore, may not be indicative of the composition of the Mortgage Loans in the Trust over the term of the Certificates. We cannot assure you that any differences in the characteristics of the Initial Pool and additional Mortgage Loans that may be acquired by the Trust after the Closing Date will not adversely affect your investment in the Certificates. See also “—Potential Conflicts of Interest in the Selection of the Mortgage Loans” below.
The Mortgage Loans Are Nonrecourse. Generally, except for certain limited nonrecourse carveouts, each of the Mortgage Loans is a nonrecourse obligation of the related Borrower. This means that, in the event of a default, recourse will generally be limited to the related Mortgaged Property and other assets that have been pledged to secure that Mortgage Loan. Consequently, full and timely payment on each Mortgage Loan will depend on one or more of the following:
the sufficiency of the net operating income of the applicable Mortgaged Property to pay debt service;
the market value of the applicable Mortgaged Property at or prior to maturity; and
the ability of the related Borrower to refinance or sell the applicable Mortgaged Property at maturity.
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In general, the value of any multifamily property will depend on its ability to generate net operating income. The ability of an owner to finance a multifamily property will depend, in large part, on the property’s value and ability to generate net operating income.
None of the Mortgage Loans will be insured or guaranteed by any governmental entity or private mortgage insurer.
If distributions on the Mortgage Loans and the other assets are insufficient to make payments on the Certificates, no other assets will be available for payment of the deficiency, except that the timely payment of interest on and the ultimate payment of principal of the Offered Certificates and the reimbursement of Realized Losses allocated to the Offered Certificates will be guaranteed by us, as described under “Description of the Certificates—Distributions—Freddie Mac Guarantee” in this offering circular. Following liquidation of all of the assets of the Trust, the obligations of the Trust to pay such deficiencies will be extinguished and will not be revived, which may result in a loss of some or all of a holder’s investment.
Performance of Each of the Mortgage Loans Will Be Dependent on the Cash Flow Produced by the Related Mortgaged Property, Which Can Be Volatile and Insufficient To Allow Timely Distributions on the Offered Certificates, and on the Value of the Related Mortgaged Property, Which May Fluctuate Over Time. The Borrower’s ability to make payments on loans secured by multifamily rental properties typically depends on the cash flow produced by those properties. The ratio of net cash flow to debt service of a mortgage loan secured by an income-producing property is an important measure of the risk of default on the loan.
Payment on each Mortgage Loan and the value of each Mortgage Loan may also depend on:
the ability of the related Borrower to sell the related Mortgaged Property or refinance the Mortgage Loan, at scheduled maturity, in an amount sufficient to repay the Mortgage Loan; and/or
in the event of a default under the Mortgage Loan and a subsequent sale of the related Mortgaged Property upon the acceleration of such Mortgage Loan’s maturity, the amount of the sale proceeds, taking into account any adverse effect of a foreclosure proceeding on those sale proceeds.
In general, if a Mortgage Loan has a relatively high loan-to-value ratio or a relatively low debt service coverage ratio, a foreclosure sale is more likely to result in proceeds insufficient to satisfy the outstanding debt.
The cash flows from the operation of multifamily real properties are volatile and may be insufficient to cover debt service on the related Mortgage Loan and pay operating expenses at any given time. This may cause the value of a property to decline. Cash flows and property values generally affect:
the ability to cover debt service;
the ability to pay a Mortgage Loan in full with sales or refinance proceeds; and
the amount of proceeds recovered upon foreclosure.
Cash flows and property values depend on a number of factors, including:
national, regional and local economic conditions, including plant closings, military base closings, economic and industry slowdowns and unemployment rates;
local real estate conditions, such as an oversupply of units similar to the units at the related Mortgaged Property;
increases in vacancy rates;
changes or continued weakness in a specific industry segment that is important to the success of the related Mortgaged Property;
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increases in operating expenses at the Mortgaged Property and in relation to competing properties;
the nature of income from the related Mortgaged Property, such as whether rents are subject to rent control or rent stabilization laws;
a decline in rental rates as leases are renewed or entered into with new tenants;
the level of required capital expenditures for proper maintenance, renovations and improvements demanded by tenants or required by law at the related Mortgaged Property;
creditworthiness of tenants, a decline in the financial condition of tenants or tenant defaults;
the number of tenants at the related Mortgaged Property and the duration of their respective leases;
dependence upon a concentration of tenants working for a particular business or industry;
demographic factors;
retroactive changes in building or similar codes that require modifications to the related Mortgaged Property;
capable management and adequate maintenance for the related Mortgaged Property;
location of the related Mortgaged Property;
proximity and attractiveness of competing properties;
whether the Mortgaged Property has uses subject to significant regulation;
the rate at which new rentals occur;
perceptions by prospective tenants of the safety, convenience, services and attractiveness of the related Mortgaged Property;
the age, construction, quality and design of the related Mortgaged Property; and
whether the related Mortgaged Property is readily convertible to alternative uses.
Criminal Activity May Adversely Affect Property Performance. Certain of the Mortgage Loans may be secured by Mortgaged Properties that may have been, or may be, the site of criminal activities. Perceptions by prospective tenants of the safety and reputation of any such Mortgaged Property may influence the cash flow produced by such Mortgaged Property. In addition, in connection with any criminal activities that occur at a related Mortgaged Property, litigation may be brought against a Borrower or political or social conditions may result in civil disturbances.
Forfeiture (Including for Drug, RICO and Money Laundering Violations) May Present Risks. 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. A number of offenses can trigger such a seizure and forfeiture including, among others, violations of the Racketeer Influenced and Corrupt Organizations Act, the Bank Secrecy Act, the Money Laundering Control Act, the USA PATRIOT Act and the regulations issued pursuant to all of them, as well as the controlled substance laws. In many instances, the United States may seize the property civilly, without a criminal prosecution.
In the event of a forfeiture proceeding, a financial institution that is a lender of funds may be able to establish its interest in the property by proving that (a) 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 (b) at the time of the execution of
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the mortgage, despite appropriate due diligence, it “did not know or was reasonably without cause to believe that the property was subject to forfeiture.” However, we cannot assure you that such a defense will be successful.
Multifamily Lending Subjects Your Investment to Special Risks that Are Not Associated with Single-Family Residential Lending. The Mortgage Loans are secured by multifamily income-producing properties.
Multifamily lending is generally thought to be riskier than single-family residential lending because, among other things, larger loans are made to single Borrowers or groups of related Borrowers.
Furthermore, the risks associated with lending on multifamily properties are inherently different from those associated with lending on the security of single-family residential properties. For example, repayment of each of the Mortgage Loans will be dependent on the performance and/or value of the related Mortgaged Property.
There are additional factors in connection with multifamily lending, not present in connection with single-family residential lending, which could adversely affect the economic performance of the respective Mortgaged Properties that secure the Mortgage Loans. Any one of these additional factors, discussed in more detail in this offering circular, could result in a reduction in the level of cash flow from those Mortgaged Properties that is required to ensure timely distributions on the Certificates.
Certain Mortgaged Properties May Contain Commercial Components. Certain of the Mortgaged Properties may contain retail, office or other commercial units. The value of retail, office and other commercial units is significantly affected by the quality of the tenants and the success of the tenant business. The correlation between the success of tenant businesses and a retail unit’s value may be more direct with respect to retail units than other types of commercial property because a component of the total rent paid by certain retail tenants may be tied to a percentage of gross sales. In addition, certain retail, office and commercial units may have tenants that are subject to risks unique to their business, such as medical offices, dental offices, theaters, educational facilities, fitness centers and restaurants. These types of leased spaces may not be readily convertible (or convertible at all) to alternative uses if the leased spaces were to become vacant. We cannot assure you that the existence of retail, office or other commercial units will not adversely impact operations at or the value of the Mortgaged Properties.
Condominium Ownership May Limit Use of the Mortgaged Property and Decision Making Related to the Mortgaged Property. In the case of condominiums, a board of managers generally has discretion to make decisions affecting the condominium and there is no assurance that the related Borrower will have any control over decisions made by the related board of managers. Decisions made by that board of managers, including decisions regarding assessments to be paid by the unit owners, insurance to be maintained on the condominium and many other decisions affecting the maintenance of the condominium, may have an adverse impact on any Mortgage Loans that are secured by condominium interests. We cannot assure you 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 on the part of the Borrower will not allow the applicable 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 a Mortgaged Property which consists of a condominium interest, due to the possible existence of multiple loss payees on any insurance policy covering the Mortgaged Property, there could be a delay in the allocation of any related insurance proceeds. Consequently, servicing and realizing upon a condominium property could subject the Trust to a greater delay, expense and risk than with respect to a Mortgage Loan secured by a property that is not a condominium.
Cooperatively-Owned Apartment Buildings Subject Your Investment to Special Risks. Certain of the Mortgage Loans that we intend to include in the Trust may be secured by a Mortgaged Property owned by a cooperative corporation. In general, each shareholder in a cooperative corporation is entitled to occupy a particular apartment unit under a long-term proprietary lease or occupancy agreement.
A tenant/shareholder of a cooperative corporation must make a monthly maintenance payment to the corporation. The monthly maintenance payment represents a tenant/shareholder’s pro rata share of the corporation’s mortgage loan payments, real property taxes, maintenance expenses and other capital and ordinary expenses of the property. These monthly maintenance payments are in addition to any payments of principal and
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interest the tenant/shareholder must make on any loans of the tenant/shareholder secured by its shares in the corporation.
A cooperative corporation is directly responsible for building maintenance and payment of real estate taxes and hazard and liability insurance premiums. A cooperative corporation’s ability to meet debt service obligations on a Mortgage Loan secured by, and to pay all other operating expenses of, the cooperatively owned property depends primarily upon the receipt of maintenance payments from the tenant/shareholders; and any rental income from units or commercial space that the cooperative corporation might control.
A cooperative corporation may have to impose special assessments on the tenant/shareholders in order to pay unanticipated expenditures. Accordingly, a cooperative corporation is highly dependent on the financial well-being of its tenant/shareholders. A cooperative corporation’s ability to pay the amount of any balloon payment due at the maturity of a Mortgage Loan secured by the cooperatively owned property depends primarily on its ability to refinance the property.
In a typical cooperative conversion plan, the owner of a rental apartment building contracts to sell the building to a newly formed cooperative corporation. Shares are allocated to each apartment unit by the owner or sponsor of the Borrower. The current tenants have a specified period to subscribe at prices discounted from the prices to be offered to the public after that period. As part of the consideration for the sale, the owner or sponsor receives all the unsold shares of the cooperative corporation. In general the sponsor controls the corporation’s board of directors and management for a limited period of time. If the sponsor holds the shares allocated to a large number of apartment units, the lender on a Mortgage Loan secured by a cooperatively owned property may be adversely affected by a decline in the creditworthiness of the sponsor.
Many cooperative conversion plans are non-eviction plans. Under a non-eviction plan, a tenant at the time of conversion who chooses not to purchase shares is entitled to reside in its apartment unit as a subtenant from the owner of the shares allocated to that unit. Any applicable rent control or rent stabilization laws would continue to be applicable to the subtenancy. In addition, the subtenant may be entitled to renew its lease for an indefinite number of years with continued protection from rent increases above those permitted by any applicable rent control and rent stabilization laws. The owner/shareholder is responsible for the maintenance payments to the cooperative corporation without regard to whether it receives rent from the subtenant or whether the rent payments are lower than maintenance payments on the unit. Newly formed cooperative corporations typically have the greatest concentration of non-tenant/shareholders.
The Source of Repayment on the Certificates Will Be Limited to Payments and Other Collections on the Mortgage Loans. The Certificates will represent interests solely in the Trust. The primary assets of the Trust will be a segregated pool of multifamily Mortgage Loans. Accordingly, repayment of the Certificates will be limited to payments and other collections on the Mortgage Loans subject, in the case of the Class A Certificates, to the Freddie Mac Guarantee.
However, the Mortgage Loans will not be an obligation of, or be insured or guaranteed by:
any governmental entity;
any private mortgage insurer;
Freddie Mac;
the Master Servicer;
the Special Servicer;
any sub-servicer of the Master Servicer or the Special Servicer;
the Trustee;
the Custodian; or
any of their or our respective affiliates.
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All of the Mortgage Loans Are Secured by Multifamily Rental Properties, Thereby Materially Exposing Certificateholders to Risks Associated with the Performance of Multifamily Rental Properties. All of the Mortgaged Properties are primarily used for multifamily rental purposes. A number of factors may adversely affect the value and successful operation of a multifamily rental property. Some of these factors include:
the number of competing residential developments in the local market, including apartment buildings and site-built single family homes;
the physical condition and amenities, including access to transportation, of the subject property in relation to competing properties;
the subject property’s reputation;
applicable state and local regulations designed to protect tenants in connection with evictions and rent increases, including rent control and rent stabilization regulations;
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;
restrictions on the age of tenants who may reside at the subject property;
local factory or other large employer closings;
the location of the property, for example, a change in the neighborhood over time;
the level of mortgage interest rates to the extent it encourages tenants to purchase housing;
the ability of the management team to effectively manage the subject property;
the ability of the management team to provide adequate maintenance and insurance;
compliance and continuance of any government housing rental subsidy programs from which the subject property receives benefits and whether such subsidies or vouchers may be used at other properties;
distance from employment centers and shopping areas;
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 payment or a reduction in occupancy level;
the financial condition of the owner of the subject property; and
government agency rights to approve the conveyance of such Mortgaged Properties could potentially interfere with the foreclosure or execution of a deed-in-lieu of foreclosure of such properties.
Because units in a multifamily rental property are primarily leased to individuals, usually for no more than a year, the ability of the property to generate net operating income is likely to change relatively quickly where a downturn in the local economy or the closing of a major employer in the area occurs.
Some units in a multifamily rental property may be leased to corporate entities. Expiration or non-renewals of corporate leases and vacancies related to corporate tenants may adversely affect the income stream at the Mortgaged Property. We cannot assure you that these circumstances will not adversely impact operations at or the value of the Mortgaged Property.
Particular factors that may adversely affect the ability of a multifamily property to generate net operating income include—
an increase in interest rates, real estate taxes and other operating expenses;
an increase in the capital expenditures needed to maintain the property or make renovations or improvements;
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an increase in vacancy rates;
a decline in rental rates as leases are renewed or replaced; and
natural disasters and civil disturbances such as earthquakes, hurricanes, floods, eruptions or riots.
The volatility of net operating income generated by a multifamily property over time will be influenced by many of the foregoing factors, as well as by—
the length of tenant leases;
the creditworthiness of tenants;
the rental rates at which leases are renewed or replaced;
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 maintain or replace tenants.
Therefore, multifamily properties with short-term or less creditworthy sources of revenue and/or relatively high operating costs can be expected to have more volatile cash flows than multifamily properties with medium- to long-term leases from creditworthy tenants and/or relatively low operating costs. A decline in the real estate market will tend to have a more immediate effect on the net operating income of multifamily properties with short-term revenue sources and may lead to higher rates of delinquency or defaults on the Mortgage Loans secured by those properties.
In addition, some states regulate the relationship of an owner and its tenants at a multifamily rental property. Among other things, these states may—
require written leases;
require good cause for eviction;
require disclosure of fees;
prohibit unreasonable rules;
prohibit retaliatory evictions;
prohibit restrictions on a resident’s choice of unit vendors;
limit the bases on which a landlord may increase rent; or
prohibit a landlord from terminating a tenancy solely by reason of the sale of the owner’s building.
Apartment building owners have been the subject of lawsuits under state “Unfair and Deceptive Practices Acts” and other general consumer protection statutes for coercive, abusive or unconscionable leasing and sales practices.
Some counties and municipalities also impose rent control regulations on apartment buildings. These regulations may limit rent increases to—
fixed percentages;
percentages of increases in the consumer price index;
increases set or approved by a governmental agency; or
increases determined through mediation or binding arbitration.
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Certain Mortgaged Properties may be subject to rent control or stabilization laws or regulations or other similar statutory or contractual programs. We cannot assure you that the rent stabilization laws or regulations will not cause a reduction in rental income. If rents are reduced, we cannot assure you that such Mortgaged Property will be able to generate sufficient cash flow to satisfy debt service payments and operating expenses.
In many cases, the rent control laws do not provide for decontrol of rental rates upon vacancy of individual units. Any limitations on a landlord’s ability to raise rents at a multifamily rental property may impair the landlord’s ability to repay a Mortgage Loan secured by the property or to meet operating costs.
In addition, multifamily rental properties are part of a market that, in general, is characterized by low barriers to entry. Thus, a particular multifamily rental property market with historically low vacancies could experience substantial new construction and a resultant oversupply of rental units within a relatively short period of time. Because units in a multifamily rental property are typically leased on a short-term basis, the tenants residing at a particular property may easily move to alternative multifamily rental properties with more desirable amenities or locations or to single family housing.
Certain of the multifamily rental properties that secure the Mortgage Loans may be subject to certain restrictions imposed pursuant to restrictive covenants, reciprocal easement agreements and operating agreements or historical landmark designations. Such use restrictions could include, for example, limitations on the use of the properties, the character of improvements on the properties, the Borrowers’ right to operate certain types of facilities within a prescribed radius of the properties and limitations affecting noise and parking requirements, among other things. In addition, certain of the multifamily rental properties that secure the Mortgage Loans may have access to certain amenities and facilities at other local properties pursuant to shared use agreements, and we cannot assure you that such use agreements will remain in place indefinitely, or that any amenities and facilities at other properties will remain available to the tenants of any multifamily rental property securing a Mortgage Loan. 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 of the multifamily rental properties that secure the Mortgage Loans may be subject to land use restrictive covenants or contractual covenants in favor of federal or state housing agencies. The obligations of the related Borrowers to comply with such restrictive covenants and contractual covenants, in most cases, constitute encumbrances on the related Mortgaged Property that are superior to the lien of the related Mortgage Loan. In circumstances where the Mortgaged Property is encumbered by a regulatory agreement in favor of a federal or state housing agency, the Borrower is generally required by the loan documents to comply with any such regulatory agreement. The covenants in a regulatory agreement may require, among other things, that a minimum number or percentage of units be rented to tenants who have incomes that are substantially lower than median incomes in the applicable area or region or impose restrictions on the type of tenants who may rent units, such as imposing minimum age restrictions. These covenants may limit the potential rental rates that may govern rentals at any of those properties, the potential tenant base for any of those properties or both. An owner may subject a multifamily rental property to these covenants in exchange for tax credits or rent subsidies. When the credits or subsidies cease, net operating income will decline. We cannot assure you that these requirements will not cause a reduction in rental income. If rents are reduced, we cannot assure you that the related property will be able to generate sufficient cash flow to satisfy debt service payments and operating expenses.
In addition, restrictive covenants and contractual covenants contained in regulatory agreements may require a Borrower, among other conditions, (i) to submit periodic compliance reports and/or permit regulatory authorities to conduct periodic inspections of the related Mortgaged Property, (ii) to meet certain requirements as to the condition of affordable units or (iii) to seek the consent of a regulatory authority in connection with the transfer or sale of the Mortgaged Property or in connection with a change in the property management. In some cases, regulatory agreements may provide for remedies other than specific performance of restrictive covenants. Such other remedies may include, but are not limited to, providing for the ability of a regulatory authority to replace the property manager. In addition, in some cases, regulatory agreements may impose restrictions on transfers of the Mortgaged Property in connection with a foreclosure, including, but not limited to, requiring regulatory authority consent and limiting the type of entities that are permissible transferees of the Mortgaged Property. We cannot assure you that these circumstances will not adversely impact operations at or the value of the Mortgaged Property, that such consent will be obtained in the event a federal or state housing agency has the right to consent to any
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change in the property management or ownership of the Mortgaged Property or that the failure to obtain such consent will not adversely impact the Trust’s ability to exercise its remedies upon default of a Mortgage Loan.
Some of the Mortgaged Properties have tenants that rely on rent subsidies under various government funded programs, including Section 8. In addition, with respect to certain of the Mortgage Loans, the Borrower may receive subsidies or other assistance from government programs. Generally, a Mortgaged Property receiving such subsidy or assistance must satisfy certain requirements, the Borrower must observe certain leasing practices and/or the tenant(s) must regularly meet certain income requirements. Certain Mortgaged Properties may be subject to a project-based Section 8 Housing Assistance Payments (“HAP”) contract. The HAP contract cannot be assigned by the lender without the consent of the United States Department of Housing and Urban Development (“HUD”) or a state or local housing agency and will not be assigned to the Trust. We cannot assure you that such programs will continue in their present form or that the Borrowers will continue to comply with the requirements of the programs to enable the Borrowers to receive the subsidies in the future or that the level of assistance provided will be sufficient to generate enough revenues for the Borrowers to meet their obligations under the Mortgage Loans, nor can we assure you that any transferee of the Mortgaged Property, whether through foreclosure or otherwise, will obtain the consent of HUD or any state or local housing agency.
Some of the Mortgaged Properties that secure the Mortgage Loans may entitle or may have entitled their owners to receive low income housing tax credits pursuant to Code Section 42. Code Section 42 provides a tax credit for owners of multifamily rental properties meeting the definition of low income housing who have received a tax credit allocation from a state or local allocating agency. The total amount of tax credits to which a property owner is entitled is based on the percentage of total units made available to qualified tenants.
The tax credit provisions limit the gross rent for each low-income unit. Under the tax credit provisions, a property owner must comply with the tenant income restrictions and rental restrictions over a minimum of a 15-year compliance period. In addition, agreements governing the multifamily rental property may require an “extended use period,” which has the effect of extending the income and rental restrictions for an additional period.
In the event a multifamily rental property does not maintain compliance with the tax credit restrictions on tenant income or rental rates or otherwise satisfy the tax credit provisions of the Code, the property owner may suffer a reduction in the amount of available tax credits and/or face the recapture of all or part of the tax credits related to the period of the noncompliance and face the partial recapture of previously taken tax credits. The loss of tax credits, and the possibility of recapture of tax credits already taken, may provide significant incentive for the property owner to keep the related multifamily rental property in compliance with such tax credit restrictions and limit the income derived from the related property.
Some of the Mortgaged Properties that secure the Mortgage Loans may entitle or may have entitled their owners to receive tax abatements or exemptions or may be subject to reduced taxes in connection with a “payment in lieu of taxes” (“PILOT”) agreement. In certain cases, such tax abatements may be scheduled to expire during the term of the Mortgage Loan.
With respect to such Mortgaged Properties that entitle their owners to receive tax exemptions, the related Cut-off Date LTVs are often calculated using appraised values that assume that the owners of such Mortgaged Properties receive such property tax exemptions. Such property tax exemptions often require the property owners to be formed and operated for qualifying charitable purposes and to use the property for those qualifying charitable purposes. Claims for such property tax exemptions must often be re-filed annually by the property owners. Although the loan documents generally require the Borrower to submit an annual claim and to take actions necessary for the Borrower and the Mortgaged Property to continue to qualify for a property tax exemption, if the Borrower fails to do so, property taxes payable by the Borrower on the Mortgaged Property could increase, which could adversely impact the cash flow at or the value of the Mortgaged Property. In addition, if the Trust forecloses on any such Mortgaged Property, the Trust may be unable to qualify for a property tax exemption. Finally, if the Trust sells any such Mortgaged Property in connection with a default on the Mortgage Loan, prospective purchasers may be unwilling to bid on the Mortgaged Property if they are unable to satisfy the requirements of a property tax exemption. This could limit the pool of prospective purchasers for any such Mortgaged Property.
We cannot assure you that any tax abatements and exemptions or PILOT agreements will continue to benefit the related Mortgaged Properties or that the continuance or termination of any of the tax abatements or
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exemptions will not adversely impact the Mortgaged Properties or the related Borrowers’ ability to generate sufficient cash flow to satisfy debt service payments and operating expenses.
The Successful Operation of a Multifamily Property Depends on Tenants. Generally, multifamily properties are subject to leases. The owner of a multifamily property typically uses lease or rental payments for the following purposes—
to pay for maintenance and other operating expenses associated with the property;
to fund repairs, replacements and capital improvements at the property; and
to pay debt service on mortgage loans secured by, and any other debt obligations associated with operating, the property.
Factors that may adversely affect the ability of a multifamily property to generate net operating income from lease and rental payments include—
an increase in vacancy rates, which may result from tenants deciding not to renew an existing lease;
an increase in tenant payment defaults;
a decline in rental rates as leases are entered into, renewed or extended at lower rates;
an increase in the capital expenditures needed to maintain the property or to make improvements; and
an increase in operating expenses.
Mortgage Loans That Are Subject to Ground Leases Can Pose Unique Risks. Certain of the Mortgaged Properties may be secured by the leasehold interests of the Borrowers. We cannot assure you that the circumstances related to any ground lease agreement at the Mortgaged Property will not adversely impact operations at or the value of the Mortgaged Property or the Borrower’s ability to generate sufficient cash flow to satisfy debt service payments and operating expenses.
Pursuant to Section 365(h) of Title 11 of the United States Code, as amended (the “Bankruptcy Code”), a ground lessee whose ground lease is rejected by a debtor ground lessor has the right to remain in possession of its leased premises under the rent reserved in the lease for the term (including renewals) of the ground lease but is not entitled to enforce the obligations of the ground lessor to provide any services required under the ground lease. In the event a ground lessee/Borrower in bankruptcy rejects any or all of its ground lease, the leasehold mortgagee would have the right to succeed to the ground lessee/Borrower’s position under the lease only if the ground lessor had specifically granted the mortgagee such right. In the event of concurrent bankruptcy proceedings involving the ground lessor and the ground lessee/Borrower, the mortgagee may be unable to enforce the bankrupt ground lessee/Borrower’s obligation to refuse to treat a ground lease rejected by a bankrupt ground lessor as terminated. In such circumstances, a ground lease could be terminated notwithstanding lender protection provisions contained therein or in the mortgage. A mortgagee could lose its security unless the bankruptcy court, as a court of equity, allows the mortgagee to assume the ground lessee’s obligations under the ground lease and succeed to the ground lessee’s position. Although not directly addressed by the 1994 amendment to the Bankruptcy Code, such a result would be consistent with the purposes of those amendments which grant leasehold mortgagees the right to succeed to the position of a leasehold mortgagor. Although consistent with the Bankruptcy Code, such position may not be adopted by a bankruptcy court.
Because a ground lease may be the primary security for a mortgage loan, the ability of a Borrower to refinance the related Mortgage Loan or its interest in the related Mortgaged Property often depends on the length of the related ground lease. The ability of the Borrower to refinance the existing debt on the Mortgaged Property may be adversely impacted by a ground lease with a term that is not significantly longer than the term of the Mortgage Loan.
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In certain instances, the ground lessor may have rights that are senior to the rights of the mortgagee, including the right to control in certain situations the proceeds of a condemnation of a portion of the mortgaged property. This right could materially adversely affect the Borrower’s ability to meet its obligations under the related Mortgage Loan documents depending on the use of the condemnation proceeds by the related ground lessor. In addition, after a foreclosure with respect to the ground lessee’s interest under the ground lease, the mortgagee may be required to obtain the consent of the ground lessor under the applicable ground lease prior to any further assignment of the applicable ground lease. This could adversely affect the mortgagee’s ability to realize on the proceeds of the sale of the Mortgaged Property.
In addition, certain of the ground leases may not prohibit the ground lessor and the ground lessee from modifying the terms of the ground lease. If a ground lease does not contain such a prohibition, generally the related underlying instruments will prohibit the Borrower, as ground lessee, from amending the terms of the ground lease without the mortgagee’s consent, and violation of that covenant could result in recourse liability to the Borrower. However, we cannot assure you that the terms of the ground lease will not be modified in a manner that would materially and adversely affect the rights of the mortgagee or the value of the related collateral.
Student Housing Facilities Pose Risks Not Associated With Other Types of Multifamily Properties. One of the Eligibility Criteria is that no Mortgaged Loan may have more than a 50% student tenant concentration, and some of the Mortgaged Properties securing the Mortgage Loans have tenants who are students. Student housing facilities may be more susceptible to damage or wear and tear than other types of multifamily housing. Such properties are also affected by their reliance on the financial well-being of the college or university to which such housing relates, competition from on-campus housing units (which may adversely affect occupancy), and the physical layout of the housing (which may not be readily convertible to traditional multifamily use). Further, student tenants have a higher turnover rate than other types of multifamily tenants, which in certain cases is compounded by the fact that some student leases are available for periods of less than 12 months.
Workforce Housing Properties Pose Risks Not Associated With Other Types of Multifamily Properties. Some of the Mortgaged Properties may be workforce housing properties. Workforce housing properties are multifamily housing properties with rents that are affordable to the majority of low- to middle-income households in a geographic location. Rents are generally less than the average market rent for a geographic location, meeting the following criteria:
in areas other than (i) high cost housing markets and (ii) urban areas with sprawl, rents are affordable to households with incomes less than 80% of the area median income;
in high cost housing markets, rents are affordable to households with incomes less than 120% of the area median income; and
in urban areas with sprawl (i.e. New York City, San Francisco and Washington, D.C.) rents are affordable to households with incomes less than 150% of the area median income.
Renters of workforce housing properties generally have incomes that are average or below average for a geographic location. Workforce housing properties are typically older class B or C properties that have basic or dated interior finishes, older appliances and limited or no amenities.
The Success of an Income-Producing Property Depends on Reletting Vacant Spaces. The operations at or the value of an income-producing property will be adversely affected if the owner or property manager is unable to renew leases or relet space on comparable terms when existing leases expire and/or become defaulted. Even if vacated space is successfully relet, the costs associated with reletting can be substantial and could reduce cash flow from the income-producing properties. Moreover, if a tenant at an income-producing property defaults in its lease obligations, the landlord 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.
We cannot assure you that these circumstances will not adversely impact operations at or the value of the Mortgaged Properties.
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If an income-producing property has multiple tenants, re-leasing expenditures may be more frequent than in the case of a property with fewer tenants, thereby reducing the cash flow generated by the multi-tenanted property. If a smaller income-producing property has fewer tenants, increased vacancy rates may have a greater possibility of adversely affecting operations at or the value of the related Mortgaged Property, thereby reducing the cash flow generated by the property. Similarly, if an income producing property has a number of short-term leases, re-leasing expenditures may be more frequent, thereby reducing the cash flow generated by such property.
Property Value May Be Adversely Affected Even When Current Operating Income Is Not. Various factors may affect the value of multifamily properties without affecting their current net operating income, including—
changes in interest rates;
the availability of refinancing sources;
changes in governmental regulations, licensing or fiscal policy;
changes in zoning or tax laws; and
potential environmental or other legal liabilities.
Maintaining a Property in Good Condition May Be Costly. The owner may be required to expend a substantial amount to maintain, renovate or refurbish a multifamily property. Failure to do so may materially impair the property’s ability to generate cash flow. The effects of poor construction quality will increase over time in the form of increased maintenance and capital improvements. Even superior construction will deteriorate over time if management does not schedule and perform adequate maintenance in a timely fashion. We cannot assure you that an income-producing property will generate sufficient cash flow to cover the increased costs of maintenance and capital improvements in addition to paying debt service on the Mortgage Loan(s) that may encumber that property.
The proportion of older Mortgaged Properties may adversely impact payments on the Mortgage Loans on a collective basis. We cannot assure you that a greater proportion of Mortgage Loans secured by older Mortgaged Properties will not adversely impact cash flow at the Mortgaged Properties on a collective basis or that it will not adversely affect payments related to your Certificates.
Certain of the Mortgaged Properties may currently be undergoing or are expected to undergo in the future redevelopment or renovation. We cannot assure you that any current or planned redevelopment or renovation will be completed, that such redevelopment or renovation will be completed in the time frame contemplated, or that, when and if redevelopment or renovation is completed, such redevelopment or renovation will improve the operations at, or increase the value of, the subject property. Failure of any of the foregoing to occur could have a material negative impact on the related Mortgage Loan, which could affect the ability of the related Borrower to repay the Mortgage Loan.
In the event the related Borrower (or a tenant, if applicable) fails to pay the costs of work completed or material delivered in connection with ongoing redevelopment or renovation, the portion of the Mortgaged Property on which there is construction may be subject to mechanic’s or materialmen’s liens that may be senior to the lien of the related Mortgage Loan.
The existence of construction at a Mortgaged Property may make such Mortgaged Property less attractive to tenants and, accordingly, could have a negative effect on net operating income.
Competition Will Adversely Affect the Profitability and Value of an Income-Producing Property. Some income-producing properties are located in highly competitive areas. Comparable income-producing properties located in the same area compete on the basis of a number of factors including—
rental rates;
location;
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type of services and amenities offered; and
nature and condition of the particular property.
The profitability and value of an income-producing property may be adversely affected by a comparable property that—
offers lower rents;
has lower operating costs;
offers a more favorable location; or
offers better facilities and/or amenities.
Costs of renovating, refurbishing or expanding an income-producing property in order to remain competitive can be substantial.
Borrower Bankruptcy Proceedings Can Delay and Impair Recovery on a Mortgage Loan. Under the Bankruptcy Code, the filing of a petition in bankruptcy by or against a Borrower, including a petition filed by or on behalf of a junior lienholder, will stay the sale of a real property owned by that Borrower, as well as the commencement or continuation of a foreclosure action.
In addition, if a bankruptcy court determines that the value of a real property is less than the principal balance of the Mortgage Loan it secures, the bankruptcy court may reduce the amount of secured indebtedness to the then-value of the property. This would make the lender a general unsecured creditor for the difference between the then-value of the property and the amount of its outstanding mortgage indebtedness.
A bankruptcy court also may—
grant a debtor a reasonable time to cure a payment default on a Mortgage Loan;
reduce monthly payments due under a Mortgage Loan;
change the rate of interest due on a Mortgage Loan; or
otherwise alter a Mortgage Loan’s repayment schedule.
Furthermore, the Borrower, as debtor-in-possession, or its bankruptcy Trustee has special powers to avoid, subordinate or disallow debts. In some circumstances, the claims of a secured lender, such as the Trust, may be subordinated to financing obtained by a debtor-in-possession subsequent to its bankruptcy.
Under the Bankruptcy Code, a lender will be stayed from enforcing a Borrower’s assignment of rents and leases. The legal proceedings necessary to resolve these issues can be time consuming and may significantly delay the receipt of rents. Rents also may escape an assignment to the extent they are used by Borrower to maintain its property or for other court authorized expenses.
As a result of the foregoing, the Trust’s recovery with respect to Borrowers in bankruptcy proceedings may be significantly delayed, and the total amount ultimately collected may be substantially less than the amount owed. Certain of the key principals or sponsors of the applicable Borrowers may have declared bankruptcy in the past, which may mean they are more likely to declare bankruptcy again in the future or put the borrowing entities into bankruptcy in the future.
Pursuant to the doctrine of substantive consolidation, a bankruptcy court, in the exercise of its equitable powers, has the authority to order that the assets and liabilities of a Borrower be consolidated with those of a bankrupt affiliate for the purposes of making distributions under a plan of reorganization or liquidation. Thus, property that is ostensibly the property of a Borrower may become subject to the bankruptcy case of an affiliate, the
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automatic stay applicable to such bankrupt affiliate may be extended to a Borrower and the rights of creditors of a Borrower may become impaired.
In connection with the origination of certain of the Mortgage Loans, no non-consolidation opinion with respect to the related Borrower entity was obtained at origination.
We cannot assure you that these circumstances will not have an adverse impact on the liquidity of the related Borrowers or the related sponsors. Therefore, we cannot assure you that these circumstances will not adversely impact the Borrowers’ or the sponsors’ ability to maintain the related Mortgaged Properties or pay amounts owed on the related Mortgage Loans.
Property Management Is Important to the Successful Operation of the Mortgaged Property. The successful operation of a real estate project depends in part on the performance and viability of the property manager. The property manager is generally responsible for:
operating the property and providing building services;
establishing and implementing the rental structure;
managing operating expenses;
responding to changes in the local market; and
advising the Borrower with respect to maintenance and capital improvements.
Properties deriving revenues primarily from short-term leases, such as the leases at multifamily properties, generally are more management intensive than properties leased to creditworthy tenants under long-term leases.
A good property manager, by controlling costs, providing necessary services to tenants and overseeing and performing maintenance or improvements on the property, can improve cash flow, reduce vacancies, reduce leasing and repair costs and preserve building value. On the other hand, management errors can, in some cases, impair short-term cash flow and the long-term viability of an income-producing property.
We do not make any representation or warranty as to the skills of any present or future property managers with respect to the Mortgaged Properties that will secure the Mortgage Loans. Furthermore, we cannot assure you that any property managers will be in a financial condition to fulfill their management responsibilities throughout the terms of their respective management agreements. In addition, certain of the Mortgaged Properties are managed by affiliates of the applicable Borrower. If a Mortgage Loan is in default or undergoing special servicing, this could disrupt the management of the Mortgaged Property and may adversely affect cash flow.
The Performance of a Mortgage Loan and the Related Mortgaged Property Depends in Part on Who Controls the Borrower and the Related Mortgaged Property. The operation and performance of a Mortgage Loan will depend in part on the identity of the persons or entities that control the related Borrower and the related Mortgaged Property. The performance of the Mortgage Loan may be adversely affected if control of the Borrower changes, which may occur, for example, by means of transfers of direct or indirect ownership interests in such Borrower. See “Description of the Mortgage Loans—Release of Property Through Defeasance or Prepayment—Due-on-Sale and Due-on-Encumbrance Provisions” in this offering circular.
Losses on Larger Mortgage Loans May Adversely Affect Distributions on the Certificates. Certain of the Mortgage Loans have Cut-off Date Principal Balances that are substantially higher than the average Cut-off Date Principal Balance. In general, these concentrations can result in losses that are more severe than would be the case if the total principal balance of the Mortgage Loans backing the Certificates were more evenly distributed.
Mortgage Loans to Related Borrowers May Result in More Severe Losses on the Certificates. Certain groups of the Mortgage Loans were made to the same Borrower or to Borrowers under common ownership. See “Description of the Mortgage Loans—Additional Loan and Property Information—Borrower Structures” in this
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offering circular. Mortgage Loans with the same Borrower or related Borrowers pose additional risks. Among other things:
financial difficulty at one Mortgaged Property could cause the owner to defer maintenance at another Mortgaged Property in order to satisfy current expenses with respect to the troubled Mortgaged Property; and
the owner could attempt to avert foreclosure on one Mortgaged Property 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.
In addition, multiple real properties owned by the same Borrower or related Borrowers are likely to have common management. This would increase the risk that financial or other difficulties experienced by the property manager could have a greater impact on the owner of the Mortgage Loans.
A Borrower’s Other Loans May Reduce the Cash Flow Available To Operate and Maintain the Related Mortgaged Property or May Interfere with the Trust’s Rights Under the Related Mortgage Loan, Thereby Adversely Affecting Distributions on the Certificates. As described under “—Subordinate Financing Increases the Likelihood That a Borrower Will Default on a Mortgage Loan” below and “Description of the Mortgage Loans—Certain Terms and Conditions of the Initial Mortgage Loans” and “—Permitted Additional Debt” in this offering circular, any of the Mortgaged Properties may be encumbered in the future by other subordinate debt. In addition, subject, in some cases, to certain limitations relating to maximum amounts, the Borrowers generally may incur trade and operational debt or other unsecured debt and enter into equipment and other personal property and fixture financing and leasing arrangements, in connection with the ordinary operation and maintenance of the related Mortgaged Property. Furthermore, in the case of any Mortgage Loan that requires or allows letters of credit to be posted by the related Borrower as additional security for the Mortgage Loan, in lieu of reserves or otherwise, such Borrower may be obligated to pay fees and expenses associated with the letter of credit and/or to reimburse the letter of credit issuer in the event of a draw on the letter of credit by the lender. The loan documents may provide that a default under any other debt incurred by the Borrower will constitute a default under the related Mortgage Loan.
The existence of other debt could:
adversely affect the financial viability of a Borrower by reducing the cash flow available to the Borrower to operate and maintain the Mortgaged Property or make debt service payments on the Mortgage Loan or loans that are cross-defaulted with the Mortgage Loan;
adversely affect the security interest of the lender in the equipment or other assets acquired through its financings;
complicate workouts or bankruptcy proceedings; and
delay foreclosure on the Mortgaged Property.
We cannot assure you that these circumstances will not adversely impact operations at or the value of the related Mortgaged Properties.
Geographic Concentration of the Mortgaged Properties May Adversely Affect Distributions on the Certificates. The concentration of Mortgaged Properties in a specific state or region will make the performance of the Mortgage Loans, as a whole, more sensitive to the following factors in the state or region where the Borrowers and the Mortgaged Properties are concentrated:
economic conditions, including real estate market conditions;
changes in governmental rules and fiscal policies;
regional factors such as earthquakes, floods, tornadoes, forest fires or hurricanes;
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acts of God, which may result in uninsured losses; and
other factors that are beyond the control of the Borrowers.
Subordinate Financing Increases the Likelihood That a Borrower Will Default on a Mortgage Loan. Certain Mortgage Loans may be encumbered with a subordinate lien.
Moreover, other than with respect to future subordinate debt meeting specified criteria, as described under “Description of the Mortgage Loans—Release of Property Through Defeasance or Prepayment—Due-on-Sale and Due-on-Encumbrance Provisions” and “Description of the Mortgage Loans—Permitted Additional Debt” in this offering circular, the Mortgage Loans require the consent of the holder of the Mortgage Loan prior to so encumbering the related Mortgaged Property. However, a violation of this prohibition may not become evident until the affected Mortgage Loan otherwise defaults, and a lender, such as the Trust, may not realistically be able to prevent a Borrower from incurring subordinate debt.
The Borrowers under the Mortgage Loans are generally permitted to incur an additional limited amount of indebtedness secured by the related Mortgaged Properties typically beginning 12 months after the origination date of each Mortgage Loan, unless otherwise provided in the related loan documents, and which may be incurred at any time, including on or before the Closing Date. Under the related loan documents, it is a condition to the incurrence of any future secured subordinate indebtedness on these Mortgage Loans that, among other things: (a) the total loan-to-value ratio of these loans be below, and the debt service coverage ratio be above, certain thresholds set out in the loan documents and (b) subordination agreements and intercreditor agreements be put in place between the Trust and the related lenders. In the event a Borrower satisfies these conditions, the Borrower is permitted to obtain secured subordinate debt from approved lenders who will make such subordinate financing exclusively for initial purchase by us. The related intercreditor agreement will provide that the subordinate debt may be transferred to certain “qualified transferees” meeting certain minimum net worth requirements or other criteria set forth in such intercreditor agreement. We may subsequently transfer the junior lien loans we hold in secondary market transactions, including securitizations. Any such junior lien mortgages and related securities may be purchased by Certificateholders in this transaction, including the directing investor, in which case the directing investor could experience conflicts of interest when exercising consent rights with respect to the Mortgage Loans and any related junior lien mortgages or related securities. See “Description of the Mortgage Loans—Permitted Additional Debt” in this offering circular.
The existence of any secured subordinated indebtedness or unsecured indebtedness increases the difficulty of making debt service payments or refinancing a Mortgage Loan at the loan’s maturity. In addition, the related Borrower may have difficulty repaying multiple loans. 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 out the junior lien.
The Type of Borrower May Entail Risk. Mortgage loans made to partnerships, corporations or other entities may entail risks of loss from delinquency and foreclosure that are greater than those of mortgage loans made to individuals. The Borrower’s sophistication and form of organization may increase the likelihood of protracted litigation or bankruptcy in default situations. The bankruptcy of the general partner in a partnership may result in the dissolution of the partnership. The dissolution of a Borrower that is a partnership, the winding up of its affairs and the distribution of its assets could result in an acceleration of its payment obligations under the related Mortgage Loan.
With respect to a majority of the Mortgage Loans, the Borrowers’ organizational documents or the terms of the Mortgage Loans limit the Borrowers’ activities to the ownership of only the related Mortgaged Properties and, subject to exceptions, including relating to future subordinate debt secured by the Mortgaged Properties, generally limit the Borrowers’ ability to incur additional future indebtedness other than trade payables and equipment financing relating to the Mortgaged Properties in the ordinary course of business. 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. To the extent that a Borrower is permitted to take on additional debt, the risk that such Borrower may become bankrupt or insolvent may increase. However, we cannot assure you that the Borrowers will comply with these requirements. Also, although a Borrower may currently be structured as a single-purpose entity, such Borrower may have previously owned property other than the Mortgaged Property and/or may not have observed all covenants and conditions which typically are required to view a Borrower as a
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“single purpose entity” under standard NRSRO criteria. We cannot assure you that circumstances arising from a Borrower’s failure to observe the required covenants will not impact the Borrower or the Mortgaged Property. In addition, Borrowers that are not single-purpose entities structured to limit the possibility of becoming insolvent or bankrupt may be more likely to become insolvent or subject to a voluntary or involuntary bankruptcy proceeding because the Borrowers may be operating entities with a business distinct from the operation of the Mortgaged Property with the associated liabilities and risks of operating an ongoing business or individuals that have personal liabilities unrelated to the Mortgaged Property. However, any Borrower, even a single-purpose entity structured to be bankruptcy-remote, as an owner of real estate, will be subject to certain potential liabilities and risks. We cannot assure you that any Borrower will not file for bankruptcy protection or that creditors of a Borrower or a corporation or individual general partner or managing member of a Borrower will not initiate a bankruptcy or similar proceeding against the Borrower or corporate or individual general partner or managing member.
The Borrowers and their owners may not have an independent director whose consent would be required to file a voluntary bankruptcy petition on behalf of such Borrower. One of the purposes of an independent director of the Borrower (or of a single purpose entity having an interest in the Borrower) is to avoid a bankruptcy petition filing which is intended solely to benefit an affiliate and is not justified by the Borrower’s own economic circumstances. Borrowers (and any single purpose entity having an interest in any such Borrowers) that do not have an independent director may be more likely to file a voluntary bankruptcy petition and therefore less likely to repay the related Mortgage Loan. Even in the case of Borrowers with independent directors, we cannot assure you that a Borrower will not file for bankruptcy protection, that creditors of a Borrower will not initiate a bankruptcy or similar proceeding against such Borrower, or that, if initiated, a bankruptcy case of the Borrower could be dismissed. Pursuant to Section 364 of the Bankruptcy Code, a bankruptcy court may, under certain circumstances, authorize a debtor to obtain credit after the commencement of a bankruptcy case, secured among other things, by senior, equal or junior liens on property that is already subject to a lien. In the recent bankruptcy case of General Growth Properties, the debtors initially sought approval of a debtor-in-possession loan to the corporate parent entities guaranteed by the property-level single purpose entities and secured by second liens on their properties. Although the debtor-in-possession loan ultimately did not include these subsidiary guarantees and second liens, we cannot assure you that, in the event of a bankruptcy of a sponsor of a Borrower, the sponsor of such Borrower would not seek approval of a similar debtor-in-possession loan, or that a bankruptcy court would not approve a debtor-in-possession loan that included such subsidiary guarantees and second liens on such subsidiaries’ properties.
Furthermore, with respect to any affiliated Borrowers, creditors of a common parent in bankruptcy may seek to consolidate the assets of those Borrowers with those of the parent. Consolidation of the assets of the Borrowers would likely have an adverse effect on the funds available to make distributions on the Certificates. The bankruptcy of a Borrower, or the general partner or the managing member of a Borrower, may impair the ability of the Trust to enforce its rights and remedies under the related mortgage.
Certain of the Borrowers on the Mortgage Loan may be a single asset entity whose only asset is the related Mortgaged Property. However, additional debt may be undertaken by such Borrower, which may increase the possibility that such Borrower may become bankrupt or insolvent. Such Borrower is not permitted to (i) own any real or personal property other than the related Mortgaged Property and personal property related to the operation and maintenance of such Mortgaged Property, (ii) operate any business other than the management and operation of such Mortgaged Property or (iii) maintain its assets in a way that is difficult to segregate and identify. We cannot assure you that these circumstances will not adversely impact operations at or the value of such Mortgaged Property.
With respect to certain of the Mortgage Loans, no guarantees of the nonrecourse carveout provisions of the related loan documents will be obtained. In addition, with respect to some of the Mortgage Loans, the nonrecourse carveout provisions of the related loan documents may be guaranteed, in whole or in part, by non U.S. individuals or entities, which may decrease the likelihood of recovery under such guarantee. In addition, some of the Mortgage Loans may be guaranteed, in whole or in part, by the related sponsors of the respective Borrowers or other parties that are funds or other entities the terms of which may be subject to expiration or other structural contingencies. In such cases, the loan documents may require such entities to extend their terms or to otherwise take action or provide additional security to the lender regarding the continued existence of such entities during the terms of the Mortgage Loans.
With respect to certain of the Mortgage Loans, the sponsor of the related Borrower may hold a preferred equity or similar interest in such Borrower. Any preferred equity interest may generally entitle the related sponsor
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to preferred equity payments and entitle the preferred equity holder to step in as managing member of the related Borrower under certain circumstances. In addition, any preferred equity interest may grant the preferred equity holder certain rights with respect to decisions regarding the related Borrower and the related Mortgaged Property. We cannot assure you that these circumstances will not adversely impact such Borrowers or the operations at or the value of the Mortgaged Properties.
With respect to certain of the Mortgage Loans, subject to certain covenants contained in the loan documents, the loan documents permit revenue derived from each related Mortgaged Property to be managed and accounted for by the property manager pursuant to a centralized cash management system under which such funds are deposited into a centralized disbursement account in which funds from certain affiliates of the related Borrower are also deposited. We cannot assure you that circumstances that may arise if each Borrower does not observe the covenants will not adversely impact such Borrower or, the operations at or the value of such Mortgaged Properties.
Tenants-in-Common. With respect to certain of the Mortgage Loans, the related Borrowers own the Mortgaged Properties as tenants-in-common.
Generally, in tenant-in-common ownership structures, each tenant-in-common owns an undivided share in the subject real property. If a tenant-in-common desires to sell its interest in the subject real property and is unable to find a buyer or otherwise desires to force a partition, the tenant-in-common has the ability to request that a court order a sale of the subject real property and distribute the proceeds to each tenant-in-common owner proportionally. To reduce the likelihood of a partition action, each tenant-in-common Borrower under the Mortgage Loan referred to above has waived its partition right. However, we cannot assure you that, if challenged, this waiver would be enforceable or that it would be enforced in a bankruptcy proceeding.
The enforcement of remedies against tenant-in-common Borrowers may be prolonged because each time a tenant-in-common Borrower files for bankruptcy, the bankruptcy court stay is reinstated. While a lender may seek to mitigate this risk after the commencement of the first bankruptcy of a tenant-in-common by commencing an involuntary proceeding against the other tenant-in-common Borrowers and moving to consolidate all those cases, we cannot assure you that a bankruptcy court would consolidate those separate cases.
The bankruptcy, dissolution or action for partition by one or more of the tenants-in-common could result in an early repayment of the related Mortgage Loan, a significant delay in recovery against the tenant-in-common Borrowers, a material impairment in property management and a substantial decrease in the amount recoverable on the Mortgage Loan.
Certain of the Mortgage Loans May Have Land Trust Borrowers. With respect to certain of the Mortgage Loans, the related Borrower may be the beneficiary of a land trust. If the Mortgaged Property is in a land trust, legal title to the real property will typically be held by a land trustee under a land trust agreement for the benefit of the Borrower as beneficiary. At origination of a mortgage loan involving a land trust, the trustee typically mortgages the property to secure the beneficiary’s obligation to make payments on the mortgage note. The lender’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 mortgage, the law of the state in which the real property is located and certain federal laws. In addition, certain decisions regarding the real property may require the consent of the holders of the beneficial interests in the land trust and, in such event, there is a risk that obtaining such consent will be time consuming and cause delays in the event certain actions need to be taken by or on behalf of the Borrower or with respect to the real property. At least one state bankruptcy court has held that the doctrine of merger applied to extinguish a land trust where the trustee was the holder of 100% of the beneficiary ownership interest in the Trust. Whether a land trust can be a debtor eligible for relief under the Bankruptcy Code depends on whether the Trust constitutes a business trust under the Bankruptcy Code. That determination is dependent on the business activity that the Trust conducts. We cannot assure you that, given the business activities that the trustee has been authorized to undertake, a bankruptcy court would find that the land trust is ineligible for relief as a debtor under the Bankruptcy Code or that there will not be delays with respect to any actions needed to be taken at the Mortgaged Property.
Certain of the Mortgage Loans Lack Customary Provisions. A number of the Mortgage Loans lack one or more features that are customary in mortgage loans intended for securitization. Among other things, the Borrowers with respect to those Mortgage Loans may not be required to have an independent director or to make
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payments to lockboxes or to maintain reserves for certain expenses, such as taxes, insurance premiums, capital expenditures, tenant improvements and leasing commissions or the requirements to make such payments may be suspended if the related Borrower complies with the terms of the related loan documents, or the lenders under such Mortgage Loans may not have the right to terminate the related property manager upon the occurrence of certain events or require lender approval of a replacement property manager. In addition, although mortgage loans intended to be securitized often have a guarantor with respect to certain bad acts such as fraud, guarantors may not be required with respect to certain of the Mortgage Loans.
Some Remedies May Not Be Available Following a Mortgage Loan Default. The Mortgage Loans contain, subject to certain exceptions, “due-on-sale” and “due-on-encumbrance” clauses. These clauses permit the holder of a Mortgage Loan to accelerate the maturity of the Mortgage Loan if the related Borrower sells or otherwise transfers or encumbers the related Mortgaged Property or its interest in the Mortgaged Property in violation of the terms of the mortgage. All of the Mortgage Loans also include a debt-acceleration clause that permits the related lender to accelerate the debt upon specified monetary or non-monetary defaults of the Borrower.
The courts of all states will enforce clauses providing for acceleration in the event of a material payment default. The equity courts of a state, however, may refuse the foreclosure or other sale of a Mortgaged Property or refuse to permit the acceleration of the indebtedness as a result of a default deemed to be immaterial or if the exercise of these remedies would be inequitable or unjust.
The related Borrower generally may collect rents for so long as there is no default. As a result, the Trust’s rights to these rents will be limited because:
the Trust may not have a perfected security interest in the rent payments until the Master Servicer, Special Servicer or sub-servicer collects them;
the Master Servicer, Special Servicer or sub-servicer may not be entitled to collect the rent payments without court action; and
the bankruptcy of the related Borrower could limit the ability of the Master Servicer, Special Servicer or sub-servicer to collect the rents.
Sponsor Defaults on Other Mortgage Loans May Adversely Impact and Impair Recovery on a Mortgage Loan. Sponsors of the related Borrowers under certain of the Mortgage Loans and/or their affiliates may be subject to defaults with respect to unrelated mortgage loans or, in some cases, with respect to prior mortgage loans that had been secured by real properties currently securing Mortgage Loans. Such sponsors may have experienced prior discounted payoffs, bankruptcy foreclosure or deed-in-lieu of foreclosure with respect to other properties or prior mortgage loans that were secured by one of the Mortgaged Properties. We cannot assure you that these circumstances will not have an adverse effect on the liquidity of the sponsors or the Borrowers or that such circumstances will not adversely affect the sponsors’ or the Borrowers’ ability to maintain each related Mortgaged Property, to pay amounts owed on each Mortgage Loan or to refinance each Mortgage Loan. See “—Borrower Bankruptcy Proceedings Can Delay and Impair Recovery on a Mortgage Loan” above.
Lending on Income-Producing Real Properties Entails Environmental Risks. Under various federal and state laws, a current or previous owner or operator of real property may be liable for the costs of cleanup of environmental contamination on, under, at or emanating from, the property. These laws often impose liability whether or not the owner or operator knew of, or was responsible for, the presence of the contamination. The costs of any required cleanup and the owner’s liability for these costs are generally not limited under these laws and could exceed the value of the property and/or the total assets of the owner. Contamination of a property may give rise to a lien on the property to assure the costs of cleanup. An environmental lien may have priority over the lien of an existing mortgage. In addition, the presence of hazardous or toxic substances, or the failure to properly clean up contamination on the property, may adversely affect the owner’s or operator’s future ability to refinance the property.
Certain environmental laws impose liability for releases of asbestos into the air, and govern the responsibility for the removal, encapsulation or disturbance of asbestos-containing materials when the asbestos-containing materials are in poor condition or when a property with asbestos-containing materials undergoes
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renovation or demolition. Certain laws impose liability for lead-based paint, lead in drinking water, elevated radon gas inside buildings and releases of polychlorinated biphenyl compounds. Third parties may also seek recovery from owners or operators of real property for personal injury or property damage associated with exposure to asbestos, lead, radon, polychlorinated biphenyl compounds and any other contaminants.
Pursuant to the federal Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended, (“CERCLA”) as well as some other federal and state laws, a secured lender, such as the Trust, may be liable as an “owner” or “operator” of the real property, regardless of whether the Borrower or a previous owner caused the environmental damage, if—
prior to foreclosure, agents or employees of the lender participate in the management or operational affairs of the Borrower; or
after foreclosure, the lender fails to seek to divest itself of the facility at the earliest practicable commercially reasonable time on commercially reasonable terms, taking into account market conditions and legal and regulatory requirements.
Although the Asset Conservation, Lender Liability, and Deposit Insurance Protection Act of 1996 attempted to clarify the activities in which a lender may engage without becoming subject to liability under CERCLA or under the underground storage tank provisions of the federal Resource Conservation and Recovery Act, that legislation itself has not been clarified by the courts and has no applicability to other federal laws or to state environmental laws except as may be expressly incorporated. Moreover, future laws, ordinances or regulations could impose material environmental liability.
Federal law requires owners of residential housing constructed prior to 1978 to disclose to potential residents or purchasers—
any condition on the property that causes exposure to lead-based paint; and
the potential hazards to pregnant women and young children, including that the ingestion of lead-based paint chips and/or the inhalation of dust particles from lead-based paint by children can cause permanent injury, even at low levels of exposure.
Property owners may be liable for injuries to their tenants resulting from exposure under various laws that impose affirmative obligations on property owners of residential housing containing lead-based paint.
Phase I environmental site assessments (each an “ESA”) may be prepared in connection with the origination of certain of the Mortgage Loans. Searches of environmental databases may also be conducted in connection with the origination of certain of the Mortgage Loans.
If the environmental investigations described above identified material adverse or potentially material adverse environmental conditions at or with respect to any of the respective Mortgaged Properties securing a Mortgage Loan or at a nearby property with potential to affect a Mortgaged Property, then the applicable Originator may have taken or caused to be taken one or more of the following actions:
an environmental consultant investigated those conditions and recommended no further investigations or remediation;
an operation and maintenance plan or other remediation was required and/or an escrow reserve was established to cover the estimated costs of obtaining that plan and/or effecting that remediation;
those conditions were remediated or abated prior to the Closing Date;
a letter was obtained from the applicable regulatory authority stating that no further action was required;
another responsible party has agreed to indemnify the holder of the Mortgage Loan from any losses that such party suffers as a result of such environmental conditions;
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an environmental insurance policy was obtained with respect to the Mortgaged Property;
in those cases in which it was known that an offsite property is the location of a leaking underground storage tank (“UST”) or groundwater contamination, a responsible party other than the related Borrower has been identified under applicable law, and generally one or more of the following are true—
1. that condition is not known to have affected the Mortgaged Property; or
2. the responsible party has either received a letter from the applicable regulatory agency stating no further action is required, established a remediation fund, engaged in responsive remediation, or provided an indemnity or guaranty to the Borrower or the mortgagee/lender; and/or
in those cases involving mortgage loans with an original principal balance of less than $1,000,000, the Borrower expressly agreed to comply with all federal, state and local statutes or regulations respecting the identified adverse environmental conditions.
We cannot assure you that environmental conditions will not adversely impact the operations at or the value of any Mortgaged Property.
For some of the Mortgaged Properties, the related ESAs may have noted that onsite USTs or leaking USTs previously had been removed or closed in place or other types of potential or actual spills or releases may have occurred, and based on criteria such as experience with past investigations, cleanups or other response actions, the quantities or types of hazardous materials involved, the absence of significant risk, tank test results or other records, and/or other circumstances including regulatory closure, the ESAs did not recommend any further investigation or other action. In some such cases, even where regulatory closure was documented for past incidents the ESAs may have reported that requests to governmental agencies for any related files are pending. However, those ESAs nevertheless concluded that such incidents were not likely to be significant at the time they were prepared.
Some Borrowers under the Mortgage Loans may not have satisfied all post-closing obligations required by the related loan documents with respect to environmental matters. We cannot assure you that such post-closing obligations have been satisfied or will be satisfied or that any of the recommended operations and maintenance plans have been or will continue to be implemented.
In addition, with respect to certain of the Mortgage Loans, the related Borrower has conducted or may be conducting short or long term radon testing at the related Mortgaged Property or has conducted radon testing and further remediation may be required. Pursuant to each related repair agreement entered into at origination, if the lender determines or has determined that the radon testing indicates further remediation is necessary, each Borrower is required to (i) provide the lender with a signed, binding, fixed price radon remediation contract with a qualified service provider, (ii) complete such remediation work within a specified time frame and (iii) enter into an operations and maintenance agreement with respect to such remediation work.
Furthermore, any particular environmental testing may not have covered all potential adverse conditions. For example, testing for lead-based paint, asbestos-containing materials, lead in water and radon was done only if the use, age, location and condition of the subject property warranted that testing. In general, testing was done for lead based paint only in the case of a multifamily property built prior to 1978, for asbestos containing materials only in the case of a property built prior to 1981 and for radon gas only in the case of a multifamily property located in an area determined by the Environmental Protection Agency to have a high concentration of radon gas or within a state or local jurisdiction requiring radon gas testing.
We cannot assure you that—
the environmental testing referred to above identified all material adverse environmental conditions and circumstances at the subject properties;
the recommendation of the environmental consultant was, in the case of all identified problems, the appropriate action to take; or
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any of the environmental escrows established or letters of credit obtained with respect to any of the Mortgage Loans will be sufficient to cover the recommended remediation or other action.
Appraisals and Market Studies May Inaccurately Reflect the Value of the Mortgaged Properties. The appraisals reflect market conditions as of the date of the appraisal valuations and may not reflect current or prospective values of the related mortgaged real properties. Additionally, with respect to any appraisals setting forth stabilization assumptions as to prospective values, we cannot assure you that such assumptions are or will be accurate or that the prospective values upon stabilization will be attained. We have not confirmed the values of the respective Mortgaged Properties in the appraisals. We have not obtained and will not obtain updated appraisals of the Mortgaged Properties in connection with this securitization.
Appraisals are not guarantees, and may not be fully indicative of present or future value because—
they represent the analysis and opinion of the appraiser at the time the appraisal is conducted and the value of the Mortgaged Property may have fluctuated since the date of the appraisal valuations;
we cannot assure you that another appraiser would not have arrived at a different valuation, even if the appraiser used the same general approach to, and the same method of, appraising the Mortgaged Property;
appraisals seek to establish the amount a typically motivated buyer would pay a typically motivated seller and therefore, could be significantly higher than the amount obtained from the sale of a Mortgaged Property under a distress or liquidation sale; and
appraisal valuations may be based on certain adjustments, assumptions and/or estimates, as further described under “Mortgage Loan Purchase and Servicing—Underwriting Matters—Appraisals and Market Studies” in this offering circular.
“Appraisal” means an appraisal prepared in accordance with 12 C.F.R. § 225.64 and conducted in accordance with the standards of the American Appraisal Institute by an appraiser selected by the Master Servicer or the Special Servicer, as applicable.
“Appraised Value” means, with respect to any Mortgaged Property, the appraised value thereof (as is) as determined by the most recent Appraisal obtained or conducted, as appropriate, pursuant to the terms of the Trust and Servicing Agreement or obtained in connection with the origination of the related Mortgage Loan.
Property Managers and Borrowers May Each Experience Conflicts of Interest in Managing Multiple Properties. In the case of many of the Mortgage Loans, the related property managers and Borrowers may experience conflicts of interest in the management and/or ownership of the related Mortgaged Properties because—
a number of those Mortgaged Properties are managed by property managers affiliated with the respective Borrowers;
the property managers also may manage additional properties, including properties that may compete with those Mortgaged Properties; and
affiliates of the property managers and/or the Borrowers, or the property managers and/or the Borrowers themselves, also may own other properties, including properties that may compete with those Mortgaged Properties.
Some of the Mortgaged Properties Are Legal Nonconforming Uses or Legal Nonconforming Structures. Some of the Mortgage Loans may be secured by a Mortgaged Property that is a legal nonconforming use or a legal nonconforming structure. This may impair the ability of the related Borrower to restore the improvements on a Mortgaged Property to its current form or use following a major casualty. See “Mortgage Loan Purchase and Servicing—Underwriting Matters—Zoning and Building Code Compliance” in this offering circular.
Changes in Zoning Laws May Affect Ability To Repair or Restore a Mortgaged Property. Due to changes in applicable building and zoning ordinances and codes that may affect some of the Mortgaged Properties
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that secure the Mortgage Loans, which changes may have occurred after the construction of the improvements on these properties, the Mortgaged Properties may not comply fully with current zoning laws because of:
density;
use;
parking;
set-back requirements; or
other building related conditions.
These ordinance and/or code changes are not expected to materially interfere with the current use of the Mortgaged Properties, and the Mortgage Loan Seller will represent that any instances of non-compliance will not materially and adversely affect the value of the related Mortgaged Property. However, these changes may limit the ability of the related Borrower to rebuild the premises “as is” in the event of a substantial casualty loss, which in turn may adversely affect the ability of the Borrower to meet its mortgage loan obligations from cash flow. With some exceptions, the Mortgage Loans secured by Mortgaged Properties which no longer conform to current zoning ordinances and codes will require, or contain provisions under which the lender in its reasonable discretion may require, the Borrower to maintain “ordinance and law” coverage which, subject to the terms and conditions of such coverage, will insure the increased cost of construction to comply with current zoning ordinances and codes. Insurance proceeds may not be sufficient to pay off the related Mortgage Loan in full. In addition, if the Mortgaged Property were to be repaired or restored in conformity with then current law, its value could be less than the remaining balance on the Mortgage Loan and it may produce less revenue than before repair or restoration.
In addition, with respect to certain of the Mortgage Loans, the related Mortgaged Properties may be non-conforming as to setbacks, parking and/or density, and in some cases ordinance and law insurance coverage may be in amounts less than generally required at origination of mortgage loans secured by similar properties.
Lending on Income-Producing Properties Entails Risks Related to Property Condition. Generally, a third-party engineering firm inspected each Mortgaged Property to assess exterior walls, roofing, interior construction, mechanical and electrical systems and general condition of the site, buildings and other improvements located at such Mortgaged Property in connection with the origination of the related Mortgage Loan.
We cannot assure you that all conditions at the Mortgaged Properties requiring repair or replacement have been identified in these inspections, or that all building code and other legal compliance issues have been identified through inspection or otherwise, or, if identified, have been adequately addressed by escrows or otherwise. Furthermore, the condition of the Mortgaged Properties may have changed since the origination of the related Mortgage Loans. Finally, with respect to certain Mortgaged Properties, the loan documents may require the related Borrower to make certain repairs or replacements on the improvements on the Mortgaged Property within certain time periods. Some of these required repairs or replacements may be in progress as of the date of this offering circular, and we cannot assure you that the related Borrowers will complete any such required repairs or replacements in a timely manner or in accordance with the requirements set forth in the loan documents. Certain of the Mortgage Loans may have units that are currently unavailable for occupancy. We cannot assure you that these circumstances will not adversely impact operations at or the value of the related Mortgaged Properties.
World Events and Natural Disasters Could Have an Adverse Impact on the Mortgaged Properties Securing the Mortgage Loans and Consequently Could Reduce the Cash Flow Available To Make Payments on the Certificates. The economic impact of the United States’ military operations in various parts of the world, as well as the possibility of any terrorist attacks domestically or abroad, is uncertain, but could have a material adverse effect on general economic conditions, consumer confidence, and market liquidity. We cannot assure you as to the effect of these events or other world events on consumer confidence and the performance of the Mortgage Loans. Any adverse impact resulting from these events could ultimately be borne by the Holders of one or more Classes of Certificates.
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In addition, natural disasters, including earthquakes, floods and hurricanes, also may adversely affect the Mortgaged Properties securing the Mortgage Loans that back the Certificates. For example, real properties located in California may be more susceptible to certain hazards (such as earthquakes or widespread fires) than properties in other parts of the country and Mortgaged Properties located in coastal states generally may be more susceptible to hurricanes than properties in other parts of the country. Hurricanes and related windstorms, floods, tornadoes and oil spills have caused extensive and catastrophic physical damage in and to coastal and inland areas located in the eastern, mid-Atlantic and Gulf Coast regions of the United States and certain other parts of the eastern and southeastern United States. The Mortgage Loans do not all require the maintenance of flood insurance for the related Mortgaged Properties. We cannot assure you that any damage caused by hurricanes, windstorms, floods, tornadoes or oil spills would be covered by insurance.
Special Hazard Losses May Cause You To Suffer Losses on the Certificates. In general, the standard form of fire and extended coverage policy covers physical damage to or destruction of the improvements of a property by fire, lightning, explosion, smoke, windstorm and hail, and riot, strike and civil commotion, subject to the conditions and exclusions specified in the related policy. Insurance policies typically do not cover any physical damage resulting from, among other things—
war and acts of terrorism;
nuclear, biological or chemical materials;
revolution;
governmental actions;
floods and other water-related causes;
earth movement, including earthquakes, landslides and mudflows;
wet or dry rot;
vermin; and
domestic animals.
Unless the related loan documents specifically require (and such provisions were not waived) the Borrower to insure against physical damage arising from these causes, then any losses resulting from these causes may be borne by you as a Holder of Certificates.
If the related loan documents do not expressly require a particular type of insurance but permit the mortgagee to require such other insurance as is reasonable, the related Borrower may challenge whether maintaining that type of insurance is reasonable in light of all the circumstances, including the cost. The Master Servicer’s efforts to require such insurance may be further impeded if the applicable Originator did not require the subject Borrower to maintain such insurance regardless of the terms of the related loan documents.
There is also a possibility of casualty losses on a real property for which insurance proceeds, together with land value, may not be adequate to pay the Mortgage Loan in full or rebuild the improvements. Consequently, we cannot assure you that each casualty loss incurred with respect to a Mortgaged Property securing one of the Mortgage Loans will be fully covered by insurance or that the Mortgage Loan will be fully repaid in the event of a casualty.
Furthermore, various forms of insurance maintained with respect to any of the Mortgaged Properties for the Mortgage Loans, including casualty insurance, may be provided under a blanket insurance policy. That blanket insurance policy will also cover other real properties, some of which may not secure Mortgage Loans. As a result of total limits under any of those blanket policies, losses at other properties covered by the blanket insurance policy may reduce the amount of insurance coverage with respect to a property securing one of the Mortgage Loans.
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Certain of the Mortgaged Properties may be partially or fully located in seismic zones 3 or 4 or a geographic location with a horizontal peak ground acceleration equal to or greater than 0.15g and a seismic assessment was performed to assess the scenario expected loss or probable maximum loss. Certain of the Mortgaged Properties may be partially or fully located in seismic zones 3 or 4 or a geographic location with a horizontal peak ground acceleration equal to or greater than 0.15g but (i) may not have had a seismic assessment performed, (ii) the Mortgage Loan Seller may have waived the seismic assessment due to characteristics of the improvements and low level risk factors present at such Mortgaged Property that mitigate elevated risk for earthquake damage or (iii) earthquake insurance was not required with respect to the Mortgaged Properties located in seismic zones 3 or 4 or a geographic location with a horizontal peak ground acceleration equal to or greater than 0.15g for which a scenario expected loss assessment or a probable maximum loss assessment was performed because the scenario expected loss or probable maximum loss for each of those Mortgaged Properties is less than or equal to 20% of the amount of the replacement cost of the improvements.
The Absence or Inadequacy of Terrorism Insurance Coverage on the Mortgaged Properties May Adversely Affect Payments on the Certificates. Following the September 11, 2001 terrorist attacks in the New York City area and Washington, D.C. area, many insurance companies eliminated coverage for acts of terrorism from their policies. Without assurance that they could secure financial backup for this potentially uninsurable risk, availability in the insurance market for this type of coverage, especially in major metropolitan areas, became either unavailable, or was offered with very restrictive limits and terms, with prohibitive premiums being requested. In order to provide a market for such insurance, the Terrorism Risk Insurance Act of 2002 was enacted on November 26, 2002, establishing the “Terrorism Risk Insurance Program.” The Terrorism Risk Insurance Program was extended through December 31, 2014 by the Terrorism Risk Insurance Program Reauthorization Act of 2007 and was subsequently reauthorized on January 12, 2015 for a period of six years through December 31, 2020 pursuant to the Terrorism Risk Insurance Program Reauthorization Act of 2015.
Under the Terrorism Risk Insurance Program, the federal government shares in the risk of losses occurring within the United States resulting from acts committed in an effort to influence or coerce United States civilians or the United States government. The federal share of compensation for insured losses of an insurer will be equal to 83% in 2017 (subject to annual decreases of 1% thereafter until equal to 80%) of the portion of such insured losses that exceed a deductible equal to 20% of the value of the insurer’s direct earned premiums over the calendar year immediately preceding that program year. Federal compensation in any program year is capped at $100 billion (with insurers being liable for any amount that exceeds such cap), and no compensation is payable with respect to a terrorist act unless the aggregate industry losses relating to such act exceed $140 million in 2017 (subject to annual increases of $20 million thereafter until equal to $200 million).
The Terrorism Risk Insurance Program does not cover nuclear, biological, chemical or radiological attacks. Unless Borrowers obtain separate coverage for events that do not meet the thresholds or other requirements above, such events would not be covered.
If the Terrorism Risk Insurance Program is not reenacted after its expiration in 2020, premiums for terrorism insurance coverage will likely increase and the terms of such insurance policies may be materially amended to increase stated exclusions or to otherwise effectively decrease the scope of coverage available. We cannot assure you that the Terrorism Risk Insurance Program will create any long term changes in the availability and cost of insuring terrorism risks. In addition, we cannot assure you that terrorism insurance or the Terrorism Risk Insurance Program will be available or provide sufficient protection against risks of loss on the Mortgaged Properties resulting from acts of terrorism.
The applicable Originator required the related Borrower to obtain terrorism insurance with respect to each of the Mortgage Loans, the cost of which, in some cases, may be subject to a maximum amount as set forth in the related loan documents. The Master Servicer will not be obligated to require any Borrower to obtain or maintain terrorism insurance in excess of the amounts of coverage and deductibles required by the loan documents. The Master Servicer will not be required to declare a default under a Mortgage Loan if the related Borrower fails to maintain insurance with respect to acts of terrorism, and the Master Servicer need not maintain (or require the Borrower to obtain) such insurance, if certain conditions are met, as described under “Description of the Mortgage Loans—Permitted Additional Debt” in this offering circular.
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The loan documents may permit the lender to temporarily suspend, cap or otherwise limit the requirement that the Borrower maintain insurance against acts of terrorism for a period not longer than one year, which suspension, waiver or cap may be renewed by the lender in one year increments, if insurance against acts of terrorism is not available at commercially reasonable rates and such hazards are not at the time commonly insured against for properties similar to the related Mortgaged Property and located in and around the region where the Mortgaged Property is located.
We cannot assure you regarding the extent to which the Mortgaged Properties securing the Mortgage Loans will be insured against acts of terrorism.
If any Mortgaged Property securing a Mortgage Loan sustains damage as a result of an uninsured terrorist or similar act, a default on such Mortgage Loan may result, and such damaged Mortgaged Property may not provide adequate collateral to satisfy all amounts owing under such Mortgage Loan. This could result in losses on some Classes of Certificates subject, in the case of the Class A Certificates, to the Freddie Mac Guarantee.
If a Borrower is required, under the circumstances described above, to maintain insurance coverage with respect to terrorist or similar acts, the Borrower may incur higher costs for insurance premiums in obtaining that coverage which would have an adverse effect on the net cash flow of the related Mortgaged Property.
The Absence or Inadequacy of Earthquake, Flood and Other Insurance May Adversely Affect Payments on the Certificates. The Mortgaged Properties may suffer casualty losses due to risks that are not covered by insurance or for which insurance coverage is inadequate. In addition, certain of the Mortgaged Properties are located in regions that have historically been at greater risk regarding acts of nature (such as hurricanes, floods and earthquakes) than other regions, as applicable. There is no assurance that Borrowers under the Mortgage Loans will be able to maintain adequate insurance. Moreover, if reconstruction or any major repairs are required, changes in laws may materially affect the Borrower’s ability to effect such reconstruction or major repairs or may materially increase the costs of reconstruction and repair. As a result of any of these factors, the amount available to make distributions on the Certificates could be reduced.
Compliance with Americans with Disabilities Act May Result in Additional Costs to Borrowers. Under the Americans with Disabilities Act of 1990, as amended (the “ADA”), all existing facilities considered to be “public accommodations” are required to meet certain federal requirements related to access and use by disabled persons such that the related Borrower is required to take steps to remove architectural and communication barriers that are deemed “readily achievable” under the ADA. Factors to be considered in determining whether or not an action is “readily achievable” include the nature and cost of the action, the number of persons employed at the related Mortgaged Property and the financial resources of the Borrower. To the extent a Mortgaged Property securing a Mortgage Loan does not comply with the ADA, the Borrower may be required to incur costs to comply with this law. We cannot assure you that the Borrower will have the resources to comply with the requirements imposed by the ADA, which could result in the imposition of fines by the federal government or an award of damages to private litigants.
Limited Information Causes Uncertainty. Certain of the Mortgage Loans are loans that were made to enable the related Borrower to acquire the related Mortgaged Property. Accordingly, for certain of these Mortgage Loans limited or no historical operating information is available with respect to the related Mortgaged Property. As a result, you may find it difficult to analyze the historical performance of those properties.
Litigation May Adversely Affect Property Performance. There may be pending or, from time to time, threatened legal proceedings against the Borrowers under the Mortgage Loans, the property managers of the related Mortgaged Properties and their respective affiliates, arising out of the ordinary business of those Borrowers, property managers and affiliates. We cannot assure you that litigation will not have a material adverse effect on your investment. See “—Borrower Bankruptcy Proceedings Can Delay and Impair Recovery on a Mortgage Loan” and “—Sponsor Defaults on Other Mortgage Loans May Adversely Impact and Impair Recovery on a Mortgage Loan” above.
We cannot assure you that any potential or active litigation will not adversely impact operations at or the value of the Mortgaged Properties.
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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’s legal rights under any of the Mortgage Loans that are secured by Mortgaged Properties located where the “one action” rules could be applicable. In the case of a Mortgage Loan that is secured by Mortgaged Properties located in multiple states, the Special Servicer may be required to foreclose first on properties located in states where the “one action” rules apply, and where non-judicial foreclosure is permitted, before foreclosing on properties located in states where judicial foreclosure is the only permitted method of foreclosure.
Potential Conflicts of Interest in the Selection of the Mortgage Loans. The Directing Third Party will be given the opportunity to perform due diligence on the Mortgage Loans. In the event that (i) the Directing Third Party, acting in a commercially reasonable manner, determines that any Mortgage Loan transferred to the Trust does not meet the Eligibility Criteria and delivers to the applicable parties to the Trust and Servicing Agreement a notice of such determination and evidence supporting such determination within 30 days after the applicable transfer date and (ii) the Directing Investor, acting in a commercially reasonable manner, does not disagree with such determination within 5 Business Days after receipt of all evidence supporting such determination, we will be required to repurchase or substitute such Ineligible Loan. The Directing Third Party may also require us to repurchase or substitute any Mortgage Loans that, in the aggregate, do not equal more than 3% of the total number of the Mortgage Loans transferred to the Trust (excluding any Ineligible Loans) for any reason. Accordingly, The Mortgage Pool (including the Initial Pool the characteristics of which are shown in this offering circular) will be adjusted by such requests by the Directing Third Party. Because of the differing subordination levels and class interest rates, and because only the Class A Certificates are guaranteed by us, the Directing Third Party’s interests may, in some circumstances, differ from those of purchasers of other Classes of Certificates, and the Directing Third Party may desire a composition of the Mortgage Pool that benefits the Directing Third Party but that does not benefit other Certificateholders. In exercising any of its rights under the Trust and Servicing Agreement, the Directing Third Party will act solely for its own benefit with regard to its due diligence and any adjustment of the Mortgage Loans included in the Trust and has no obligation or liability to any other party. You are not entitled to, and should not, rely in any way on the Directing Third Party’s acceptance of any Mortgage Loans. The inclusion of any Mortgage Loan in the Trust is not an indication of the Directing Third Party’s analysis of that Mortgage Loans nor can it be taken as any endorsement of the Mortgage Loans by the Directing Third Party. See also “—Risks Related to the Certificates—Potential Conflicts of Interest Among the Certificateholders” below.
Servicers May Not Follow the Requirements of the Guide and Other Purchase and Servicing Agreements, and the Servicing Standard May Change Periodically. We, as the Master Servicer and the Special Servicer, will be required to service the Mortgage Loans in accordance with the Freddie Mac Servicing Practices, as further described in “Mortgage Loan Purchase and Servicing—Mortgage Loan Servicing Policies and Procedures—Servicing Responsibilities” in this offering circular. Freddie Mac Servicing Practices require the Master Servicer and the Special Servicer to service and administer the Mortgage Loans in accordance with the Freddie Mac Multifamily Seller/Servicer Guide (or any successor to the Guide). The Guide comprises our servicing requirements for our multifamily commercial mortgage loans and we may modify the Guide and any of our policies or procedures at any time. Freddie Mac Servicing Practices also include servicing and administering in accordance with any of our written policies, procedures or other written communications, or such policies, procedures or written communications made available in writing by us to the Third Party Master Servicer or the Third Party Special Servicer or our servicers, as applicable. In the normal course of our business we may make periodic changes to the servicing provisions of the Guide and may adopt or modify our written policies, procedures or other written communications with respect to the servicing and administration of a Mortgage Loan. Any such future changes to the Guide will become applicable to the servicing of the Mortgage Loans at such future time. We cannot assure you that any future changes will not have an adverse impact on the Mortgage Loans and the Certificates. See also “—Risks Relating to Freddie Mac—Freddie Mac’s Changes in Business Practices May Negatively Impact the Certificateholders” below.
Our servicers are required to follow the requirements set forth in the Guide. Any failure of our servicers to follow such requirements in the Guide may result in such Mortgage Loans experiencing a higher rate of Realized Losses than if the Mortgage Loans had been serviced in accordance with such requirements.
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The Prospective Performance of the Mortgage Loans Included in the Trust 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 Mortgaged 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 Mortgaged Property represents a separate and distinct business venture and, as a result each mortgage loan requires a unique underwriting analysis. Furthermore, economic and other conditions affecting Mortgaged 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 independently from the performance of mortgage loans underlying any other series of Certificates.
Risks Related to the Certificates
The Assets of the Trust May Be Insufficient To Allow for Repayment in Full on the Certificates. The Certificates do not represent obligations of any person or entity and do not represent a claim against any assets other than those of the Trust. No governmental agency or instrumentality will guarantee or insure payment on the Certificates, except that the timely payment of interest on and the ultimate payment of principal of the Offered Certificates and the reimbursement of Realized Losses allocated to the Offered Certificates will be guaranteed by us, as described under “Description of the Certificates—Distributions—Freddie Mac Guarantee” in this offering circular. In addition, neither we nor our affiliates are responsible for making payments on Certificates that are not Class A Certificates (which are covered by the Freddie Mac Guarantee) if collections received in respect of the Mortgage Loans are insufficient. If collections received in respect of the Mortgage Loans are insufficient to make payments on the Certificates, other than our payment obligation with respect to the Class A Certificates under the Freddie Mac Guarantee as described under “Description of the Certificates—Distributions—Freddie Mac Guarantee” in this offering circular, no other assets will be available to you for payment of the deficiency, and you will bear the resulting loss.
Any Credit Risk Associated with the Mortgage Loans in the Trust Will be Born by the Certificateholders. The Trust will acquire the Mortgage Loans (with the aggregate outstanding balance of such Mortgage Loans not to exceed the Program Size at any time) on the Closing Date and from time to time after the Closing Date as described under “The Mortgage Loan Purchase, Trust and Servicing Agreement—General” in this offering circular and hold such Mortgage Loans until we purchase such Mortgage Loans at the applicable Par Purchase Price and securitize them in one of our securitization programs. Although we will be required to cure, repurchase or substitute a Repurchase Loan, we will not be obligated to purchase any Defaulted Loan that is not a Repurchase Loan, and the Special Servicer will be required to either pursue a Workout (with the consent of the Directing Investor) or liquidate such Defaulted Loans in accordance with the terms of the Trust and Servicing Agreement. Furthermore, although we may be required to purchase one or more Mortgage Loans from the Trust in certain limited circumstances to cure an Interest Mismatch after the Revolving Period, we will not be required to purchase and securitize the Mortgage Loans within any specific timeframe, and we may not be able to securitize the Mortgage Loans for a prolonged period of time. In the event that the Trust holds the Mortgage Loans longer than expected, the Trust may be exposed to a higher risk of a default under the Mortgage Loans. See also “—A Delay in a Securitization of the Mortgage Loans Held in the Trust and Our Inability to Transfer Additional Mortgage Loans to the Trust May Adversely Affect Your Investment in the Certificates” and “—Our Interests May Not be Aligned With the Interests of the Certificateholders and Conflicts of Interest May Arise from Our Various Roles under the Trust and Servicing Agreement” below. Accordingly, through the issuance of the Certificates, we will transfer certain credit risk that we would otherwise bear with respect to the Mortgage Loans prior to the securitization of the Mortgage Loans.
Any Workout or Liquidation of a Defaulted Loan May Adversely Affect Your Investment in the Certificate. Any Workout of a Defaulted Loan may include modifying the terms of such Defaulted Loan that is in default or whose default is reasonably foreseeable. A modification of any Defaulted Loan implemented by the Special Servicer in order to maximize the ultimate proceeds of such Defaulted Loan may have the effect of, among other things, reducing or otherwise changing the mortgage rate, forgiving or forbearing on payments of principal,
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interest or other amounts owed under such Defaulted Loan, extending the final maturity date of such Defaulted Loan, capitalizing or deferring delinquent interest and other amounts owed under such Defaulted Loan, forbearing payment of a portion of the principal balance of such Defaulted Loan or any combination of these or other modifications. Any modified Defaulted Loan may remain in the Trust, and the modification may result in a reduction in the funds received with respect to such Defaulted Loan and decreased or delayed collections and/or a Realized Loss.
In the event that the Special Servicer elects to liquidate a Defaulted Loan, the Special Servicer will be required to conduct a Standard Auction and complete such Standard Auction within 90 days after the initiation of such Standard Auction. If (i) the Special Servicer is unable to obtain a buyer for a Defaulted Loan pursuant to a Standard Auction within such 90-day period or (ii) the Directing Investor waives the requirement that the Special Servicer conduct a Standard Auction, the Special Servicer may offer to sell such Mortgage Loan to a single purchaser or may dispose of such Mortgage Loan pursuant to a process agreed upon by the Special Servicer and the Directing Investor. Such sale of a Defaulted Loan may be delayed and may result in decreased or delayed collections and/or a Realized Loss.
In addition, within 6 months after the Final Remaining Term Payment Date, the Special Servicer will be required to sell all of the Defaulted Loans pursuant to the Defaulted Loan Provision. If the Special Servicer is unable to sell all of the Defaulted Loans pursuant to the Defaulted Loan Provision within such 6-month period, the Special Servicer will be required to sell the remaining Defaulted Loans to Freddie Mac at fair value, as determined by a third party appointed by Freddie Mac (with the consent of the Directing Third Party (if any Realized Losses resulting from such sale would be allocated to all or any portion of the Certificates held by the Directing Third Party), which consent may not be unreasonably withheld or delayed). Any delay in the sale of the Defaulted Loans or insufficient net sales proceeds of such Defaulted Loans will result in decreased or delayed collections and/or a Realized Loss.
All Realized Losses resulting from a Workout or sale of a Defaulted Loan will be allocated, first, to the Class D Certificates (but only until the Class Principal Balance of such Class has been reduced to $1,000), second, to the Class C Certificates, third, to the Class B Certificates, and fourth, to the Class A Certificates, in that order, in each case until the Class Principal Balance of each such Class (other than the Class D Certificates) has been reduced to zero (or in the case of the Class D Certificates, the Class Principal Balance of such Class has been reduced to $1,000). As a result of such reductions, less interest will accrue on each affected Class of Certificates than would otherwise be the case. Once a Realized Loss is allocated to a Certificate, no principal or interest will be distributable with respect to such written down amount and no reimbursement will be made with respect to any Realized Losses allocated to such Certificate (other than the Class A Certificates, which respect to which we will be required to make a guarantee payment with respect to any Realized Loss allocated to the Class A Certificates). See “Description of the Certificates—Reduction of Certificate Principal Balances in Connection with Realized Losses” in this offering circular.
Any rights that the Directing Third Party and the Directing Investor have in connection with a Workout or sale of Defaulted Loans may also adversely affect your investment in the Certificates. See “—Potential Conflicts of Interest Among the Certificateholders” below.
You should consider the risk that losses on the Mortgage Loans could result in your failure to fully recover your initial investment. We make no representation as to the frequency of delinquencies, defaults and/or liquidations that may occur with respect to the Mortgage Loans, or the magnitude of any losses that may occur with respect to the Mortgage Loans.
A Delay in a Securitization of the Mortgage Loans Held in the Trust and Our Inability to Transfer Additional Mortgage Loans to the Trust May Adversely Affect Your Investment in the Certificates. We expect to securitize the Mortgage Loans held by the Trust and to acquire additional Mortgage Loans and transfer such additional Mortgage Loans to the Trust from time to time on a regular basis. However, we cannot assure you that we will be able to purchase the Mortgage Loans from the Trust for a securitization and transfer additional Mortgage Loans to the Trust on a regular basis as we anticipate. Our ability to purchase and securitize the Mortgage Loans from the Trust and to acquire additional Mortgage Loans and transfer such Mortgage Loans to the Trust on a regular basis depends on a number of factors that are beyond our control, including any economic downturn, disruptions in the real estate and securitization markets, as well as those events and circumstances described under “—Other
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Events or Circumstances May Affect the Value and Liquidity of Your Investment”, “—The Volatile Economy and Credit Disruptions May Adversely Affect the Value and Liquidity of Your Investment” and “—Legal and Regulatory Provisions Affecting Investors Could Adversely Affect the Liquidity of Your Investment” below. In addition, our ability to securitize the Mortgage Loans and to transfer additional Mortgage Loans to the Trust from time to time after the Closing Date will depend on various factors including any legislative or regulatory actions affecting our role, our business model, our structure and future results of operations. See “—Risks Relating to Freddie Mac” below. For certain conflicts of interest involving our decision to purchase and securitize the Mortgage Loans, see “—Our Interests May Not be Aligned With the Interests of the Certificateholders and Conflicts of Interest May Arise from Our Various Roles under the Trust and Servicing Agreement” below.
In the event that we do not purchase and securitize the Mortgage Loans in a timely manner, the Trust (and the Certificateholders) may be exposed to a higher credit risk associated with such Mortgage Loans than if such Mortgage Loans were purchased by us from the Trust and securitized in one of our securitization programs promptly after the transfer to the Trust. In addition, if the Trust has an insufficient number of Mortgage Loans that generate interest collections during the term of the Certificates, you may experience interest shortfalls on any Payment Date. Although the timely payment of interest on and the ultimate payment of principal of the Offered Certificates and the reimbursement of Realized Losses allocated to the Offered Certificates will be guaranteed by us, the sole source of an interest payment on the Mezzanine Certificates will be any portion of interest collections available for such payment on the Mezzanine Certificates pursuant to the priority of payment described under “Description of the Certificates” in this offering circular. If a Waterfall Trigger Event occurs during the Revolving Period, the Class B Certificates and the Class C Certificates are entitled to receive their respective interest payments prior to any interest payment on the Class A Certificates. However, we cannot assure you that interest collections in the Collection Account will be sufficient to pay such interest on the Class B Certificates and/or the Class C Certificates. Furthermore, if any interest shortfall is caused by a default under any Mortgage Loan, such shortfall amount will reduce the amount of interest on the Mezzanine Certificates that is payable prior to the payment of interest on the Class A Certificates, as further described under “Description of the Certificates” in this offering circular.
Credit Support Is Limited and May Not Be Sufficient To Prevent Loss on the Certificates. The Class D Certificates are generally subordinated to the other Certificates in right of payment, and the Class C Certificates are generally subordinated to the Class B Certificates and the Class A Certificates in right of payment, and the Class B Certificates are generally subordinated to the Class A Certificates, in right of payment.
All Realized Losses resulting from a Workout or sale of a Defaulted Loan will be allocated, first, to the Class D Certificates (but only until the Class Principal Balance of such Class is reduced to $1,000), second, to the Class C Certificates, third, to the Class B Certificates, and fourth, to the Class A Certificates, in that order, in each case until the Class Principal Balance of each such Class (other than the Class D Certificates) has been reduced to zero (or in the case of the Class D Certificates, the Class Principal Balance of such Class has been reduced to $1,000). To the extent that the credit support provided by a more junior Class of Certificates is not sufficient to cover such Realized Losses, such Realized Losses may be allocated to a senior Class of Certificate. Once a Realized Loss is allocated to any Certificate to reduce the Certificate Principal Balance of such Certificate, such reduction will be permanent and no reimbursement of such Realized Loss will be made to such Certificate.
The Freddie Mac Guarantee is intended to provide credit enhancement to the Offered Certificates as described in this offering circular by increasing the likelihood that Holders of the Offered Certificates will receive (i) timely payments of interest, (ii) reimbursement of Realized Losses allocated to the Offered Certificates and (iii) ultimate payment of principal by the Final Certificate Maturity Date to the Holders of the Offered Certificates. If, however, we were to experience financial difficulties, or if the Conservator were to place us in receivership and our guarantee was repudiated as described in “—Risks Relating to Freddie Mac” below, the credit enhancement provided by the Freddie Mac Guarantee may be insufficient and the Holders of Offered Certificates may suffer losses as a result of the various contingencies described in this “Risk Factors” section and elsewhere in this offering circular. See “Description of the Certificates—Distributions—Freddie Mac Guarantee” in this offering circular for a detailed description of the Freddie Mac Guarantee. No governmental agency or instrumentality will guarantee or insure payment on the Certificates, except that the timely payment of interest on and the ultimate payment of principal of the Offered Certificates and the reimbursement of Realized Losses allocated to the Offered Certificates will be guaranteed by us.
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When making an investment decision, you should consider, among other things—
the distribution priorities of the respective Classes of Certificates;
the order in which the outstanding principal balances of the respective Classes of Certificates will be reduced in connection with any Realized Loss (although such Realized Loss with respect to the Class A Certificates will be covered under the Freddie Mac Guarantee); and
the characteristics and quality of the Mortgage Loans.
Any Unpaid Program Expenses Will Be Paid First Before Any Distributions are Made on the Certificates. We, as Master Servicer, are permitted to withdraw funds in the Collection Account to pay Program Expenses from time to time. Program Expenses include regular fees payable to us in our capacities as Master Servicer, Special Servicer and Trustee and fees payable to our servicers and the Certificate Administrator and other expenses of the Trust, including any interest accrued on the Guarantee Payment and fees payable to us as Guarantor, and any Guarantee Payments made by us (other than the Waterfall Trigger Event Guarantee Payments), as further described under “Description of the Certificates” in this offering circular. Program Expenses are payable from the interest collections on the Mortgage Loans during the Revolving Period. Any indemnification amounts payable to the Certificate Administrator will be subject to an annual cap of $150,000 until the end of the Revolving Period, but no indemnification amounts payable to the other parties to the Trust and Servicing Agreement will be subject to a cap. We cannot assure you that the Trust will not incur any unanticipated Program Expenses. Also any unpaid indemnification amounts due to such annual cap will be paid to the Certificate Administrator after the end of the Revolving Period before any distribution is made to the Certificateholders. Payment of Program Expenses prior to the distribution of principal and/or interest payments on the Certificates may result in a delay or loss of your investment in the Certificates.
The Offered Certificates Have Uncertain Yields to Maturity.
The yield on the Offered Certificates will depend on, among other things—
the price you pay for the Offered Certificates; and
the rate, timing and amount of distributions on the Offered Certificates.
The rate, timing and amount of distributions on the Offered Certificates will depend on, among other things—
the class interest rate for, and the other payment terms of, the Offered Certificates;
the rate and timing of payments and other collections of principal on the Mortgage Loans;
the occurrence of an Asset Mismatch, an Interest Mismatch or a Termination Event;
the incurrence of any unanticipated Program Expenses;
the rate and timing of defaults, and the severity of losses, if any, on the Mortgage Loans;
the rate, timing, severity and allocation of other shortfalls and expenses that reduce amounts available for distribution on the Certificates (although such shortfalls with respect to the Offered Certificates may be covered under the Freddie Mac Guarantee, as further described in this offering circular); and
servicing decisions with respect to the Mortgage Loans.
These factors cannot be predicted with any certainty. Accordingly, you may find it difficult to analyze the effect that these factors might have on the yield to maturity of the Offered Certificates.
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During the Revolving Period, no Certificates will be entitled to receive principal distributions, and all Principal Collections received in respect of the Mortgage Loans will be only available to pay the Par Purchase Price for the additional Mortgage Loans, except in certain circumstances when an Asset Mismatch occurs and no additional Mortgage Loans can be transferred to the Trust pursuant to the terms of the Trust and Servicing Agreement, as further described under “Description of the Certificates—Mandatory Principal Payment; Cleanup Call” in this offering circular. After the end of the Revolving Period, until the Final Remaining Term Payment Date, 75% of Available Principal Collections received during the related Collection Period will be applied to pay principal on the Offered Certificates. The remaining 25% of Available Principal Collections will be deposited into the Principal Reserve Account and funds deposited into the Principal Reserve Account will not be available for distribution on the Certificates until the Final Remaining Term Payment Date, except in certain circumstances where a pro rata prepayment of the Offered Certificates and/or the Mezzanine Certificates is required to cure an Asset Mismatch and/or an Interest Mismatch, as further described under “Description of the Certificates—Mandatory Principal Payment; Cleanup Call” in this offering circular. On the Final Remaining Term Payment Date and on each Payment Date after the Final Remaining Term Payment Date, all available funds will be applied to pay principal and interest on the Certificates in the order of priority as described under “Description of the Certificates—Distributions—Priority of Distributions” in this offering circular. Accordingly, no principal will be distributed to the Mezzanine Certificates until the Final Remaining Term Payment Date except in certain limited circumstances.
During the Revolving Period, the Master Servicer may pay Program Expenses only from interest collections received on the Mortgage Loans during the related Collection Period, and after the Revolving Period, the Master Servicer will be required to pay Program Expenses from any interest collections received in respect of the Mortgage Loans and then from any Principal Collections. On any Remaining Term Payment Date prior to the Final Remaining Term Payment Date, no Principal Collections will be applied to pay any interest due on the Class A Certificates and/or the Mezzanine Certificates. On any Payment Date, in the event that funds available for distribution to the Certificates are insufficient to pay any accrued and unpaid interest on the Mezzanine Certificates pursuant to the applicable priority of distribution as described under “Description of the Certificates—Distributions” in this offering circular, any accrued and unpaid interest on the Mezzanine Certificates will be deferred until such Payment Date on which funds are available for such payment. No interest will accrue on any such accrued and unpaid interest on the Mezzanine Certificates.
Payments of principal on the Offered Certificates after the end of the Revolving Period will depend on, among other things, the rate and timing of payments of principal on the Mortgage Loans after the end of the Revolving Period. Prepayments on the Mortgage Loans may result in a faster rate of principal payments on the Offered Certificates, thereby resulting in shorter average lives for the Offered Certificates than if those prepayments had not occurred. The rate and timing of principal prepayments on pools of mortgage loans is influenced by a variety of economic, demographic, geographic, social, tax and legal factors. In addition, any repurchase of a Mortgage Loan by the Mortgage Loan Seller due to a defect or breach of a representation or warranty after the end of the Revolving Period will have the same effect as a prepayment of such Mortgage Loan. See “The Mortgage Loan Purchase, Trust and Servicing Agreement—Events of Default” in this offering circular. Accordingly, we cannot predict the rate and timing of principal prepayments on the Mortgage Loans. As a result, repayment of the Offered Certificates could occur significantly earlier or later, and the average lives of the Offered Certificates could be significantly shorter or longer, than you expected.
If you purchase the Offered Certificates at a premium, and if principal distributions on the Offered Certificates are made after the end of the Revolving Period at a rate faster than you anticipated at the time of your purchase, then your actual yield to maturity may be lower than you had assumed at the time of your purchase. Conversely, if you purchase the Offered Certificates at a discount, and if principal distributions on the Offered Certificates are at a rate slower than you anticipated at the time of your purchase, then your actual yield to maturity may be lower than you had assumed at the time of your purchase.
The yield to maturity on the Offered Certificates will be highly sensitive to changes in the levels of LIBOR such that decreasing levels of LIBOR will have a negative effect on the yield to maturity of the Holders of such Certificates. In addition, prevailing market conditions may increase the interest rate margins above LIBOR at which comparable securities are being offered, which would cause the Offered Certificates to decline in value. Investors in the Offered Certificates should consider the risk that lower than anticipated levels of LIBOR could result in lower yield to investors than the anticipated yield and the risk that higher market interest rate margins above LIBOR could
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result in a lower value of the Offered Certificates. See “—Ongoing Investigations Concerning LIBOR Could Adversely Affect Your Investment in the Offered Certificates” below.
Furthermore, the Mortgage Loans will bear interest at a fixed rate, and the Trust will not enter into any cap agreement to protect itself against significant movements in LIBOR. If LIBOR increases, the amount of interest due on the Offered Certificates will increase, and interest collections remaining after the payment of Program Expenses may not be sufficient to cover the interest payments due on the Offered Certificates. In the event we make a Guarantee Payment to cover any interest shortfall resulting from such increase in LIBOR, the amount of Program Expenses payable by the Trust will also increase, and such increase in the amount of Program Expenses will reduce the amount of funds available for distribution to the Offered Certificates and the other Classes of Certificates. See “—Any Unpaid Program Expenses Will Be Paid First Before Any Distributions are Made on the Certificates” above.
We have the option to purchase all of the Mortgage Loans at the Par Purchase Price and terminate the Trust if on any Remaining Term Payment Date the aggregate Stated Principal Balance of the Mortgage Loans is less than 10% of the Program Size. The yield on the Offered Certificates will also be affected by our purchase of the Mortgage Loans after the occurrence of the Cleanup Call. We cannot assure you that the proceeds from our purchase of the Mortgage Loans will be sufficient to distribute the outstanding Certificate Principal Balance plus accrued interest and any undistributed shortfalls in interest accrued on the Certificates. Accordingly, the Holders of Certificates may suffer an adverse impact on the overall yield on their Certificates, may experience repayment of their investment at an unpredictable and inopportune time or may even incur a loss on their investment, subject to the Freddie Mac Guarantee in the case of the Offered Certificates. See “The Mortgage Loan Purchase, Trust and Servicing Agreement—Termination” in this offering circular.
In addition, the timing of a Workout or sale of the Defaulted Loans by the Special Servicer may adversely affect the yield to maturity on the Certificates. Any delay in a Workout or Sale of the Defaulted Loans could adversely affect your investment in the Certificates. Prior to the Final Remaining Term Payment Date, there is no specific timeline within which the Special Servicer is required to liquidate or dispose of all of the Defaulted Loans. If the Final Remaining Term Payment Date occurs, the Special Servicer will be required to sell all of the Defaulted Loans within 6 months after the Final Remaining Term Payment Date. We cannot assure you that the Special Servicer will timely complete any Workout or sale of a Defaulted Loan or that any delay in a Workout or sale of a Defaulted Loan will not adversely affect the yield to maturity on the Certificates. See “—Any Workout or Liquidation of a Defaulted Loan May Adversely Affect Your Investment in the Certificate” above. See also “Yield and Maturity Considerations” in this offering circular.
Our Interests May Not be Aligned With the Interests of the Certificateholders and Conflicts of Interest May Arise from Our Various Roles under the Trust and Servicing Agreement. We will act as Mortgage Loan Seller, Guarantor, Master Servicer, Special Servicer, Trustee and Custodian. We will also retain the Class D Certificates and act as the initial Directing Investor. Our interests in acting in each such capacity under the Trust and Servicing Agreement may give rise conflicts of interest and be adverse to the interests of the Certificateholders. In particular, we, in any such capacity, may take any action or refrain from taking any action, that may not be in the best interests of the Certificateholders but may be required by FHFA or by applicable law. Such action may include revising provisions of the Guide to provide less or more stringent servicing requirements. See “—Risks Relating to the Mortgage Loans—Servicers May Not Follow the Requirements of the Guide and Other Purchase and Servicing Agreements, and the Servicing Standard May Change Periodically” below. In addition, in connection with our role as Mortgage Loan Seller or Directing Investor, we will be acting solely for our own benefit and not as agent or fiduciary on behalf of investors. See “—Potential Conflicts of Interest Among the Certificateholders” below. Also, there is no independent third party engaged with respect to the Certificates to monitor and supervise our activities as Master Servicer, Special Servicer, Trustee and Custodian.
We may acquire additional mortgage loans similar to the Mortgage Loans in the future to securitize them in one of our securitization programs without transferring such mortgage loans to the Trust for any reason. Properties secured by such mortgage loans, similar to other third-party owned real estate, may compete with the Mortgaged Properties for existing and potential tenants. We cannot assure you that our activities or activities of our servicers or their affiliates with respect to such other properties will not adversely impact the performance of the Mortgaged Properties.
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We may also have ongoing relationships with the Borrowers under the Mortgage Loans. If any of the Mortgage Loans are refinanced, we may purchase the refinanced loan. We may also be influenced by our desire to maintain good ongoing relationships with the Borrowers.
We may benefit from this offering in a number of ways, some of which may be inconsistent with the interests of purchasers of the Certificates. We may benefit from a completed offering of the Certificates because the offering would provide liquidity, transfer the credit risk of the Mortgage Loans to the Certificateholders during the aggregation period prior to the securitization of such Mortgage Loans and establish a market precedent and a valuation data point for securities similar to the Certificates, thus enhancing our ability to conduct similar offerings in the future and permitting them to write up, avoid writing down or otherwise adjust the fair value of the Mortgage Loans or other similar loans or securities held on our balance sheet.
In the ordinary course of their businesses, we and our servicers will service mortgage loans other than those included in the Trust. In addition, we may own other mortgage loans. These other mortgage loans may be similar to the Mortgage Loans. The mortgaged properties securing these other loans maybe in the same markets as the Mortgaged Properties securing the Mortgage Loans, may have owners and/or property managers in common with the Mortgaged Properties securing the Mortgage Loans and/or may be sponsored by parties that also sponsor the Mortgaged Properties securing the Mortgage Loans. In these cases, our interests or interests of our servicers and their clients may differ from and compete with the interests of the Trust and these activities may adversely affect the amount and timing of collections on the Mortgage Loans.
In addition, any of our servicers or one or more of their respective affiliates may have originated some of the Mortgage Loans. As a result, our servicers may have interests with respect to such Mortgage Loans, such as relationships with the Borrowers or the sponsors of the Borrowers that differ from, and may conflict with, your interests. Furthermore, we will retain the Class D Certificates and may hold additional Certificates from time to time. Also, any of our servicers and their affiliates may purchase or retain any Class of Certificates. Our or our servicers’ ownership of any Certificates could cause a conflict between our or our servicers’ duties under the Trust and Servicing Agreement and our or our servicers’ interest as a Holder of a Certificate, especially to the extent that certain actions or events have a disproportionate effect on one or more Classes of Certificates.
Furthermore, we or any successor Special Servicer may enter into one or more arrangements or have relationships with the Directing Third Party, the Directing Investor or any other Certificateholders (or any affiliate or a third-party representative of any of them) that conflict with those of Certificateholders of other Classes of Certificates. Each of these relationships should be considered carefully by you before you invest in any Certificates.
Under the Trust and Servicing Agreement, we are required to service the Mortgage Loans in accordance with the Servicing Standard. However, we cannot assure you that any actions taken by us or our servicers will not give rise to conflicts of interest and will not be adverse to the interests of the Certificateholders.
We May Not Be Able To Make a Required Cure, Repurchase or Substitution of a Repurchase Loan. We will be the only seller that will transfer the Mortgage Loans to the Trust, and in connection with such transfer, we will make a representation that each Mortgage Loan meets the Eligibility Criteria, which includes the criterion that each Mortgage Loan must be eligible for securitization under Freddie Mac’s K-series securitization program or any other securitization program proposed by the Mortgage Loan Seller and approved by the Directing Investor. The Directing Third Party will have the right to determine whether any Mortgage Loan does not meet the Eligibility Criteria within 30 days after the Closing Date or the applicable Subsequent Transfer Date, as applicable, and may, within such 30-day period, request us to repurchase or substitute an Ineligible Loan. After such 30-day period, our representation that each Mortgage Loan meets the Eligibility Criteria will be deemed to be true and correct, and we will not be required to repurchase or substitute any Mortgage Loan due to any breach or alleged breach of such representation after such 30-day period.
In connection with each transfer of a Mortgage Loan, we will also make the representations and warranties with respect to such Mortgage Loan set forth on Exhibit D to this offering circular, subject to, if applicable, any Approved Exceptions to such representations and warranties. Any Approved Exceptions for any additional Mortgage Loan that may be transferred to the Trust after the Closing Date may not be similar in amount, significance and type to the Approved Exceptions for the Initial Mortgage Loans set forth in Exhibit E to this offering circular. In the event that a defect in the mortgage file relating to any Mortgage Loan or a breach of any
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such representation or warranty that we make with respect to any Mortgage Loan materially and adversely affects the value of such Mortgage Loan or the interests of the Certificateholders of any Class of Certificates as determined by the Directing Third Party, we will be required to cure such defect or breach or repurchase or substitute such Defective Loans in accordance with the terms of the Trust and Servicing Agreement. In addition, if requested by the Directing Third Party within 30 days after the applicable Transfer Date, we will be required to repurchase or substitute any Permitted Kick Out Loan.
We cannot assure you that we will effect any cure, repurchase or substitution of a Mortgage Loan. We may have various legal defenses available to us in connection with a cure, repurchase or substitution obligation. In addition, if we fail to securitize the Mortgage Loans in the Trust or fulfill such obligation to purchase or substitute the Mortgage Loans in accordance with the terms of the Trust and Servicing Agreement, Certificateholders could experience cash flow disruptions or losses on your Certificates subject, in the case of the Offered Certificates, to the Freddie Mac Guarantee.
See “—Risks Relating to Freddie Mac” below, and “Freddie Mac” and “The Mortgage Loan Purchase, Trust and Servicing Agreement—Repurchase and Substitution of Mortgage Loans by the Mortgage Loan Seller” in this offering circular.
Potential Conflicts of Interest of the Placement Agents and Their Affiliates. We expect that we will offer the Offered Certificates to investors through Placement Agents. The activities of those Placement Agents and their respective affiliates (collectively, the “Placement Agent Entities”) may result in certain conflicts of interest. The Placement Agent Entities may retain, or own in the future, Classes of Certificates and any voting rights of those Classes could be exercised by any such Placement Agent Entity in a manner that could adversely impact one or more Classes of Certificates. If that were to occur, that Placement Agent Entity’s interests may not be aligned with the interests of the Holders of the Certificates.
The Placement Agent Entities include broker-dealers whose businesses include executing securities and derivative transactions on their own behalf as principals and on behalf of clients. As such, they actively make markets in and trade financial instruments for their own accounts and for the accounts of customers. These financial instruments include debt and equity securities, currencies, commodities, bank loans, indices, baskets and other products. The Placement Agent Entities’ activities include, among other things, executing large block trades and taking long and short positions directly and indirectly, through derivative instruments or otherwise. The securities and instruments in which the Placement Agent Entities take positions, or expect to take positions, include loans similar to the Mortgage Loans, securities and instruments similar to the Certificates, and other securities and instruments. Market making is an activity where the Placement Agent Entities buy and sell on behalf of customers, or for their own accounts, to satisfy the expected demand of customers. By its nature, market making involves facilitating transactions among market participants that have differing views of securities and instruments. As a result, you should expect that the Placement Agent Entities will take positions that are inconsistent with, or adverse to, the investment objectives of investors in one or more Classes of Certificates.
As a result of the Placement Agent Entities’ various financial market activities, including acting as a research provider, investment advisor, market maker or principal investor, you should expect that personnel in various businesses throughout the Placement Agent Entities will have and express research or investment views and make recommendations that are inconsistent with, or adverse to, the objectives of investors in one or more Classes of Certificates.
To the extent a Placement Agent Entity makes a market in the Certificates (which it is under no obligation to do), it would expect to receive income from the spreads between its bid and offer prices for the Certificates. The price at which a Placement Agent Entity may be willing to purchase Certificates, if it makes a market, will depend on market conditions and other relevant factors and may be significantly lower than the issue price for the Certificates and significantly lower than the price at which it may be willing to sell the Certificates.
In addition, the Placement Agent Entities will have no obligation to monitor the performance of the Certificates or the actions of the Master Servicer, the Special Servicer, the Certificate Administrator, the Trustee, the Custodian, us or the directing investor, and will have no authority to advise such parties or to direct their actions. Furthermore, the Placement Agent Entities may have ongoing relationships with, render services to, and engage in transactions with the Borrowers, the sponsors of the Borrowers and their respective affiliates, which relationships
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and transactions may create conflicts of interest between the Placement Agent Entities, on the one hand, and the Trust, on the other hand.
Furthermore, the Placement Agent Entities expect that a completed offering will enhance their ability to assist clients and counterparties in the transaction or in related transactions (including assisting clients in additional purchases and sales of the Certificates and hedging transactions). The Placement Agent Entities expect to derive fees and other revenues from these transactions. In addition, participating in a successful offering and providing related services to clients may enhance the Placement Agent Entities’ relationships with various parties, facilitate additional business development, and enable them to obtain additional business and generate additional revenue.
Each of these relationships should be considered carefully before making an investment in any Class of Certificates.
Potential Conflicts of Interest Among the Certificateholders. We expect to retain the Class D Certificates and will act as the initial Directing Investor. Also, we and our servicers and their affiliates may purchase any other Classes of Certificates. The ownership of any Certificates by us, or any of our servicers and/or their affiliates could cause a conflict between our or their duties under the Trust and Servicing Agreement or the Guide, as applicable, and our or their interest as a Holder of a Certificate, especially to the extent that certain actions or events have a disproportionate effect on one or more Classes of Certificates. Although we are required to service the Mortgage Loans in accordance with the Servicing Standard, we cannot assure you that any action taken by us or our servicer with respect to any Mortgage Loan will not have a more favorable effect on one or more Classes of Certificates that may be held by us, our servicers or any of their affiliates.
The Directing Investor will have the right to consent to any Workout of a Defaulted Loan by the Special Servicer. In connection with such Workout, the Directing Investor will also have the right to approve the related Asset Status Report and actions to be taken by the Special Servicer. The Directing Investor may have interests that conflict with those of certain Certificateholders in granting such consent or approval. We will be the initial Directing Investor and are not currently affiliated with any Borrower. However, in the event that the Directing Investor becomes an affiliate of a Borrower with respect to any Mortgage Loan or hold any Junior Loan, the Directing Investor may have further interests that conflict with those of other Certificateholders. Upon the occurrence and during the continuance of any Affiliated Borrower Loan Event with respect to the Directing Investor and such Mortgage Loan, certain rights of the Directing Investor including the right to access to certain information relating such Mortgage Loan will be restricted as described in “The Mortgage Loan Purchase, Trust and Servicing Agreement—Transfer of Servicing Between Master Servicer and Special Servicer” and “—Directing Investor and Directing Third Party” in this offering circular. However, we cannot assure you that any exercise of the rights of the Directing Investor that is affiliated with a Borrower of any Mortgage Loan or holds a Junior Loan will not adversely affect your interests in the Certificates.
In addition, the Directing Investor or the Directing Third Party may enter into hedging or other transactions or otherwise have business objectives that could cause its interests with respect to the Mortgage Pool to diverge from those of other purchasers of the Certificates. Because the incentives and actions of the Directing Third Party or the Directing Investor may, in some circumstances, differ from or be adverse to those of purchasers of other Classes of Certificates, you are strongly encouraged to make your own investment decision based on a careful review of the information set forth in this offering circular and your own view of the Mortgage Loans.
By its acceptance of a Certificate, each Certificateholder confirms its understanding that the Directing Investor and the Directing Third Party may take actions that favor the interests of one or more Classes of the Certificates over other Classes of the Certificates and that the Directing Investor and the Directing Third Party may have special relationships and interests that conflict with those of Certificateholders of some Classes of the Certificates and, that the Directing Investor and the Directing Third Party will have no liability to any Certificateholder for any action taken or not taken, or any recommendation provided, as applicable, and each Certificateholder agrees to take no action against the Directing Investor or the Directing Third Party as a result of any such action or omission, recommendation or special relationship or conflict.
Your Lack of Control Over the Trust Can Adversely Impact Your Investment. Except as described below, investors in the Certificates do not have the right to make decisions with respect to the administration of the Trust. These decisions are generally made, subject to the express terms of the Trust and Servicing Agreement and
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certain rights that the Directing Investor and/or Directing Third Party may have, by the Master Servicer, the Special Servicer, the Certificate Administrator and the Trustee. Any decision made by any of those parties in respect of the Trust in accordance with the terms of the Trust and Servicing Agreement, even if it determines that decision to be in your best interests, may be contrary to the decision that you would have made and may negatively affect your interests.
In addition, in certain limited circumstances, Certificateholders have the right to vote on matters affecting the Trust. In some cases, these votes are by Certificateholders taken as a whole and in others the vote is by Class. Your interests as a Certificateholder of a particular Class may not be aligned with the interests of Certificateholders of one or more other Classes of Certificates in connection with any such vote. In all cases, voting is based on the outstanding Certificate Principal Balance, which is reduced by Realized Losses. These limitations on voting could adversely affect your ability to protect your interests with respect to matters voted on by Certificateholders. See “Description of the Certificates—Voting Rights” in this offering circular.
A Certificate registered in the name of the Trustee, the Custodian, the Certificate Administrator, the Master Servicer, the Special Servicer, Freddie Mac, or any affiliate of any of them, as applicable, will be deemed not to be outstanding and the voting rights to which it is entitled will not be taken into account for the purposes of giving any consent, approval or waiver pursuant to the Trust and Servicing Agreement with respect to the rights, obligations or liabilities of such party, as further described under “Description of the Certificates—Voting Rights” in this offering circular.
The Certificateholders will not have the right to replace the Master Servicer, the Special Servicer, the Trustee or the Custodian without cause.
See also “—Potential Conflicts of Interest Among the Certificateholders” above.
Commencing Legal Proceedings Against Parties to the Trust and Servicing Agreement May Be Difficult. The Trustee may not be required to commence legal proceedings against third parties at the direction of any Certificateholders unless, among other conditions, at least 25% of the voting rights associated with the Certificates join in the demand and offer to the Trustee such reasonable security or indemnification as it may require. Those Certificateholders may not commence legal proceedings themselves with respect to the Trust and Servicing Agreement or the Certificates unless the Trustee has refused to institute proceedings after the conditions described in the proceeding sentence have been satisfied. These provisions may limit your personal ability to enforce the provisions of the Trust and Servicing Agreement.
You May Be Bound by the Actions of Other Certificateholders. In some circumstances, the consent or approval of the Holders of a specified percentage of the Certificates will be required in order to direct, consent to or approve certain actions, including amending the Trust and Servicing Agreement. In these cases, this consent or approval will be sufficient to bind all Holders of Certificates.
The Volatile Economy and Credit Disruptions May Adversely Affect the Value and Liquidity of Your Investment. In recent years, the real estate and securitization markets, including the market for CMBS, as well as global financial markets and the economy generally, experienced significant dislocations, illiquidity and volatility and thus affected the values of such CMBS. We cannot assure you that another dislocation in CMBS will not occur.
Any economic downturn may adversely affect the financial resources of Borrowers and may result in the inability of Borrowers to make principal and interest payments on, or to refinance, their Mortgage Loans when due or to sell their Mortgaged Properties for an amount sufficient to pay off such Mortgage Loans when due. In the event of default by any Borrower, the Trust may suffer a partial or total loss with respect to the related Mortgage Loan. Any delinquency or loss on any Mortgage Loan would have an adverse effect on the distributions of principal and interest received by Certificateholders.
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Other Events or Circumstances May Affect the Value and Liquidity of Your Investment. The value and liquidity of your investment in the Certificates may be affected by general economic conditions and financial markets, as well as the following events or circumstances:
wars, revolts, terrorist attacks, armed conflicts, energy supply or price disruptions, political crises, natural disasters, civil unrest and/or protests and man-made disasters may have an adverse effect on the Mortgaged Properties and/or the Certificates;
defaults on the Mortgage Loans may occur in large concentrations over a period of time, which might result in rapid declines in the value of the Certificates;
the values of the Mortgaged Properties may have declined since the related Mortgage Loans were originated and may decline following the issuance of the Certificates and such declines may be substantial and occur in a relatively short period following the issuance of the Certificates; and such declines may occur for reasons largely unrelated to the circumstances of the particular Mortgaged Property;
if the Mortgage Loans default, then the yield on your investment may be substantially reduced notwithstanding that liquidation proceeds may be sufficient to result in the repayment of the principal of and accrued interest on the Offered Certificates; an earlier than anticipated repayment of principal (even in the absence of losses) in the event of a default in advance of the maturity date would tend to shorten the weighted average period during which you earn interest on your investment; and a later than anticipated repayment of principal (even in the absence of losses) in the event of a default upon the maturity date would tend to delay your receipt of principal and the interest on your investment may be insufficient to compensate you for that delay;
even if net sales proceeds received on Defaulted Loans are sufficient to cover the principal and accrued interest on those Mortgage Loans, the Trust may experience losses in the form of special servicing fees and other expenses, and you may bear losses as a result, or your yield may be adversely affected by such losses;
the time periods to resolve Defaulted Loans may be long, and those periods may be further extended because of Borrower bankruptcies and related litigation; this may be especially true in the case of loans made to Borrowers that have, or whose affiliates have, substantial debts other than the Mortgage Loan, including related subordinate or mezzanine financing;
trading activity associated with indices of CMBS may drive spreads on those indices wider than spreads on CMBS, thereby resulting in a decrease in the value of such CMBS, including the Offered Certificates, and spreads on those indices may be affected by a variety of factors, and may or may not be affected for reasons involving the commercial and multifamily real estate markets and may be affected for reasons that are unknown and cannot be discerned;
if you determine to sell the Certificates, you may be unable to do so or you may be able to do so only at a substantial discount from the price you paid; this may be the case for reasons unrelated to the then-current performance of the Offered Certificates or the Mortgage Loans; and this may be the case within a relatively short period following the issuance of the Certificates; and
even if CMBS are performing as anticipated, the value of such CMBS in the secondary market may nevertheless decline as a result of a deterioration in general market conditions for other asset-backed securities or structured products, and you may be required to report declines in the value of the Certificates, and/or record losses, on your financial statements or regulatory or supervisory reports, and/or repay or post additional collateral for any secured financing, hedging arrangements or other financial transactions that you are entering into that are backed by or make reference to the Certificates, in each case as if the Certificates were to be sold immediately.
Legal and Regulatory Provisions Affecting Investors Could Adversely Affect the Liquidity of Your Investment. We make no representation as to the proper characterization of the Certificates for legal investment, financial institution regulatory, financial reporting or other purposes, as to the ability of particular investors to purchase the Certificates under applicable legal investment or other restrictions or as to the consequences of an
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investment in the Certificates for such purposes or under such restrictions. Changes in federal banking and securities laws and other laws and regulations may have an adverse effect on issuers, investors, or other participants in the asset-backed securities markets including the CMBS market. While the general effects of such changes are uncertain, regulatory or legislative provisions applicable to certain investors may have the effect of limiting or restricting their ability to hold or acquire CMBS, which in turn may adversely affect the ability of investors in the Certificates who are not subject to those provisions to resell their Certificates in the secondary market. For example:
Investors should be aware of the risk retention and due diligence requirements in Europe (the “EU Risk Retention and Due Diligence Requirements”) which currently apply, or are expected to apply in the future, to various types of regulated investors in the European Economic Area (“EEA”), including credit institutions, authorized alternative investment fund managers, investment firms, insurance and reinsurance undertakings and Undertakings for Collective Investment in Transferable Securities funds. Among other things, such requirements restrict an investor who is subject to the EU Risk Retention and Due Diligence Requirements from investing in securitizations unless: (i) the originator, sponsor or original lender in respect of the relevant securitization has explicitly disclosed that it will retain, on an on-going basis, a net economic interest of not less than 5% in respect of certain specified credit risk tranches or securitized exposures; and (ii) such investor is able to demonstrate that they have undertaken certain due diligence in respect of various matters including but not limited to its securities position, the underlying assets and (in the case of certain types of investors) the relevant sponsor or originator. Failure to comply with one or more of the requirements may result in various penalties including, in the case of those investors subject to regulatory capital requirements, the imposition of a punitive capital charge on the securities acquired by the relevant investor.
On September 30, 2015, the European Commission published a proposal to amend the EU Risk Retention and Due Diligence Requirements (the “Draft CRR Amendment Regulation”) and a proposed regulation relating to a European framework for simple, transparent and standardized securitization (such proposed regulation, including any implementing regulation, technical standards and official guidelines related thereto, together with the Draft CRR Amendment Regulation, the “Securitization Regulation”) which would, among other things, re-cast the EU risk retention rules as part of wider changes to establish a “Capital Markets Union” in Europe. The Presidency of the Council of Ministers of the European Union has also published compromise proposals concerning the Securitization Regulation. The Securitization Regulation will need to be considered, finalized and adopted by the European Parliament and Council of Ministers. It is unclear at this time when the Securitization Regulation will become effective. You should be aware that there are material differences between the current EU Risk Retention and Due Diligence Requirements and the Securitization Regulation. The Securitization Regulation may go into effect in a form that differs from the published proposals and drafts.
None of us or our affiliates or any other person intends to retain a material net economic interest in the securitization constituted by the issue of the Certificates in accordance with the EU Risk Retention and Due Diligence Requirements or to take any other action that may be required by EEA-regulated investors for the purposes of their compliance with the EU Risk Retention and Due Diligence Requirements. Consequently, the Certificates are not a suitable investment for EEA credit institutions, EEA investment firms or the other types of EEA-regulated investors mentioned above. As a result, the price and liquidity of the Certificates in the secondary market may be adversely affected. EEA-regulated investors are encouraged to consult with their own investment and legal advisors regarding the suitability of the Certificates for investment.
Recent changes in federal banking and securities laws, including those resulting from the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) enacted in the United States, may have an adverse effect on issuers, investors, or other participants in the asset-backed securities markets. In particular, new capital regulations were issued by the U.S. banking regulators in July 2013; these regulations implement the increased capital requirements established under the Basel Accord and are being phased in over time. These new capital regulations eliminate reliance on credit ratings and otherwise alter, and in most cases increase, the capital requirements imposed on depository institutions and their holding companies, including with respect to ownership of asset-backed securities such as CMBS. Further changes in capital requirements have been announced by the Basel Committee on Banking Supervision and it is uncertain when such changes will be implemented in the United States. When fully implemented in the
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United States, these changes may have an adverse effect with respect to investments in asset-backed securities, including CMBS. As a result of these regulations, investments in CMBS, such as the Certificates, by financial institutions subject to bank capital regulations may result in greater capital charges to these financial institutions and these new regulations may otherwise adversely affect the treatment of CMBS for their regulatory capital purposes.
The Financial Accounting Standards Board has adopted changes to the accounting standards for structured products. These changes, or any future changes, may affect the accounting for entities such as the Trust, could under certain circumstances require an investor or its owner generally to consolidate the assets of the Trust in its financial statements and record third parties’ investments in the Trust as liabilities of that investor or owner or could otherwise adversely affect the manner in which the investor or its owner must report an investment in CMBS for financial reporting purposes.
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, accounting and other advisors in determining whether, and to what extent, the Certificates will constitute legal investments for them or are subject to investment or other restrictions, unfavorable accounting treatment, capital charges or reserve requirements.
The Market Value of the Certificates Will Be Sensitive to Factors Unrelated to the Performance of the Certificates and the Mortgage Loans. The market value of the Certificates can decline even if the Certificates and the Mortgage Loans are performing at or above your expectations. The market value of the Certificates will be sensitive to fluctuations in current interest rates. However, a change in the market value of the Certificates as a result of an upward or downward movement in current interest rates may not equal the change in the market value of the Certificates as a result of an equal but opposite movement in interest rates.
The market value of the Certificates will also be influenced by the supply of and demand for CMBS generally. The supply of CMBS will depend on, among other things, the amount of commercial and multifamily mortgage loans, whether newly originated or held in portfolio, that are available for securitization. A number of factors will affect investors’ demand for CMBS, including—
the availability of alternative investments that offer high yields or are perceived as being a better credit risk, having a less volatile market value or being more liquid;
legal and other restrictions that prohibit a particular entity from investing in CMBS or limit the amount or types of CMBS that it may acquire;
investors’ perceptions regarding the commercial and multifamily real estate markets which may be adversely affected by, among other things, a decline in real estate values or an increase in defaults and foreclosures on mortgage loans secured by income-producing properties;
investors’ perceptions regarding the capital markets in general, which may be adversely affected by political, social and economic events completely unrelated to the commercial and multifamily real estate markets; and
the impact on demand generally for investments like the Certificates or CMBS as a result of the existence or cancellation of government sponsored economic programs.
If you decide to sell the Certificates, you may have to sell at a discount from the price you paid for reasons unrelated to the performance of the Certificates or the related Mortgage Loans. Pricing information regarding the Certificates may not be generally available on an ongoing basis.
Restrictions on Transfer May Adversely Affect the Liquidity of the Offered Certificates. We have not registered or qualified the Offered Certificates, or the offering of the Offered Certificates pursuant to this offering circular, under the Securities Act or the securities laws of any state or other jurisdiction. Furthermore, neither we nor any other person or entity will be obligated to so register or qualify the Offered Certificates, or any offering of the Offered Certificates, or to take any action not otherwise required under the Trust and Servicing Agreement to
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permit the reoffer, resale, pledge or other transfer of any Offered Certificate without such registration or qualification. The Offered Certificates will not be transferable other than in a transaction that is exempt from or otherwise does not require registration or qualification under the Securities Act and applicable state and foreign securities laws, and upon satisfaction of certain other conditions provided for in the Trust and Servicing Agreement. See “Plan of Distribution” in this offering circular. Any Holder of an Offered Certificate desiring to effect such transfer will be deemed to have agreed to indemnify the Mortgage Loan Seller, the Guarantor, the Placement Agents, the Trustee, the Custodian, the Certificate Administrator, the Master Servicer, the Special Servicer and the designated certificate registrar for the Certificates against any liability that may result if the transfer is not so exempt or is not made in accordance with such applicable federal, state and foreign laws and the applicable transfer restrictions set forth in the Trust and Servicing Agreement, as described under “Description of the Certificates—Book-Entry Registration” in this offering circular.
There is currently no secondary market for the Offered Certificates, and we cannot assure you that a secondary market for the Offered Certificates will develop. If a secondary market does develop, we cannot assure you that it will provide you with liquidity of investment or will continue for the life of the Offered Certificates. We will not list the Offered Certificates on any national securities exchange or an automated quotation system of a registered securities association. As a result, you must be prepared to bear the risk of holding the Offered Certificates to maturity.
The market value of the Offered Certificates will fluctuate with changes in prevailing rates of interest or other credit related market changes. Consequently, the sale of the Offered Certificates in any market that may develop may be at a discount from the related par value or purchase price.
The liquidity of the Offered Certificates may be affected by present uncertainties and future unfavorable determinations concerning legal investment. The Offered Certificates will not constitute “mortgage related securities” for purposes of SMMEA. See “Legal Investment” in this offering circular.
Book-Entry Registration. The Offered Certificates issued in book-entry form will be represented by a book-entry certificate registered in the name of Cede & Co., as the nominee for The Depository Trust Company, and will not be registered in the names of the related beneficial owners of those Certificates or their nominees. As a result, unless and until definitive certificates are issued, beneficial owners of Offered Certificates will not be recognized as “Certificateholders” for certain purposes. Therefore, until you are recognized as a “Certificateholder”, you will be able to exercise the rights of Holders of Offered Certificates only indirectly through The Depository Trust Company and its participating organizations. See “Description of the Certificates—Registration and Denominations” in this offering circular.
As a beneficial owner holding an Offered Certificate through the book-entry system, you will be entitled to receive the reports described under “Description of the Certificates—Reports to Certificateholders; Available Information” in this offering circular and notices only through the facilities of The Depository Trust Company and its respective participants or from the Certificate Administrator, if you have certified to the Certificate Administrator that you are a beneficial owner of Offered Certificates using the applicable form annexed to the Trust and Servicing Agreement. Upon presentation of evidence satisfactory to the Certificate Administrator of your beneficial ownership interest in the Offered Certificates, you will be entitled to access to the monthly reports to Certificateholders from the Certificate Administrator.
The Limited Nature of Ongoing Information May Make It Difficult for You To Resell the Offered Certificates. The primary source of ongoing information regarding your certificates, including information regarding the status of the related Mortgage Loans, will be the periodic reports made available by the Certificate Administrator described under the heading “Description of the Certificates—Reports to Certificateholders; Available Information” in this offering circular. We cannot assure you that any additional ongoing information regarding your certificates will be available through any other source. In addition, we are not aware of any source through which price information about the certificates will be generally available on an ongoing basis. The limited nature of the information regarding the certificates may adversely affect the liquidity of the Offered Certificates, even if a secondary market for the Offered Certificates is available.
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The Certificates Will Not Be Rated. We have not engaged any NRSRO to rate any Class of Certificates. The absence of ratings may adversely affect the ability of an investor to purchase or retain, or otherwise impact the liquidity, market value and regulatory characteristics of, the Certificates.
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 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 Certificates.
Ongoing Investigations Concerning LIBOR Could Adversely Affect Your Investment in the Offered Certificates. Regulators and law-enforcement agencies from a number of governments, including entities in the United States, Japan, Canada and the United Kingdom, have been conducting civil and criminal investigations into whether the banks that contributed to the British Bankers’ Association (the “BBA”) in connection with the calculation of daily LIBOR may have underreported or otherwise manipulated or attempted to manipulate LIBOR. Investigations remain ongoing and we cannot assure you that there will not be findings of rate setting manipulation or that improper manipulation of LIBOR or other similar inter-bank lending rates will not occur in the future.
Based on a review conducted by the Financial Conduct Authority of the United Kingdom (the “FCA”) and a consultation conducted by the European Commission, proposals have been made for governance and institutional reform, regulation, technical changes and contingency planning. In particular: (a) new legislation has been enacted in the United Kingdom pursuant to which LIBOR submissions and administration are now “regulated activities” and manipulation of LIBOR has been brought within the scope of the market abuse regime; (b) legislation has been proposed which if implemented would, among other things, alter the manner in which LIBOR is determined, compel more banks to provide LIBOR submissions, and require these submissions to be based on actual transaction data; and (c) LIBOR rates for certain currencies and maturities are no longer published daily. In addition, pursuant to authorization from the FCA, ICE Benchmark Administration Limited (the “IBA”) (formerly NYSE Euronext Rate Administration Limited) took over the administration of LIBOR from the BBA on February 1, 2014. Any new administrator of LIBOR may make methodological changes to the way in which LIBOR is calculated or may alter, discontinue or suspend calculation or dissemination of LIBOR.
We cannot predict the changes that will ultimately be made to LIBOR, the effect of any such changes or any other reforms to LIBOR that may occur, or the effect of the ongoing LIBOR investigations referred to above. These matters may result in a sudden or prolonged increase or decrease in reported LIBOR rates, LIBOR being more volatile than they have been in the past and/or fewer loans utilizing LIBOR as an index for interest payments. In addition, questions surrounding the integrity in the process for determining LIBOR may have other unforeseen consequences, including potential litigation against banks and/or obligors on loans. Any uncertainty in the value of LIBOR or the development of a market view that LIBOR was manipulated or may be manipulated may adversely affect the liquidity of the Class A Certificates in the secondary market and their market value.
Our Investment in the Certificates Could Adversely Affect the Liquidity of Your Investment. We will retain the Class D Certificates and may purchase some or all of a Class of Certificates. An investment by us in the Certificates may adversely affect the liquidity of the Certificates, even if a secondary market for the Certificates is available. In the event that we purchase some or all of a Class of Certificates and decide to sell its investment, the sale of the Certificates in any market that may develop may be at a discount from the related par value or purchase price. As a result, the price and liquidity of the Certificates in the secondary market may be adversely affected. We cannot assure you that a secondary market will develop or, if it does develop, that it will provide you with liquidity of investment or continue for the life of the Certificates.
Risks Relating to Freddie Mac
The Conservator May Repudiate Freddie Mac’s Contracts, Including Its Guarantee and Other Obligations Related to the Offered Certificates. On September 6, 2008, the Federal Housing Finance Agency (“FHFA”) was appointed Freddie Mac’s conservator by the FHFA director. See “Freddie Mac—Freddie Mac Conservatorship” in this offering circular. The conservator has the right to transfer or sell any asset or liability of ours, including its guarantee obligation, without any approval, assignment or consent. If the conservator were to transfer our guarantee obligation to another party, Holders of the Offered Certificates would have to rely on that party for the satisfaction of the guarantee obligation and would be exposed to the credit risk of that party. We also
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have the obligation to repurchase or substitute a Repurchase Loan and purchase all of the Mortgage Loans at the Par Purchase Price upon the occurrence of certain events under the Trust and Servicing Agreement. If the conservator were to transfer our purchase obligations to another party, Holders of the Certificates would have to rely on that party for satisfaction of the purchase obligations and would be exposed to credit risk of that party.
Future Legislation and Regulatory Actions Will Likely Affect the Role of Freddie Mac. Future legislation will likely materially affect our role, our business model, our structure and future results of operations. Some or all of our functions could be transferred to other institutions, and we could cease to exist as a stockholder-owned company or at all.
On February 11, 2011, the Obama Administration delivered a report to Congress that lays out the Administration’s plan to reform the U.S. housing finance market, including options for structuring the government’s long-term role in a housing finance system in which the private sector is the dominant provider of mortgage credit. The report recommends winding down Freddie Mac and Fannie Mae, stating that the Administration will work with FHFA to determine the best way to responsibly reduce the role of Freddie Mac and Fannie Mae in the market and ultimately wind down both institutions. The report recommends using a combination of policy levers to wind down Freddie Mac and Fannie Mae, shrink the government’s footprint in housing finance, and help bring private capital back to the mortgage market, including: (i) increasing guarantee fees; (ii) increasing private capital ahead of Freddie Mac and Fannie Mae guarantees and phasing in a 10% down payment requirement; (iii) reducing conforming loan limits; and (iv) winding down Freddie Mac and Fannie Mae’s investment portfolios.
In addition to legislative actions, FHFA has expansive regulatory authority over us, and the manner in which FHFA will use its authority in the future is unclear. FHFA could take a number of regulatory actions that could materially adversely affect us, such as changing or reinstating current capital requirements, which are not binding during conservatorship. On January 20, 2017, a new presidential administration took office. We have no ability to predict what regulatory and legislative policies or actions the new presidential administration will pursue with respect to us.
FHFA Could Terminate the Conservatorship by Placing Freddie Mac into Receivership, Which Could Adversely Affect the Freddie Mac Guarantee. Under the Federal Housing Finance Regulatory Reform Act (the “Reform Act”), FHFA must place us into receivership if FHFA determines in writing that our assets are less than its obligations for a period of 60 days. FHFA has notified us that the measurement period for any mandatory receivership determination with respect to our assets and obligations would commence no earlier than the SEC public filing deadline for its quarterly or annual financial statements and would continue for 60 days after that date. FHFA has also advised us that, if, during that 60-day period, we receive funds from the U.S. Department of the Treasury (“Treasury”) in an amount at least equal to the deficiency amount under the senior preferred stock purchase agreement between FHFA, as our conservator, and Treasury (as amended, the “Purchase Agreement”), the Director of FHFA will not make a mandatory receivership determination.
In addition, we could be put into receivership at the discretion of the Director of FHFA at any time for other reasons, including conditions that FHFA has already asserted existed at the time we were placed into conservatorship. These include: a substantial dissipation of assets or earnings due to unsafe or unsound practices; the existence of an unsafe or unsound condition to transact business; an inability to meet its obligations in the ordinary course of business; a weakening of its condition due to unsafe or unsound practices or conditions; critical undercapitalization; the likelihood of losses that will deplete substantially all of its capital; or by consent. A receivership would terminate the conservatorship. The appointment of FHFA (or any other entity) as our receiver would terminate all rights and claims that its creditors may have against our assets or under its charter arising as a result of their status as creditors, other than the potential ability to be paid upon our liquidation. Unlike a conservatorship, the purpose of which is to conserve our assets and return it to a sound and solvent condition, the purpose of a receivership is to liquidate our assets and resolve claims against us.
In the event of a liquidation of our assets, we cannot assure you that there would be sufficient proceeds to pay the secured and unsecured claims of the company, repay the liquidation preference of any series of its preferred stock or make any distribution to the holders of its common stock. To the extent that we are placed in receivership and do not or cannot fulfill our guarantee or other contractual obligations to the holders of our mortgage-related securities, including the Certificates, such holders could become unsecured creditors of us with respect to claims made under our guarantee or our other contractual obligations.
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As receiver, FHFA could repudiate any contract we entered into prior to its appointment as receiver if FHFA determines, in its sole discretion, that performance of the contract is burdensome and that repudiation of the contract promotes the orderly administration of our affairs. The Reform Act requires that any exercise by FHFA of its right to repudiate any contract occur within a reasonable period following its appointment as receiver.
If FHFA, as receiver, were to repudiate our guarantee obligations, the receivership estate would be liable for actual direct compensatory damages as of the date of receivership under the Reform Act. Any such liability could be satisfied only to the extent that our assets were available for that purpose.
Moreover, if our guarantee obligations were repudiated, payments of principal and/or interest to the Holders of the Offered Certificates would be reduced in the event of any Borrower’s late payment or failure to pay or a servicer’s failure to remit Borrower payments into the Trust or advance Borrower payments. Any actual direct compensatory damages owed as a result of the repudiation of our guarantee obligations may not be sufficient to offset any shortfalls experienced by the Holders of the Offered Certificates.
During a receivership, certain rights of the Holders of the Offered Certificates under the Trust and Servicing Agreement may not be enforceable against FHFA, or enforcement of such rights may be delayed.
The Reform Act also provides that no person may exercise any right or power to terminate, accelerate or declare an event of default under certain contracts to which we are a party, or obtain possession of or exercise control over any of our property, or affect any of our contractual rights, without the approval of FHFA as receiver, for a period of 90 days following the appointment of FHFA as receiver.
If we are placed into receivership and do not or cannot fulfill our guarantee obligations or other contractual obligations under the Trust and Servicing Agreement, Holders of the Certificates could become unsecured creditors of ours with respect to claims made under our guarantee or other contractual obligations.
Freddie Mac’s Changes in Business Practices May Negatively Impact the Certificateholders. We have a set of policies and procedures that it follows in the normal course of its mortgage loan purchase and servicing business, which are generally described in this offering circular. Certain of these practices are subject to change over time, as a result of changes in the economic environment and as a result of regulatory changes and changes in requirements of its regulators, or its Conservator, among other reasons. Freddie Mac may at any time change its practices as they relate to servicing requirements for its servicers, quality control policies and quality assurance policies, as well as other policies and procedures that may, in their current forms, benefit the Certificateholders. See “Mortgage Loan Purchase and Servicing” in this offering circular. In undertaking any changes to its practices or its policies and procedures, we may exercise complete discretion and may undertake changes that negatively impact the Certificateholders in pursuing other interests, including, but not limited to, minimizing losses for the taxpayers and complying with requirements put forth by its regulators, among others.
DESCRIPTION OF THE TRUST
The entity issuing the Certificates will be FMPRE 2017–KT01 Multifamily Aggregation Risk Transfer Trust, which we refer to in this offering circular as the “Trust.” The Trust is a New York common law trust that will be formed on the Closing Date pursuant to the Trust and Servicing Agreement. The only activities that the Trust may perform are those set forth in the Trust and Servicing Agreement, which are generally limited to owning and administering the Mortgage Loans, disposing of Defaulted Loans, issuing the Certificates and making distributions and providing reports to Certificateholders. Accordingly, the Trust may not issue securities other than the Certificates, or invest in securities, other than investment of funds in certain accounts maintained under the Trust and Servicing Agreement in certain short-term, high-quality investments. The Trust may not lend or borrow money. The Trust and Servicing Agreement may be amended as set forth under “The Mortgage Loan Purchase, Trust and Servicing Agreement—Amendment” in this offering circular. The Trust administers the Mortgage Loans through the Master Servicer and the Special Servicer. A discussion of the duties of the servicers, including any discretionary activities performed by each of them, is set forth under “The Mortgage Loan Purchase, Trust and Servicing Agreement” in this offering circular.
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The only assets of the Trust other than the Mortgage Loans are certain accounts maintained pursuant to the Trust and Servicing Agreement, the obligations of Freddie Mac pursuant to the Freddie Mac Guarantee and the short-term investments in which funds in the Collection Account and other accounts are invested. The Trust has no present liabilities, but has potential liability relating to ownership of the Mortgage Loans, and indemnity obligations to the Trustee, the Custodian, the Certificate Administrator, the Master Servicer, the Special Servicer and Freddie Mac. The fiscal year of the Trust is the calendar year. The Trust has no executive officers or board of directors. It acts through the Trustee, the Custodian, the Certificate Administrator, the Master Servicer and the Special Servicer.
The Mortgage Loan Seller is contributing the Mortgage Loans to the Trust. The Mortgage Loan Seller is purchasing the Mortgage Loans from the Mortgage Loan Seller pursuant to the Trust and Servicing Agreement, as described in “Summary of Offering Circular—The Mortgage Loans—Source of the Mortgage Loans” and “Description of the Mortgage Loans—Representations and Warranties” in this offering circular.
The Trust will be relying on an exclusion under the Investment Company Act contained in Section 3(c)(5) of the Investment Company Act under the Investment Company Act, although there may be additional exclusions or exemptions available to the Trust. Accordingly, the Trust is being structured so as not to constitute a “covered fund” for purposes of the regulations adopted on December 10, 2013 to implement Section 619 of the Dodd-Frank Act (such statutory provision, together with such implementing regulations, the “Volcker Rule”). The Volcker Rule generally prohibits “banking entities” (which is broadly defined to include U.S. banks and bank holding companies and many non-U.S. banking entities, together with their respective subsidiaries and other affiliates) from (i) engaging in proprietary trading, (ii) acquiring or retaining an ownership interest in or sponsoring a “covered fund” and (iii) entering into certain relationships with such funds. The Volcker Rule became effective on July 21, 2012, and final regulations implementing the Volcker Rule were adopted on December 10, 2013. Banking entities are required to be in conformance with the Volcker Rule by July 21, 2015, although ownership interests or sponsorships in covered funds in existence prior to December 31, 2013 are not required to be brought into conformance until July 21, 2017 (with the possibility of an additional five-year extension for certain illiquid funds). Prior to the applicable conformance date expiration, banking entities must make good faith efforts to conform their activities and investments to the Volcker Rule. Under the Volcker Rule, unless otherwise jointly determined otherwise by specified federal regulators, a “covered fund” does not include an issuer that may rely on an exclusion or exemption from the definition of “investment company” under the Investment Company Act other than the exclusions contained in Section 3(c)(1) and Section 3(c)(7) of the Investment Company Act. The general effects of the Volcker Rule remain uncertain. Any prospective investor in the Certificates, including a U.S. or foreign bank or a subsidiary or other bank affiliate, should consult its own legal advisors regarding such matters and other effects of the Volcker Rule.
There are no legal proceedings pending against the Trust that are material to the Certificateholders.
FREDDIE MAC
General
We will transfer Mortgage Loans from time to time to the Trust and will guarantee the timely payment of interest on and ultimate payment of principal of the Offered Certificates and the reimbursement of Realized Losses allocated to the Offered Certificates pursuant to the Trust and Servicing Agreement. Freddie Mac will also act as the Master Servicer, the Special Servicer, the Trustee and the Custodian. See “The Mortgage Loan Purchase, Trust and Servicing Agreement” in this offering circular.
We are one of the largest participants in the U.S. mortgage market. Freddie Mac is a stockholder-owned government-sponsored enterprise chartered by Congress on July 24, 1970 under the Freddie Mac Act to stabilize residential mortgage markets in the United States and expand opportunities for homeownership and affordable rental housing.
Our statutory purposes are:
to provide stability in the secondary market for residential mortgages;
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to respond appropriately to the private capital markets;
to provide ongoing assistance to the secondary market for residential mortgages (including mortgages on housing for low- and moderate-income families involving a reasonable economic return that may be less than the return earned on other activities) by increasing the liquidity of mortgage investments and improving the distribution of investment capital available for residential mortgage financing; and
to promote access to mortgage credit throughout the United States (including central cities, rural areas and other underserved areas) by increasing the liquidity of mortgage investments and improving the distribution of investment capital available for residential mortgage financing.
We fulfill the requirements of our charter by purchasing residential mortgages and mortgage-related securities in the secondary mortgage market and securitizing such mortgages into mortgage-related securities for our mortgage-related investment portfolio. We also purchase multifamily residential mortgages in the secondary mortgage market and hold these loans either for investment or sale. We finance the purchases of our mortgage-related securities and mortgage loans, and manage our interest-rate and other market risks, primarily by issuing a variety of debt instruments and entering into derivative contracts in the capital markets. Although we are chartered by Congress, we are solely responsible for making payments on our obligations. Neither the U.S. government nor any agency or instrumentality of the U.S. government other than Freddie Mac guarantees our obligations.
Freddie Mac Conservatorship
We continue to operate under the conservatorship that commenced on September 6, 2008, conducting our business under the direction of the FHFA, Freddie Mac’s conservator (the “Conservator”). FHFA was established under the Reform Act. Prior to the enactment of the Reform Act, HUD had general regulatory authority over Freddie Mac, including authority over Freddie Mac’s affordable housing goals and new programs. Under the Reform Act, FHFA now has general regulatory authority over Freddie Mac, though HUD still has authority over Freddie Mac with respect to fair lending.
Upon its appointment, FHFA, as Conservator, immediately succeeded to all of our rights, titles, powers and privileges and of any of our stockholders, officers or directors with respect to us and our assets, and succeeded to the title to all of our books, records and assets held by any other legal custodian or third party. During the conservatorship, the Conservator has delegated certain authority to our Board of Directors to oversee, and to our management to conduct, day-to-day operations so that we can continue to operate in the ordinary course of business. There is significant uncertainty as to whether or when we will emerge from conservatorship, as it has no specified termination date, and as to what changes may occur to our business structure during or following conservatorship, including whether we will continue to exist. While we are not aware of any current plans of its Conservator to significantly change its business structure in the near term, there are likely to be significant changes beyond the near-term that will be decided by the Congress and the new presidential administration that took office on January 20, 2017. We have no ability to predict what regulatory and legislative policies or actions the new presidential administration will pursue with respect to us.
To address deficits in our net worth, FHFA, as Conservator, entered into the Purchase Agreement with Treasury, and (in exchange for an initial commitment fee of senior preferred stock and warrants to purchase common stock) Treasury made a commitment to provide funding, under certain conditions. We are dependent upon the continued support of Treasury and FHFA in order to continue operating our business. Our ability to access funds from Treasury under the Purchase Agreement is critical to keeping it solvent and avoiding appointment of a receiver by FHFA under statutory mandatory receivership provisions.
On February 11, 2011, the Obama Administration delivered a report to Congress that lays out the Administration’s plan to reform the U.S. housing finance market, including options for structuring the government’s long-term role in a housing finance system in which the private sector is the dominant provider of mortgage credit. The report recommends winding down Freddie Mac and Fannie Mae, stating that the Administration will work with FHFA to determine the best way to responsibly reduce the role of Freddie Mac and Fannie Mae in the market and ultimately wind down both institutions. The report states that these efforts must be undertaken at a deliberate pace, which takes into account the impact that these changes will have on Borrowers and the housing market.
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The report states that the government is committed to ensuring that Freddie Mac and Fannie Mae have sufficient capital to perform under any guarantees issued now or in the future and the ability to meet any of their debt obligations, and further states that the Administration will not pursue policies or reforms in a way that would impair the ability of Freddie Mac and Fannie Mae to honor their obligations. The report states the Administration’s belief that under the companies’ senior preferred stock purchase agreements with Treasury, there is sufficient funding to ensure the orderly and deliberate wind down of Freddie Mac and Fannie Mae, as described in the Administration’s plan.
Additional information regarding the conservatorship, the Purchase Agreement and other information (including, without limitation, any financial information) concerning Freddie Mac is available in the annual reports on Form 10-K, quarterly reports on Form 10-Q and other reports filed with the SEC by Freddie Mac. You should review such reports in connection with your decision to invest in the Senior Certificates.
Proposed Operation of Multifamily Mortgage Business on a Stand-Alone Basis
Legislation has been proposed in Congress that, if passed into law, would require us to transition our multifamily operations to a stand-alone entity. Because proposed legislation ultimately may not be passed into law or may be changed before it is passed into law, it is uncertain whether we will be required to transition our multifamily operations to a stand-alone entity by such proposed legislation or any other method.
If we were to transition our multifamily operations to one or more stand-alone entities, such entities may be entitled to exercise the rights and perform our obligations under the Trust Agreement and other transaction documents. However, our obligations under the Freddie Mac Guarantee and as Mortgage Loan Seller would continue to be our obligations in our capacity as Guarantor of the Class A Certificates and Mortgage Loan Seller, respectively.
Litigation Involving Freddie Mac
For more information on Freddie Mac’s involvement as a party to various legal proceedings, see the annual reports on Form 10-K, quarterly reports on Form 10-Q and other reports filed with the SEC by Freddie Mac.
Credit Risk Retention
Freddie Mac, as sponsor of this securitization transaction, will not retain risk pursuant to provisions of FHFA’s Credit Risk Retention Rule (12 C.F.R. Part 1234) (the “Credit Risk Retention Rule”) because FHFA, as conservator and in furtherance of the goals of the conservatorship, has determined to exercise authority under Section 1234.12(f)(3) of the Credit Risk Retention Rule to sell or otherwise hedge the credit risk that Freddie Mac would be required to retain and has instructed Freddie Mac to take such action necessary to effect this outcome. Freddie Mac also will not rely on a third party purchaser to retain risk pursuant to the Credit Risk Retention Rule, as may otherwise be permitted under Section 1234.7 (Commercial mortgage‐backed securities). As a result, no party will retain risk with respect to the transaction in a form or an amount pursuant to the terms of the Credit Risk Retention Rule. Although Freddie Mac will not be retaining risk pursuant to the Credit Risk Retention Rule as a result of FHFA instructions, it may elect to retain, to the extent permitted by FHFA, some portion of the Certificates.
MORTGAGE LOAN PURCHASE AND SERVICING
General
We will transfer certain Mortgage Loans that we purchase from our approved sellers to the Trust on the Closing Date and from time to time after the Closing Date and service the Mortgage Loans pursuant to the Trust and Servicing Agreement. Any mortgage loans that we purchase from our approved sellers must satisfy the mortgage loan purchase standards that are contained in the Freddie Mac Act. These standards require us to purchase mortgage loans of a quality, type and class that meet generally the purchase standards imposed by private institutional mortgage loan investors. This means the mortgage loans must be readily marketable to institutional mortgage loan investors.
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The Guide. In addition to the standards in the Freddie Mac Act, which we cannot change, we have established our own multifamily mortgage loan purchase standards, appraisal guidelines and servicing policies and procedures. These are included in our Multifamily Seller/Servicer Guide which can be accessed by subscribers at www.allregs.com (the “Guide”). Forms of our current Loan Documents can be found on our website, www.freddiemac.com. Certain provisions of the Loan Documents are described in “Description of the Mortgage Loans” in this offering circular. We, as the Master Servicer and the Special Servicer, and the servicers, acting as our sub-servicers, will be required to service the Mortgage Loans pursuant to, among other things, Freddie Mac Servicing Practices, including the Guide, as described below under “—Mortgage Loan Servicing Policies and Procedures” below.
We may waive or modify our mortgage loan purchase standards and servicing guidelines and servicing policies and procedures when we purchase any particular mortgage loan or afterward. We have described such waivers and modifications in this offering circular where we believe they may materially change the prepayment behavior of the Mortgage Loans. We also reserve the right to change our mortgage loan purchase standards, credit, appraisal, underwriting guidelines and servicing policies and procedures at any time. This means that the Mortgage Loans may not conform at any particular time to all of the provisions of the Guide or our mortgage loan purchase documents.
Certain aspects of our mortgage loan purchase standards and servicing guidelines are summarized below. However, this summary is qualified in its entirety by the Guide, any applicable Loan Documents, any applicable servicing agreements and any applicable supplemental disclosures.
Mortgage Loan Purchase Standards. We use mortgage loan information available to us to determine which mortgage loans we will purchase, the prices we will pay for mortgage loans, how to pool the mortgage loans we purchase and which mortgage loans we will retain in our portfolio. The information we use varies over time, and may include:
the loan-to-value and debt service coverage ratios of the mortgage loan;
the strength of the market in which the Mortgaged Property is located;
the strength of the Mortgaged Property’s operations;
the physical condition of the Mortgaged Property;
the financial strength of the Borrower and its principals;
the management experience and ability of the Borrower and its principals or the property manager, as applicable; and
our evaluation of and experience with the seller of the mortgage loan.
To the extent allowed by the Freddie Mac Act, we have discretion to determine our mortgage loan purchase standards and whether the mortgage loans we purchase will be securitized or held in our portfolio.
Eligible Sellers, Servicers and Warranties. We approve sellers and servicers of mortgage loans based on a number of factors, including their financial condition, operational capability and mortgage loan origination and servicing experience. The seller or servicer of a mortgage loan need not be the originator of that mortgage loan. The Mortgage Loans we purchase from our approved sellers are serviced by such sellers or servicers approved by us after our purchase and will continue to be serviced by such sellers or servicers as our sub-servicers after such Mortgage Loans are transferred to the Trust.
In connection with our purchase of a mortgage loan, we rely on the representations and warranties of the seller with respect to certain matters, as is customary in the secondary market. These warranties cover such matters as:
the accuracy of the information provided by the Borrower;
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the accuracy and completeness of any third party reports prepared by a qualified professional;
the validity of each mortgage as a first or second lien, as applicable;
the timely payments on each mortgage loan at the time of delivery to us;
the physical condition of the Mortgaged Property;
the accuracy of rent schedules; and
the originator’s compliance with applicable state and federal laws.
These representations and warranties of the seller will be subject to any exceptions that are approved by Freddie Mac during the origination process for such Mortgage Loan.
Underwriting Matters
General. Each Mortgage Loan was (or will be) originated by one of our approved sellers (or an originator that sold such Mortgage Loan to such approved seller) and re-underwritten by us substantially in accordance with the standards in the Freddie Mac Act and the Guide. In connection with the origination or acquisition of each of the Initial Mortgage Loans, the applicable originator (or acquiror) of such Initial Mortgage Loan evaluated the corresponding Mortgaged Property or Mortgaged Properties in a manner generally consistent with the standards described below.
Neither the Trust nor the Mortgage Loan Seller obtained or will obtain updated property condition assessments or appraisals in connection with this securitization. We cannot assure you that the information in such property condition reports and appraisals reflect the current condition of or estimate of the value of the Mortgaged Properties.
Environmental Assessments. With respect to certain of the Mortgaged Properties securing the Mortgage Loans, Phase I environmental site assessments may be prepared in connection with the origination of the Mortgage Loans. The environmental site assessments, meeting criteria consistent with the Guide, are prepared pursuant to ASTM International standards for Phase I environmental site assessments. In addition to the Phase I standards, many of the environmental reports include additional research, such as limited sampling for asbestos-containing material, lead-based paint and radon, depending on the property use and/or age. Additionally, as needed pursuant to ASTM International standards, supplemental Phase II site sampling investigations are completed for some Mortgaged Properties to evaluate further certain environmental issues. We cannot assure you that the environmental assessments or investigations, as applicable, identify all environmental conditions and risks at, or that any environmental conditions will not have a material adverse effect on the value of or cash flow from, one or more of the Mortgaged Properties.
With respect to certain of the Mortgaged Properties, a search of environmental databases or environmental site assessments may be conducted. We cannot assure you that the environmental database searches will identify all environmental conditions and risks at, or that any environmental conditions will not have a material adverse effect on the value of or cash flow from, one or more of the Mortgaged Properties.
Property Condition Assessments. A third-party engineering firm may inspect any of the Mortgaged Properties to assess exterior walls, roofing, interior construction, mechanical and electrical systems and general condition of the site, buildings and other improvements located at such Mortgaged Properties.
The inspections may identify various deferred maintenance items and necessary capital improvements at the Mortgaged Properties. Any resulting inspection reports will generally include an estimate of cost for any recommended repairs or replacements at a Mortgaged Property. When repairs or replacements are recommended and deemed material by the applicable originator, the related Borrower will be required to carry out necessary repairs or replacements and, in some instances, to establish reserves, generally in the amount of 100% to 125% of the cost estimated in the inspection report, to fund deferred maintenance or replacement items that the reports characterized as in need of prompt attention. We cannot assure you that another inspector would not have
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discovered additional maintenance problems or risks, or arrived at different, and perhaps significantly different, judgments regarding the problems and risks disclosed by the respective inspection reports and the cost of corrective action. In addition, some of the required repairs or replacements may be in progress as of the date of this offering circular, and we cannot assure you that the related Borrowers will complete any such required repairs or replacements in a timely manner or in accordance with the requirements set forth in the Loan Documents.
Appraisals and Market Studies. An independent appraiser that is state-certified and/or a member of the American Appraisal Institute generally conducts an appraisal in order to establish an appraised value with respect to all of the Mortgaged Properties.
In general, appraisals seek to establish the amount a typically motivated buyer would pay a typically motivated seller. However, this amount could be significantly higher than the amount obtained from the sale of a particular Mortgaged Property under a distress or liquidation sale. By contrast, appraised values contemplate a sale at a specific date and the passing of ownership from seller to buyer under the following conditions:
buyer and seller are motivated;
both parties are well informed or well advised, and each is acting in what he considers his own best interests;
a reasonable time is allowed to show the Mortgaged Property in the open market;
payment is made in terms of cash in U.S. dollars or in comparable financial arrangements; and
the price paid for the Mortgaged Property is not adjusted by special or creative financing or sales concessions granted by anyone associated with the sale.
Each appraisal of a Mortgaged Property involves a physical inspection of the property and reflects a correlation of the values established through the sales comparison approach, the income approach and/or the cost approach.
Either the appraisal itself, or a separate letter, will contain a statement to the effect that the appraisal guidelines set forth in Title XI of the Financial Institutions Reform, Recovery and Enforcement Act of 1989 were followed in preparing that appraisal. However, neither the Trust nor any other party will independently verify the accuracy of this statement.
In the case of any Mortgage Loan, the related Borrower may acquire the Mortgaged Property at a price less than the Appraised Value on which the Mortgage Loan was underwritten.
Zoning and Building Code Compliance. In connection with the origination of each Mortgage Loan, the applicable originator examines whether the use and operation of the related Mortgaged Property are in material compliance with zoning, land-use, building, fire and health ordinances, rules, regulations and orders then-applicable to the Mortgaged Property. Evidence of this compliance may be in the form of certifications and other correspondence from government officials or agencies, title insurance endorsements, engineering, consulting or zoning reports, appraisals, legal opinions, surveys, recorded documents, temporary or permanent certificates of occupancy and/or representations by the related Borrower. Where a material noncompliance is found or the Mortgaged Property as then operated is a legal non-conforming use and/or structure, an analysis will be generally conducted as to—
whether, in the case of material noncompliance, such noncompliance constitutes a legal non-conforming use and/or structure, and if not, whether an escrow or other requirement was appropriate to secure the taking of necessary steps to remediate any material noncompliance or constitute the condition as a legal non-conforming use or structure;
the likelihood that a material casualty would occur that would prevent the Mortgaged Property from being rebuilt in its current form; and
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whether existing replacement cost property damage insurance or, if necessary, supplemental law or ordinance coverage would, in the event of a material casualty, be sufficient—
1. to satisfy the entire Mortgage Loan; or
2. taking into account the cost of repair, to pay down the Mortgage Loan to a level that the remaining collateral would be adequate security for the remaining loan amount.
We cannot assure you that any such analysis in this regard will be correct, or that the above determinations will be made in each and every case.
Mortgage Loan Servicing Policies and Procedures
General. We generally supervise servicing of the Mortgage Loans according to our written policies, procedures and the Guide. With respect to any Mortgage Loans transferred to the Trust, we, in our capacity as the Master Servicer and the Special Servicer, will be required to service the Mortgage Loans and the Defaulted Loans in accordance with Freddie Mac Servicing Practices, an important component of which is the Guide. Each Mortgage Loan is currently serviced by an approved servicer, which will continue to service such Mortgage Loan on our behalf after such Mortgage Loan is transferred to the Trust on the Closing Date. We may waive or modify our servicing policies and procedures, as reflected in the Guide, at any time. Certain aspects of our mortgage loan purchase and servicing guidelines are summarized below. However, this summary is qualified in its entirety by the Guide. The Guide can be accessed by subscribers at www.allregs.com.
Servicing Responsibilities
We delegate the primary servicing function to our servicers; accordingly, if our servicers lack appropriate process controls, experience a failure in their controls, or experience an operating disruption in their ability to service the Mortgage Loans, the Mortgage Loans could be adversely affected. See “Risk Factors—Risks Related to the Mortgage Loans—Servicers May Not Follow the Requirements of the Guide and Other Purchase and Servicing Agreements, and the Servicing Standard May Change Periodically” in this offering circular.
Servicers must diligently perform all services and duties customary to the servicing of multifamily mortgages and as required by Freddie Mac Servicing Practices, including the Guide. These include:
collecting and posting payments on the Mortgage Loans and remitting net payments to us;
identifying and reporting delinquencies and defaults;
analyzing and making recommendations regarding any special Borrower requests, such as requests for assumptions, subordinate financing and partial release;
submitting monthly electronic remittance reports and annual financial statements obtained from Borrowers;
administering escrow accounts;
inspecting properties;
responding to inquiries of Borrowers or government authorities; and
managing insurance claims.
Servicers service the Mortgage Loans, either directly or through approved sub-servicers, and receive fees for their services. Each servicer is required to ensure that any outsourced servicing responsibility is completed in accordance with the Guide and with high quality standards. Each servicer is required to maintain thorough and accurate information and records regarding each outsourced servicing responsibility and ensure that the outsourcer has appropriate controls in place to fulfill its responsibilities. Each servicer will be liable to us for all obligations that it outsources.
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We monitor each servicer’s performance through periodic and special reports and inspections to ensure it complies with its obligations. Servicers may remit payments to us under various arrangements but these arrangements do not affect the timing of payments to investors. We invest those payments at our own risk and for our own benefit until we pass through the payments to investors.
Servicing Accounts
Each servicer is required to hold the reserve funds in one or more accounts (the “Servicing Accounts”), into which all escrow payments received by such servicer with respect to the Mortgage Loans will be deposited and retained in accordance with the requirements of the Loan Documents, or if the Loan Documents do not contain specific requirements, the requirements set forth in the Guide. Unless we have deferred our right to require a reserve for any item(s), the applicable servicer is required to collect reserves for taxes, ground rents, assessments and charges that may, if not paid on a timely basis, become prior liens on the related Mortgaged Property, premiums on all insurance policies (individual policies, blanket insurance policies, master programs, and liability insurance policies covering multiple properties, where the related Borrower is required to carry insurance) required by the Guide and any other agreements entered into in connection with the purchase of such Mortgage Loans. For taxes, ground rents, assessments and premiums for individual insurance policies, if the servicer is collecting a reserve when we purchase the Mortgage Loan, the servicer is required to continue to collect 1/12th of the yearly charge for each reserve together with each monthly installment payable under the related Mortgage Loan.
Each servicer is required to pay, at its own expense, any interest payable to the related Borrower for the reserve funds or any other funds held by such servicer, whether due to contractual agreement or operation of law. Each servicer is required to use funds deposited in a reserve only for items related to the purpose for which the reserve was established. The servicers may not withdraw miscellaneous costs, including Uniform Commercial Code (“UCC”) filing fees, overnight delivery charges and/or late payment fees, from the reserves. The servicers must obtain bills for and pay all reserve items before the applicable penalty or termination date. The servicers must maintain adequate records to prove payment of all reserve items.
At least annually, each servicer is required to compute the required reserve installment amounts based on reasonable estimates of assessments and bills to determine that sufficient funds are being collected or have been collected to meet all reserve payments. If the amount held in the reserve by any servicer, together with the future monthly reserve installments, exceeds the amount required to pay reserve items as they fall due, such servicer must either repay the excess promptly to the related Borrower (if there is no default under the terms of the related Loan Documents) or credit the excess to the related Borrower by a reduction in monthly reserve installments.
If any servicer deems the amount held in the Servicing Accounts insufficient to pay the reserve items when due, such servicer must obtain the necessary additional funds from the related Borrower before the latest date on which the charges may be paid prior to penalty, lapse of insurance policies, etc. If the related Borrower fails to remit the deficient amount, or if there is insufficient time to obtain the amount, the servicer must pay any reserve items due and reflect a shortage in such Borrower's reserve. However, during any period in which such Borrower is in bankruptcy, the servicer may not make any advance in excess of the reserve funds for the reserve items without our prior consent.
Each servicer is required to advance the shortage in the reserve funds and must notify us if any advance is unresolved for 30 days. To the extent permitted by the Loan Documents and applicable law, each servicer may, without our prior approval, start collecting the reserves not previously required, but may not discontinue collecting reserves without our prior written approval.
If we have deferred our right to collect the reserves for any item, or if the applicable Loan Documents or applicable law do not provide for the collection of the reserves or if the reserves are not being collected for some or all items when a Mortgage Loan was sold to us, the related servicer must proceed as follows: (i) at least annually, the servicer must either require the related Borrower to furnish proof of payment of all taxes, insurance premiums, ground rents, assessments and other charges or use other reliable means (such as tax services) commonly employed by private institutional mortgage investors to determine that these items have been paid; (ii) on a semiannual basis, for each Mortgage Loan secured by a Mortgaged Property with a risk rating greater than seven, or any Mortgage Loan that we otherwise identify to the related servicer, such servicer must require the related Borrower to furnish proof of payment of water and sewer charges, or require such Borrower to provide a certification that the water and
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sewer charges have been paid, or use other reliable means commonly employed by private institutional mortgage investors to determine that water and sewage charges have been paid.
If any servicer discovers that any charge listed in clause (i) or (ii) above has not been paid, such servicer must immediately contact the related Borrower in writing and require such Borrower to provide proof of payment within 10 days and provide us with a copy of such notice.
If any Borrower fails to pay any charge listed in clause (i) above or does not provide proof of that payment within the required 10 days, the related servicer is required to advance funds for the unpaid charge and any applicable penalty unless the related Borrower is in bankruptcy. If such servicer fails to advance funds for the unpaid charge, we will hold such servicer solely responsible for any penalties, interest or related charges resulting from the servicer's failure to make the advance. If the Borrower is in bankruptcy, the servicer may not make any advances in excess of reserve funds for reserve items without our prior consent. Each servicer must attempt to work out an arrangement with the related Borrower for repayment of any advance and, if allowed by law and the Loan Documents, must begin to collect reserves for future charges. If a servicer cannot reach an agreement with a Borrower for the Borrower's repayment of the advanced amount or if the Borrower fails to comply with the terms of any such arrangement or refuses to set up a reserve for future charges, such servicer must promptly notify us of all advances and must immediately recommend, in writing, a plan to protect our interest.
Property Insurance
The servicers are required to make or obtain a flood zone determination (“FZD”) for each Mortgage Loan to be sold to us. Each FZD determines whether any of the buildings (including each insurable improvement, whether habitable or not) on the Mortgaged Property are located in an area that has been identified by the Federal Emergency Management Agency (“FEMA”) as a Special Flood Hazard Area (“SFHA”).
The servicers or the party from whom any FZD was obtained, must document the FZD using the Standard Flood Hazard Determination form issued by FEMA. If a party other than the servicers make an FZD, that party must have guaranteed to the servicers the accuracy of the determination in accordance with federal law.
If any building (including each insurable improvement, whether habitable or not) that is part of a Mortgaged Property is located in an SFHA and the community where the Property is located participates in the National Flood Insurance Program (NFIP), the Seller/Servicer must ensure that flood insurance is in force for each such building as of the origination date and that the Borrower maintains the insurance for the term of the Mortgage Loan.
The servicers must ensure that all insurance coverage required by the Loan Documents and the Guide is in place for the life of the Mortgage Loans. This may include:
adding coverage that is not currently in place (for example, if FEMA has determined a Mortgaged Property is now in an SFHA and flood insurance is now required), and/or
increasing the coverage (for example, if the replacement cost of the improvements on a Mortgaged Property has increased and the insurance coverage must be updated).
In addition, if there is insurance coverage in force on any Mortgaged Property that we no longer require (for example, if FEMA has determined that a Mortgaged Property is no longer in an SFHA and flood insurance is not required) the related servicer must notify us, provide supporting documentation and explain why the insurance is no longer required.
At least annually, and prior to the expiration of each required insurance policy, the servicers must verify that the applicable Borrower will renew the existing coverage and/or obtain new insurance coverage in compliance with the Trust and Servicing Agreement. The servicer must retain in the mortgage file a copy of the applicable renewal and/or new insurance documentation.
Each servicer must require the applicable Borrower to provide evidence of renewed insurance prior to the expiration date of each policy.
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If a servicer determines that a Mortgaged Property's insurance has lapsed, is cancelled, is inadequate, or is not in force for any reason, the servicer must prevent a gap in insurance by one or more of the following means:
contacting the Borrower and working with the Borrower to resolve the deficiency,
having in place or obtaining a portfolio insurance policy and/or other insurance vehicle or vehicles designed to provide required coverage if one or more policies lapses, is cancelled, is inadequate or is not in force, or
implementing force placed insurance.
Any insurance policy intended to prevent a gap in insurance coverage, or to supplement inadequate coverage, must:
provide retroactive and/or automatic coverage,
cover the Mortgage Loans serviced for us,
include deductibles no greater than those required by the Purchase and Servicing Documents,
provide all property damage and liability insurance required by the Purchase and Servicing Documents, and
be provided by an insurance carrier meeting the requirements of the Guide, based on the total unpaid principal balance of the Mortgage Loans insured under the policy by the servicer.
Under certain circumstances, we require the use of force placed insurance to prevent a lapse in insurance coverage. If the required force placed insurance is not available, the servicer must contact Freddie Mac.
If coverage is force placed pursuant to the Guide, the servicer must immediately send written notification to us detailing the insurance issues, the force placed coverage and the deductibles. The servicer must retain in the mortgage file a copy of the written notification regarding force placed insurance.
Each servicer must adjust the related Borrower's insurance reserve payments for the force placed insurance if the Borrower is required to make periodic reserve deposits for insurance premiums or bill the Borrower to recover the advance (if the servicer does not maintain an insurance reserve for the Borrower). If an insurance reserve account is not currently required, we may require any servicer to set up a reserve. If the Borrower refuses to reimburse a servicer for the force placed insurance, the servicer must submit a the applicable legal referral form to us. We will reimburse the applicable servicer for any advances that such servicer has made for premiums for such force placed insurance to the same extent that we would reimburse the servicer for advances to pay required insurance premiums.
Inspection of Property and General Information Regarding Assessments
We will require each servicer to perform periodic assessments of each Mortgaged Property to assist us in preventing Mortgage Loan defaults and losses through the early detection and resolution of concerns about a Mortgage Loan. Each servicer is required to complete the assessments in a sufficiently detailed manner to provide a framework for us to monitor the performance of the related Mortgage Loan.
Each servicer is required to conduct a periodic inspection of each Mortgaged Property and review the income and expense statements for each Mortgaged Property. We also offer to inspect specific Mortgaged Properties based on certain risk ratings assigned to the related Borrower. For a Mortgage Loan with a transfer of ownership or subordinate financing, a property inspection report is due at the time of the transfer or subordinate financing. For a Mortgage Loan with a tax lien, a property inspection report is due when the tax lien is filed unless the related servicer has submitted a loan management form setting forth an analysis of the Borrower’s compliance with the Loan Documents and a property inspection report within the previous 180 days and the servicer does not know of any material changes with respect to the condition of the related Mortgaged Property or the related
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Borrower’s compliance with the Loan Documents. Each servicer is required to submit the inspection report no later than two months after the date of the actual inspection, even if the inspection report has a later due date.
Modification and Release
The servicers are not permitted to modify, waive or release any term of any Loan Document, accept any prepayment, or consent to any postponement of performance by any Borrower of any obligation under any Loan Document, except as may be permitted by the terms of the Loan Documents and/or authorized by the Guide.
Permitted Subordinate Mortgage Debt
The Borrowers under all of the Mortgage Loans are permitted to incur an additional limited amount of indebtedness secured by the related Mortgaged Properties generally beginning 12 months after the origination date of each related Mortgage Loan, unless otherwise provided in the related loan documents, and which may be incurred at any time, including on or before the Closing Date. It is a condition to the incurrence of any future secured subordinate loan that, among other things: (i) the total loan-to-value ratio of these loans be below, and the debt service coverage ratio be above, certain thresholds set out in the related Loan Documents and (ii) subordination agreements and intercreditor agreements be put in place between the Trust and the related lenders. In the event a Borrower satisfies these conditions, the Borrower will be permitted to obtain secured subordinate debt from the lender that originated or is servicing the Senior Loan, who would make such subordinate financing exclusively for initial purchase by us. A default under the subordinate loan documents will constitute a default under the related senior Mortgage Loan. We may subsequently transfer the junior lien loans it holds in secondary market transactions, including securitizations.
The Loan Documents require that any such subordinate debt be governed by an intercreditor agreement which will, in general, govern the respective rights of the holder of the subordinate loan and the Trust as the holder of the related Senior Loan.
Servicing Compensation; Payment of Servicing Expenses; Indemnification
The compensation for each servicer's duties for each Mortgage Loan is the servicing spread that the servicer will be entitled to retain so long as it services the Mortgage Loan for us.
Servicers are generally responsible for performing the duties required under the Guide at their own expense and without cost or charge to us, except as otherwise described below. The servicers may charge to the Borrowers costs that are incurred by the servicers to provide services to the Borrowers only to the extent allowed under the terms of the Loan Documents and any applicable law. These costs include the servicing of the Borrowers’ reserves and any cost associated with satisfaction and release of the related Mortgage Loan.
We are required to reimburse the servicers for reasonable expenses incurred in accordance with the following guidelines.
Type of expenditure Reimbursement guidelines
Trustee/legal/receiver fees Reimbursement will be based on limitations established by us, unless the servicer obtains prior written approval for an increased amount from us.
Advertising fees Reimbursement will be made for reasonable and customary costs consistent with local foreclosure practices.
Sheriff fees Reimbursement will be made for reasonable and customary costs consistent with local foreclosure practices.
Court costs Reimbursement will be made for reasonable and customary costs consistent with local foreclosure practices.
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Type of expenditure Reimbursement guidelines
Insurance premiums Reimbursement will be made through the cancellation date of the policy.
Taxes Reimbursement will be made for taxes assessed and paid; penalties and late charges will not be reimbursed by us.
Maintenance Reimbursement will be made without prior approval up to a cumulative balance of $1,500 per Mortgaged Property. If total expenditures in this category are expected to exceed $1,500 for the Mortgaged Property, prior written approval from us is required.
Utilities Reimbursement will be made for reasonable and customary charges based on the occupancy status and seasonal needs.
Repairs/replacement Reimbursement will be made only for those expenditures receiving prior written approval from us unless the costs were incurred in an emergency situation to preserve and protect the related Mortgaged Property and the servicer notified us within 72 hours after occurrence.
Title costs Reimbursement will be made only for title abstracts and title commitments. Reimbursement for title policies requires our prior written approval.
Appraisals/broker price opinions/inspections
Reimbursement will be made only with our prior written approval.
Management/leasing fees Reimbursement will be made in accordance with contractual terms.
Each servicer is required to indemnify us for and hold us harmless from any loss, damage or expenses (including court costs and reasonable attorney fees) that we sustain as a direct or indirect result of any failure on such servicer’s part to properly perform its services, duties and obligations under the Trust and Servicing Agreement or as a direct or indirect result of the servicer's bankruptcy or insolvency.
Default Management
We or our counsel will commence any foreclosure action, including sending the demand and acceleration letters to the related Borrower, unless we provide other instructions to the applicable servicer. With our approval, the servicer will advance the cost of any Appraisal, environmental assessment or property condition report. We will be required to reimburse the servicers for certain costs and expenses as described under “—Servicing Compensation; Payment of Servicing Expenses; Indemnification” in this offering circular.
Servicers are required to provide the unpaid principal balance, arrearages, advances, default interest and/or late charges, yield maintenance or other breakage fee and all other amounts necessary to compute the total Mortgage Loan debt to us upon request. We will determine the amount of the bid at a foreclosure sale and the bid will be entered by our employee, our representative, or the attorney handling the foreclosure sale. It is a servicer's responsibility to act in the most timely, efficient and responsible manner to protect our interests or, in the case of a participation, the respective interests of us and any other participant. The servicers must exercise diligence to prevent any losses.
Servicers must refer all written requests for any type of loan modification or repayment plan to us. We will advise the servicer that we will manage the request. We will negotiate the modification/repayment plan, have all
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necessary documents prepared, and notify the servicer of any changes to the Mortgage Loan. During the negotiation period, the servicers may be asked to provide us with such items as arrearage calculations, property inspection, original Loan Documents and recommendations for action.
The servicers must assist us when necessary to obtain title reports, title endorsements, UCC searches and other recorded documents in connection with any modification/repayment negotiation. We may request that the servicers complete a property inspection. The servicers must request in writing and receive approval from us before incurring any expense reimbursable under “—Servicing Compensation; Payment of Servicing Expenses; Indemnification” above. The servicers must attach to their referral of the Borrowers request a copy of the reserve and suspense account balances with a description of the source and reason for any suspense account funds.
All fees and expenses described under “—Servicing Compensation; Payment of Servicing Expenses; Indemnification” above that are approved by us, including the cost of the legal counsel selected by us, must be billed to and paid by us. After completion of the proceedings, the Mortgage Loan Seller or the applicable servicer will reimburse these fees and expenses by wire transfer to us in proportion to the Mortgage Loan Seller's or servicer's interest in the Mortgage Loan, if any, unless collection from the related Borrower is allowed under applicable law. Each servicer must obtain wire transfer instructions from us and must send the wire transfer in accordance with the instructions to our attention. The wire transfer must reference the Mortgaged Property name, our contact person and our loan number. Other reimbursement arrangements may be made at a servicer's request and in our discretion if circumstances warrant. Our reimbursement to the servicer of any costs and expenses will not prejudice any rights we may have against a seller or servicer with respect to the sale or servicing of the Mortgage Loan.
Removal of a Servicer
We are entitled to terminate any servicer with respect to any Mortgage Loan with or without cause under the Guide.
DESCRIPTION OF THE MORTGAGE LOANS
General
The assets of the Trust will consist primarily of mortgage loans (“Mortgage Loans”) that the Mortgage Loan Seller will transfer to the Trust on the Closing Date and from time to time after the Closing Date in accordance with terms of the Trust and Servicing Agreement, as further described under “The Mortgage Loan Purchase, Trust and Servicing Agreement” in this offering circular.
Each Mortgage Loan will pay a fixed rate of interest and will be secured by a Mortgaged Property that consists of a single parcel or two or more contiguous or non-contiguous parcels, and such parcel or parcels are referred to collectively as a “Mortgaged Property” securing the related Mortgage Loan.
Each of the Mortgage Loans is an obligation of the related Borrower to repay a specified sum with interest. Each of the Mortgage Loans is evidenced by one or more promissory notes and secured by a mortgage, deed of trust or other similar security instrument that creates a mortgage lien on the fee and/or leasehold interest of the related Borrower or another party in one or more multifamily real properties. That mortgage lien will, in all cases, be a first priority lien subject to certain standard permitted encumbrances and/or any subordinate liens described in this offering circular.
Generally, except for certain limited nonrecourse carveouts, each of the Mortgage Loans is a nonrecourse obligation of the related Borrower. In the event of a payment default by the Borrower, recourse will be limited to the corresponding Mortgaged Property for satisfaction of that Borrower’s obligations. None of the Mortgage Loans will be insured or guaranteed by any governmental entity or by any other person.
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Eligibility Criteria
Freddie Mac, in its capacity as the Mortgage Loan Seller, will be required to make a representation and warranty in the Trust and Servicing Agreement that each Mortgage Loan transferred by the Mortgage Loan Seller to the Trust meets the following criteria (the “Eligibility Criteria”):
(1) Each Mortgage Loan must be eligible for securitization under Freddie Mac’s K-series securitization program or any other securitization program proposed by the Mortgage Loan Seller and approved by the Directing Investor.
(2) No Mortgage Loan may have a loan-to-value (“LTV”) of greater than 80%. An LTV with respect to each Mortgage Loan will be calculated in Freddie Mac’s sole discretion and in accordance with Freddie Mac underwriting standards.
(3) No Mortgage Loan may have a debt service coverage ratio (“DSCR”) of less than 1.25x. A DSCR with respect to each Mortgage Loan will be calculated based on (a) amortizing debt service payments (with the exception of interest-only mortgage loans which will be calculated based on interest-only payments) and (b) net cash flow, but otherwise the method of calculating the DSCR will be in Freddie Mac’s sole discretion and in accordance with Freddie Mac underwriting standards.
(4) No Mortgage Loan may have more than a 50% student or military tenant concentration and no Mortgage Loan may be backed by seniors housing (including independent living and assisted living properties) or manufactured housing.
(5) No Mortgage Loan sold to the Trust may cause the weighted average LTV of the Mortgage Pool to be greater than 76%. The weighted average LTV of the Mortgage Pool will be calculated in Freddie Mac’s sole discretion and in accordance with Freddie Mac underwriting standards.
(6) No Mortgage Loan sold to the Trust may cause the weighted average DSCR of the Mortgage Pool to be less than 1.35x. The weighted average DSCR of the Mortgage Pool will be calculated based on (a) amortizing debt service payments for each Mortgage Loan (with the exception of interest-only mortgage loans which will be calculated based on interest-only payments) and (b) net cash flow, but otherwise the method of calculating the DSCR will be in Freddie Mac’s sole discretion and in accordance with Freddie Mac underwriting standards.
(7) No Mortgage Loan sold to the Trust may cause a metropolitan statistical area (MSA) to represent more than 15% of the Mortgage Pool.
(8) On the date it is sold to the Trust, no Mortgage Loan sold to the Trust may have the Stated Principal Balance of more than 20% of the Program Size.
(9) No Mortgage Loan may have been originated greater than six months prior to the time of sale into the Trust.
(10) Except with respect to any Junior Loan identified in the Mortgage Loan Schedule or the related Supplement to Mortgage Loan Schedule, as applicable, no Mortgage Loan is cross-collateralized or cross-defaulted with any other Mortgage Loan.
With respect to any Mortgage Loan that does not become an Ineligible Loan within 30 days after the applicable Transfer Date, the Mortgage Loan Seller’s representation that such Mortgage Loan meets the Eligible Criteria will be deemed to be true and correct, and the Mortgage Loan Seller will not be required to repurchase such Mortgage Loan due to any breach or alleged breach of such representation after such 30-day period.
Representations and Warranties
As of the Closing Date or, with respect to Mortgage Loans acquired by the Trust after the Closing Date, as of the applicable date of acquisition, the Mortgage Loan Seller will make representations and warranties set forth on
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Exhibit D to this offering circular, subject to any exceptions to such representations and warranties that are approved by the Mortgage Loan Seller during the origination process for such Mortgage Loan.
The rights of the Certificateholders against the Mortgage Loan Seller with respect to any material breach are described under “The Mortgage Loan Purchase, Trust and Servicing Agreement—Rights Upon Event of Default” in this offering circular.
Initial Pool Information
We intend to transfer 38 Initial Mortgage Loans to the Trust on the Closing Date (the “Initial Pool”) with the aggregate Cut-off Date Principal Balance of $997,425,958. The Initial Mortgage Loans are secured by the 38 Mortgaged Properties identified on Exhibit A to this offering circular. Certain characteristics of the Initial Pool are also set forth on Exhibit B to this offering circular. All of the Initial Mortgage Loans have been originated as of the date of this offering circular. Certain of the Initial Mortgage Loans have not yet been acquired by us but are expected to be acquired by us prior to the Closing Date. Certain characteristics of any additional Mortgage Loans that the Trust may acquire from us may be different from the characteristics of the Initial Pool shown in this offering circular. The Mortgage Loans in the Initial Pool may not be indicative of the composition of the Mortgage Loans in the Trust over the term of the Certificates. See “Risk Factors—Risks Related to the Mortgage Loans—The Mortgage Pool is Subject to Change” and “—Potential Conflicts of Interest in the Selection of the Mortgage Loans” in this offering circular.
Certain Terms and Conditions of the Initial Mortgage Loans
Below is a summary of certain terms and conditions of the Loan Documents for the Initial Mortgage Loans. Terms and conditions of the Loan Documents for any additional Mortgage Loans that may be transferred to the Trust after the Closing Date may differ from those terms and conditions described below.
Due Dates. Subject, in some cases, to a next business day convention, monthly installments of principal and/or interest will be due on the first of the month with respect to each of the Initial Mortgage Loans.
Mortgage Interest Rates; Calculations of Interest. Each Initial Mortgage Loan bears interest at a mortgage interest rate that, in the absence of default or modification, is fixed until maturity.
Term to Maturity. Each Initial Mortgage Loan will have the initial term to maturity ranging from 84 to 120 months.
Balloon Loans. Each Initial Mortgage Loan is a balloon loan and has an amortization schedule that is significantly longer than the actual term of such Initial Mortgage Loan.
Prepayment Provisions. As of origination, all of the Initial Mortgage Loans provided for certain restrictions and/or requirements with respect to prepayments such as the requirement to pay prepayment penalties or yield maintenance charges during some portion of their respective loan terms.
Casualty and Condemnation. In the event of a condemnation or casualty at the Mortgaged Property securing any of the Initial Mortgage Loans, the Borrower will generally be required to restore that Mortgaged Property. However, the lender may under certain circumstances apply the condemnation award or insurance proceeds to the repayment of debt, which will not require payment of any prepayment premium.
Lockboxes. Certain Initial Mortgage Loans may provide for a soft lockbox with springing cash management. Such accounts are in the form of a cash management arrangement pursuant to which rents (and other amounts received) are deposited by the related Borrower or the property manager into the lockbox account and (i) prior to an event of default with respect to the related Initial Mortgage Loan, such funds are swept to a Borrower controlled account and (ii) after an event of default with respect to the related Initial Mortgage Loan, such funds are swept to a lender controlled account and used to pay debt service, reserves and any other amounts due under the related Initial Mortgage Loan.
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Escrow and Reserve Accounts. Most of the Initial Mortgage Loans provide for the establishment of escrow and/or reserve accounts for the purpose of holding amounts required to be on deposit as reserves for—
taxes and insurance;
capital improvements; and/or
various other purposes.
Upon the acquisition of an Initial Mortgage Loan by the Trust, these accounts will come under the sole control of the Master Servicer or an approved servicer. Most of the Initial Mortgage Loans that provide for such accounts require that the accounts be funded out of monthly escrow and/or reserve payments by the related Borrower.
Tax Escrows. If an escrow is required to be funded for taxes on an Initial Mortgage Loan, the related Borrower will generally be required to deposit on a monthly basis an amount equal to one-twelfth of the annual real estate taxes and assessments. With respect to certain Initial Mortgage Loans, initial or monthly escrows for taxes may not be required at origination but may be required thereafter subject to certain conditions set forth in the related loan documents. If an escrow was funded, the funds will be applied by the Master Servicer to pay for taxes and assessments at the related Mortgaged Property.
Insurance Escrows. If an escrow is required to be funded for insurance premiums on an Initial Mortgage Loan, the related Borrower will generally be required to deposit on a monthly basis an amount equal to one-twelfth of the annual premiums payable on insurance policies that the Borrower is required to maintain. With respect to certain Initial Mortgage Loans, initial or monthly escrows for insurance premiums may not be required at origination but may be required thereafter subject to certain conditions set forth in the related loan documents. If an escrow was funded, the funds will be applied by the Master Servicer to pay for insurance premiums at the related Mortgaged Property.
Under some of the other Initial Mortgage Loans, the insurance carried by the related Borrower may be in the form of a blanket policy. In these cases, the amount of the escrow is an estimate of the proportional share of the premium allocable to the Mortgaged Property, or the Borrower pays the premium directly. See “—Permitted Additional Debt—Property Damage, Liability and Other Insurance” below.
Recurring Replacement Reserves. Under some of the Initial Mortgage Loans, the related Borrowers may be required to make reserve deposits into a separate account for capital replacements and repairs. In the case of some of the Mortgaged Properties, those reserve deposits are initial amounts and may vary over time. In these cases, the related mortgage instrument and/or other related loan documents may provide for applicable reserve deposits to cease upon achieving predetermined maximum amounts in the related reserve account. Under some of the Initial Mortgage Loans, the related Borrowers may be permitted to deliver letters of credit from third parties in lieu of establishing and funding the reserve accounts or may substitute letters of credit and obtain release of established reserve accounts.
Engineering/Deferred Maintenance Reserves. Under some of the Initial Mortgage Loans, the related Borrowers may be required to deposit engineering reserves established at the origination of such Initial Mortgage Loans for repairs and/or deferred maintenance items that are generally required to be corrected within 12 months from origination. In certain cases, the engineering reserve for a Mortgaged Property may be less than the cost estimate in the related inspection report because—
the Mortgage Loan Seller may not have considered various items identified in the related inspection report significant enough to require a reserve; and/or
various items identified in the related inspection report may have been corrected.
In the case of some of the Mortgaged Properties securing the Initial Mortgage Loans, the engineering reserve was a significant amount and substantially in excess of the cost estimate set forth in the related inspection report because the Mortgage Loan Seller required the Borrower to establish reserves for the completion of major
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work that had been commenced. In the case of some Mortgaged Properties acquired with the proceeds of the related Initial Mortgage Loan, the related Borrower escrowed an amount substantially in excess of the cost estimate set forth in the related inspection report because it contemplated completing repairs in addition to those shown in the related inspection report. Not all engineering reserves are required to be replenished. We cannot assure you that the work for which reserves were required will be completed in a timely manner or that the reserved amounts will be sufficient to cover the entire cost of the required work.
Release of Property Through Defeasance or Prepayment
Defeasance. Certain Mortgage Loans may permit the related Borrower to obtain the release of the related Mortgaged Property through defeasance of the related Mortgage Loan.
The Borrower is permitted to deliver, during specified periods and subject to specified conditions, (i) direct, non-callable and non-redeemable U.S. treasury obligations, (ii) non-callable bonds, debentures, notes and other similar debt obligations issued by Freddie Mac or Fannie Mae and/or (iii) direct, non-callable and non-redeemable securities issued or fully insured as to payment by any Federal Home Loan Bank, as substitute collateral and obtain a full release of the Mortgaged Property. In general, the securities that are to be delivered in connection with the defeasance of any Initial Mortgage Loan must provide for a series of payments that—
will be made prior, but as closely as possible, to all successive due dates through and including the maturity date (or, in some cases, the end of the lockout period), and
will, in the case of each due date, be in the total amount equal to or greater than the monthly debt service payment, including any applicable balloon payment, scheduled to be due on that date.
In connection with any delivery of defeasance collateral, the related Borrower will be required to deliver a security agreement granting the Trust a first priority security interest in the collateral, together with an opinion of counsel confirming the first priority status of the security interest.
Neither the Trust nor any other party makes any representation as to the enforceability of the defeasance provisions of any of the Initial Mortgage Loans.
Prepayment. All of the Initial Mortgage Loans will permit the related Borrower to obtain the release of all of the real property securing the Initial Mortgage Loan during the yield maintenance period upon the prepayment of such Initial Mortgage Loan in full, together with the payment of a prepayment premium as described in “—Certain Terms and Conditions of the Initial Mortgage Loans—Prepayment Provisions” above.
Due-on-Sale and Due-on-Encumbrance Provisions. All of the Initial Mortgage Loans contain both a due-on-sale clause and a due-on-encumbrance clause. In general, except for the requested transfers discussed in the next paragraph and subject to the discussion under “—Permitted Additional Debt” below, these clauses either—
permit the holder of the mortgage to accelerate the maturity of the subject Initial Mortgage Loan if the related Borrower sells or otherwise transfers an interest in the corresponding Mortgaged Property, Borrower or controlling entity or encumbers the corresponding Mortgaged Property without the consent of the holder of the mortgage, unless such sale, transfer or encumbrance is permitted by the loan documents; or
unless permitted by the loan documents, prohibit the Borrower from otherwise selling, transferring or encumbering the corresponding Mortgaged Property without the consent of the holder of the mortgage.
All of the Initial Mortgage Loans permit one or more of the following types of transfers:
transfer of the Mortgaged Property if specified conditions are satisfied, without any adjustment to the interest rate or to any other economic terms of an Initial Mortgage Loan, which conditions typically include, among other things—
1. the transferee meets lender’s eligibility, credit, management and other standards satisfactory to lender in its sole discretion;
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2. the transferee’s organization, credit and experience in the management of similar properties are deemed by the lender, in its discretion, to be appropriate to the overall structure and documentation of the existing financing;
3. the corresponding Mortgaged Property will be managed by a property manager meeting the requirements set forth in the loan documents; and
4. the corresponding Mortgaged Property, at the time of the proposed transfer, meets all standards as to its physical condition, occupancy, net operating income and the collection of reserves satisfactory to lender in its sole discretion;
a transfer that occurs by devise, descent, or by operation of law upon the death of a natural person to one or more members of the decedent’s immediate family or to a Trust or family conservatorship established for the benefit of such immediate family member or members, if specified conditions are satisfied, which conditions typically include, among other things—
1. the property manager (or a replacement property manager approved by lender), if applicable, continues to be responsible for the management of the corresponding Mortgaged Property, and such transfer may not result in a change in the day-to-day operations of the corresponding Mortgaged Property; and
2. those persons responsible for the management and control of the applicable Borrower remain unchanged as a result of such transfer, or any replacement management is approved by lender;
any transfer of an interest in an applicable Borrower or any interest in a controlling entity, such as the transfers set forth below:
1. a sale or transfer to one or more of the transferor’s immediate family members (a spouse, parent, child, stepchild, grandchild or step-grandchild);
2. a sale or transfer to any Trust having as its sole beneficiaries the transferor and/or one or more of the transferor’s immediate family members (a spouse, parent, child, stepchild, grandchild or step-grandchild);
3. a sale or transfer from a Trust to any one or more of its beneficiaries who are immediate family members (a spouse, parent, child, stepchild, grandchild or step-grandchild) of the transferor;
4. the substitution or replacement of the Trustee of any Trust with a Trustee who is an immediate family member (a spouse, parent, child, stepchild, grandchild or step-grandchild) of the transferor;
5. a sale or transfer to an entity owned and controlled by the transferor or the transferor’s immediate family members (a spouse, parent, child, stepchild, grandchild or step-grandchild); or
6. a transfer of non-controlling ownership interests in the related Borrower;
if, in each case, specified conditions are satisfied. If title to the Mortgaged Property is not being transferred, these conditions typically include, among other things, that a specified entity or person retain control of the applicable Borrower and manage the day-to-day operations of the corresponding Mortgaged Property.
Neither the Trust nor any other party makes any representation as to the enforceability of any due-on-sale or due-on-encumbrance provision in any Initial Mortgage Loan.
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Permitted Additional Debt
General. Other than as described below, the Initial Mortgage Loans generally prohibit the Borrowers from incurring, without lender consent, any additional debt secured or unsecured, direct or contingent other than (i) permitted subordinate supplemental mortgages as described under “—Permitted Subordinate Mortgage Debt” below, and (ii) customary unsecured trade payables incurred in the ordinary course of owning and operating the corresponding Mortgaged Property that do not exceed, in the aggregate, at any time a maximum amount of up to 2.0% of the original principal amount of the corresponding Initial Mortgage Loan and are paid within 60 days of the date incurred.
Permitted Subordinate Mortgage Debt. The Borrowers are generally permitted to incur an additional limited amount of indebtedness secured by the related Mortgaged Properties generally beginning 12 months after the origination date of each related Initial Mortgage Loan, unless otherwise provided in the related loan documents, and which may be incurred at any time, including on or before the Closing Date. It is a condition to the incurrence of any future secured subordinate loan that, among other things: (i) the total loan-to-value ratio of these loans be below, and the debt service coverage ratio be above, certain thresholds set out in the related loan documents and (ii) subordination agreements and intercreditor agreements be put in place between the Trust and the related lenders. In the event a Borrower satisfies these conditions, the Borrower will be permitted to obtain secured subordinate debt from certain approved lenders who will make such subordinate financing exclusively for initial purchase by Freddie Mac. A default under the subordinate loan documents will constitute a default under the related senior Initial Mortgage Loan. Freddie Mac may subsequently transfer the junior lien loans it holds in secondary market transactions, including securitizations.
The loan documents require that any such subordinate debt be governed by an intercreditor agreement which will, in general, govern the respective rights of the holder of the subordinate loan and the Trust as the holder of the related Senior Loan. The following paragraphs describe certain provisions that will be included in the intercreditor agreements, but they do not purport to be complete and are subject, and qualified in their entirety by reference to the actual provisions of each intercreditor agreement. The Trust as the holder of the Senior Loan is referred to in these paragraphs as the “Senior Loan Holder” and the related Initial Mortgage Loan included in the Trust is referred to as the “Senior Loan”. Any related subordinate loan is referred to as the “Junior Loan”.
Allocations of Payments. The right of any holder of a Junior Loan to receive payments of interest, principal and other amounts will be subordinated to the rights of the Senior Loan Holder. Generally, as long as no event of default has occurred under the Senior Loan or a Junior Loan, the related Borrower will make separate payments of principal and interest to any holder of a Junior Loan and the Senior Loan Holder, respectively. If an event of default occurs with respect to the Senior Loan or a Junior Loan, or the related Borrower becomes a subject of any bankruptcy, insolvency or reorganization proceeding, then, prior to any application of payments to a Junior Loan, all amounts tendered by the related Borrower or otherwise available for payment will be applied, net of certain amounts, to satisfy the interest (other than default interest), principal and other amounts owed with respect to the related Senior Loan until these amounts are paid in full. Any payments received by any holder of a Junior Loan during this time are required to be forwarded to the Senior Loan Holder.
Modifications. The Senior Loan Holder will be permitted to enter into any amendment, deferral, extension, modification, increase, renewal, replacement, consolidation, supplement or waiver of any term or provision of any Senior Loan without the consent of any holder of a Junior Loan unless such modification will (i) increase the interest rate or principal amount of the Senior Loan, (ii) increase in any other material respect any monetary obligations of related Borrower under the Senior Loan, (iii) extend or shorten the scheduled maturity date of the Senior Loan (other than pursuant to extension options exercised in accordance with the terms and provisions of the related loan documents), (iv) convert or exchange the Senior Loan into or for any other indebtedness or subordinate any of the Senior Loan to any indebtedness of related Borrower, (v) amend or modify the provisions limiting transfers of interests in the related Borrower or the related Mortgaged Property, (vi) modify or amend the terms and provisions of the Senior Loan cash management agreement with respect to the manner, timing and method of the application of payments under the related loan documents, (vii) cross-default the Senior Loan with any other indebtedness, (viii) consent to a higher strike price with respect to any new or extended interest rate cap agreement entered into in connection with the extended term of the Senior Loan, (ix) obtain any contingent interest, additional interest or so-called “kicker” measured on the basis of the cash flow or appreciation of the Mortgaged Property (or other similar equity participation), or (x) extend the period during which voluntary prepayments are prohibited or during which
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prepayments require the payment of a static prepayment premium or yield maintenance charge or increase the amount of any such static prepayment premium or yield maintenance charge. However, in no event will the Senior Loan Holder be obligated to obtain the consent of the holder of a Junior Loan in the case of a workout or other surrender, compromise, release, renewal, or modification of the Senior Loan during the existence of a continuing Senior Loan event of default, except that under all conditions Senior Loan Holder will obtain the consent of any holder of a Junior Loan to a modification with respect to clause (i) (with respect to increasing the principal amount of the Senior Loan only) and clause (x) of this paragraph.
Any holder of a Junior Loan will be permitted to enter into any amendment, deferral, extension, modification, increase, renewal, replacement, consolidation, supplement or waiver of any term or provision of any Junior Loan without the consent of the Senior Loan Holder unless such modification will (i) increase the interest rate or principal amount of such Junior Loan, (ii) increase in any other material respect any monetary obligations of related Borrower under the related loan documents with respect to such Junior Loan, (iii) extend or shorten the scheduled maturity date of such Junior Loan (other than pursuant to extension options exercised in accordance with the terms and provisions of the related loan documents), (iv) convert or exchange such Junior Loan into or for any other indebtedness or subordinate any Junior Loan to any indebtedness of the related Borrower, (v) amend or modify the provisions limiting transfers of interests in the related Borrower or the related Mortgaged Property, (vi) consent to a higher strike price with respect to any new or extended interest rate cap agreement entered into in connection with the extended term of such Junior Loan, (vii) cross-default such Junior Loan with any other indebtedness, (viii) obtain any contingent interest, additional interest or so-called “kicker” measured on the basis of the cash flow or appreciation of the related Mortgaged Property (or other similar equity participation) or (ix) extend the period during which voluntary prepayments are prohibited or during which prepayments require the payment of a static prepayment premium or yield maintenance charge or increase the amount of any such static prepayment premium or yield maintenance charge. However, in no event will any holder of a Junior Loan be obligated to obtain the Senior Loan Holder’s consent to a modification or amendment in the case of a workout or other surrender, compromise, release, renewal, or modification of such Junior Loan if an event of default has occurred and is continuing with respect to such Junior Loan, except that under all conditions any holder of a Junior Loan will be required to obtain the Senior Loan Holder’s consent to a modification with respect to clause (i) (with respect to increasing the principal amount of such Junior Loan only), clause (ii), clause (iii) (with respect to shortening the scheduled maturity date of such Junior Loan only), clause (iv), clause (viii) and clause (ix) of this paragraph.
Cure. Upon the occurrence of any default that would permit the Senior Loan Holder under the related loan documents to commence an enforcement action, a holder of a Junior Loan will have the right to receive notice from the Senior Loan Holder of the default and the right to cure that default after or prior to the expiration of the related Borrower’s cure period or in some cases for a period extending beyond the related Borrower’s cure period. A holder of a Junior Loan generally will have a specified period of time, set forth in the related intercreditor agreement, to cure any default, depending on whether the default is monetary or non-monetary. A holder of a Junior Loan is prohibited from curing monetary defaults for longer than four consecutive months. Before the lapse of such cure period, neither the Master Servicer nor the Special Servicer may foreclose on the related Mortgaged Property or exercise any other remedies with respect to the Mortgaged Property.
Property Damage, Liability and Other Insurance. The loan documents for each of the Initial Mortgage Loans generally require that, with respect to the related Mortgaged Property, the related Borrower maintain property damage, flood (if any portion of the improvements of the subject property is in a flood zone), commercial general liability and business income/rental value insurance in the amounts required by the loan documents, subject to exceptions in some cases for tenant insurance. We cannot assure you regarding the extent to which the Mortgaged Properties securing the Initial Mortgage Loans will be insured against flood, earthquake or other risks.
Certain Mortgaged Properties may be partially or fully located in seismic zones 3 or 4 or a geographic location with a horizontal peak ground acceleration equal to or greater than 0.15g. In such circumstances, a seismic assessment may be performed to assess the scenario expected loss or probable maximum loss. However, a seismic assessment may not be performed if the Mortgage Loan Seller waives the seismic assessment due to characteristics of the improvements and low level risk factors present at each Mortgaged Property that mitigate elevated risk for earthquake damage. In addition, earthquake insurance may not be required with respect to the Mortgaged Properties located in seismic zones 3 or 4 or a geographic location with a horizontal peak ground acceleration equal to or greater than 0.15g in circumstances where a scenario expected loss assessment or a probable maximum loss
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assessment was performed and the scenario expected loss or probable maximum loss for each of those Mortgaged Properties is less than or equal to 20% of the amount of the replacement cost of the improvements.
Subject to the discussion below regarding insurance for acts of terrorism, the Master Servicer will be required to use reasonable efforts in accordance with the Servicing Standard to cause each Borrower to maintain, and, if such Borrower does not so maintain, the Master Servicer will itself cause to be maintained, for each Mortgaged Property (including each Mortgaged Property relating to any Defaulted Loan) all insurance coverage as is required under the related loan documents or the Servicing Standard. The Master Servicer will not be required to require the related Borrower to obtain or maintain earthquake or flood insurance coverage that is not available at commercially reasonable rates, as determined by the Master Servicer in accordance with the Servicing Standard. If such Borrower fails to do so, the Master Servicer must maintain that insurance coverage, to the extent—
the Trustee has an insurable interest; and
the insurance coverage is available at commercially reasonable rates, as determined by the Master Servicer in accordance with the Servicing Standard.
However, the Master Servicer will not be required to declare a default under an Initial Mortgage Loan if the related Borrower fails to maintain insurance providing for coverage for property damage resulting from a terrorist or similar act, and the Master Servicer need not maintain (or require the Borrower to obtain) such insurance, if the Special Servicer has determined (after due inquiry in accordance with the Servicing Standard and with the consent of the directing investor, which consent is subject to certain limitations and a specified time period as set forth in the Trust and Servicing Agreement; provided that the Special Servicer will not follow any such direction, or refrain from acting based on the lack of any such direction, of the directing investor, if following any such direction of the directing investor or refraining from taking such action based on the lack of any such direction of the directing investor would violate the Servicing Standard), in accordance with the Servicing Standard, that either:
such insurance is not available at commercially reasonable rates and such hazards are not at the time commonly insured against for properties similar to the related Mortgaged Property and located in and around the region in which the Mortgaged Property is located; or
such insurance is not available at any rate.
The insurance coverage required to be maintained by the Borrowers may not cover any physical damage resulting from, among other things, war, revolution, or nuclear, biological, chemical or radiological materials. In addition, even if a type of loss is covered by the insurance policies required to be in place at the Mortgaged Property, the Mortgaged Property may suffer losses for which the insurance coverage is inadequate. For example, in the case where terrorism coverage is included under a policy, if the terrorist attack is, for example, nuclear, biological or chemical in nature, the policy may include an exclusion that precludes coverage for such terrorist attack.
Various forms of insurance maintained with respect to one or more of the Mortgaged Properties securing the Initial Mortgage Loans, including casualty insurance, may be provided under a blanket insurance policy. That blanket insurance policy will also cover other real properties, some of which may not secure Initial Mortgage Loans. As a result of total limits under any of those blanket policies, losses at other properties covered by the blanket insurance policy may reduce the amount of insurance coverage with respect to a property securing one of the Initial Mortgage Loans.
The Initial Mortgage Loans generally provide that insurance and condemnation proceeds are to be applied either—
to restore the related Mortgaged Property (with any balance to be paid to the Borrower); or
towards payment of the Initial Mortgage Loan.
The Master Servicer and the Special Servicer may each satisfy its obligations regarding maintenance of the property damage insurance policies by maintaining a lender placed insurance policy that provides protection equivalent to the individual policies otherwise required by the loan documents or the Servicing Standard (including
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containing a deductible clause consistent with the Servicing Standard) insuring against hazard losses with respect to all of the Mortgaged Properties in the Trust for which it is responsible. Solely in the event that Accepted Servicing Practices is the applicable Servicing Standard, the deductible clause (if any) in the lender placed insurance policy referred to in the preceding sentence is required to be in an amount not in excess of customary amounts, in which case if (i) an insurance policy complying with the loan documents or the Servicing Standard is not maintained on the related Mortgaged Property and (ii) there are losses which would have been covered by such insurance policy had it been maintained, the Master Servicer or the Special Servicer, as applicable, must deposit into the Collection Account from the Master Servicer’s or the Special Servicer’s, as applicable, own funds the portion of such loss or losses that would have been covered under such insurance policy but is not covered under the lender placed insurance policy because such deductible exceeds the deductible limitation required by the related loan documents or the Servicing Standard or, in the absence of any such deductible limitation, the deductible limitation which is consistent with the Servicing Standard.
Additional Loan and Property Information
Borrower Structures. With respect to all of the Initial Mortgage Loans, the related Borrowers are single purpose entities whose organizational documents or the terms of the Initial Mortgage Loans limit their activities to the ownership of only the related Mortgaged Property or properties and, subject to exceptions, including relating to subordinate debt secured by the related Mortgaged Properties, generally limit the Borrowers’ ability to incur additional indebtedness other than trade payables and equipment financing relating to the Mortgaged Properties in the ordinary course of business.
With respect to certain other Initial Mortgage Loans, the related Borrower is a single asset entity that is not permitted to (i) own any real or personal property other than the related Mortgaged Property and personal property related to the operation and maintenance of such Mortgaged Property, (ii) operate any business other than the management and operation of such Mortgaged Property or (iii) maintain its assets in a way that is difficult to segregate and identify.
With respect to certain Initial Mortgage Loans, guarantees of the nonrecourse carveout provisions of the related loan documents may not be obtained. In addition, with respect to some of the Initial Mortgage Loans, the nonrecourse carveout provisions of the related loan documents may be guaranteed, in whole or in part, by non U.S. individuals or entities, which may decrease the likelihood of recovery under such guarantee. In addition, some of the Initial Mortgage Loans may be guaranteed, in whole or in part, by the related sponsors of the respective Borrowers or other parties that are funds or other entities the terms of which may be subject to expiration or other structural contingencies. In such cases, the loan documents may require such entities to extend their terms or to otherwise take action or provide additional security to the lender regarding the continued existence of such entities during the terms of the Initial Mortgage Loans.
With respect certain Initial Mortgage Loans, the sponsor of the related Borrower may hold a preferred equity or similar interest in such Borrower. Any preferred equity interest may generally entitle the related sponsor to preferred equity payments and entitle the preferred equity holder to step in as managing member of the related Borrower under certain circumstances. In addition, any preferred equity interest may grant the preferred equity holder certain rights with respect to decisions regarding the related Borrower and the related Mortgaged Property. We cannot assure you that these circumstances will not adversely impact such Borrowers or the operations at or the value of the Mortgaged Properties.
See “Risk Factors—Risks Related to the Mortgage Loans—The Type of Borrower May Entail Risk” in this offering circular for a further description of each of these Borrower structures.
Delinquencies. None of the Initial Mortgage Loans will be, as of the applicable Cut-off Date, 30 days or more delinquent with respect to any monthly debt service payment.
Title, Survey and Similar Issues. The permanent improvements on certain of the Mortgaged Properties may encroach over an easement or a setback line or onto another property. In other instances, certain oil, gas or water estates may affect a property. Generally, in those cases, either (i) the related lender’s title policy insures against loss if a court orders the removal of the improvements causing the encroachment or (ii) the respective title and/or survey issue was analyzed by the originating lender and determined not to materially affect the respective
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Mortgaged Property for its intended use. There is no assurance, however, that any such analysis in this regard is correct, or that such determination was made in each and every case.
DESCRIPTION OF THE CERTIFICATES
General
The Certificates will be issued on the Closing Date pursuant to the Trust and Servicing Agreement. They will represent the entire beneficial ownership interest of the Trust. The assets of the Trust will include:
the Mortgage Loans;
any and all payments under and proceeds of the Mortgage Loans received after their respective Cut-off Dates, other than payments of principal, interest and other amounts due and payable on the Mortgage Loans on or prior to the applicable Cut-off Date and Principal Prepayments paid on or prior to the applicable Cut-off Date;
any sales proceeds of the Mortgage Loans and other collections received in respect of the Mortgage Loans from time to time that are deposited in the Collection Account described under “—Collection Account” below, the Distribution Account described under “—Distribution Account” below, the Principal Reserve Account described under “—Principal Reserve Account” below or any servicing account (in the case of a servicing account, to the extent of the Trust’s interest in that account); and
the rights of the mortgagee under all insurance policies with respect to the Mortgage Loans.
The Certificates will include the following Classes:
the Class A Certificates that are offered by this offering circular; and
the Class B Certificates, the Class C Certificates and the Class D Certificates, which are not offered by this offering circular.
Collection Account
General. The Master Servicer will be required to establish and maintain an account, on behalf of the Trustee for the benefit of the Certificateholders, for purposes of holding payments and other collections that it receives with respect to the Mortgage Loans (the “Collection Account”). The Collection Account must be an eligible account that meets the requirements of the Trust and Servicing Agreement.
Deposits. The Master Servicer will be required to deposit or cause to be deposited into the Collection Account on a daily basis, except as otherwise provided below, all collections on or in respect of each Mortgage Loan (if any) received after the related Cut-off Date (other than (i) payments of principal and interest due on or prior to such Cut-off Date and any amounts that are required to be deposited into the Servicing Accounts pursuant to the Guide and (ii) actual payments from the Borrowers that the Master Servicer or the Special Servicer is entitled to retain as compensation under the Trust and Servicing Agreement and as described in “The Mortgage Loan Purchase, Trust and Servicing Agreement—Servicing and Other Compensation and Payment of Expenses—Additional Servicing Compensation” in this offering circular) constituting the following—
all payments of principal and interest on such Mortgage Loans;
any Prepayment Charges received in respect of such Mortgage Loans;
any Par Purchase Price received from the Mortgage Loan Seller (including the Final Sales Proceeds) and any Defaulted Loan Proceeds, other than any Par Purchase Price received from the Mortgage Loan Seller that is required to be deposited into the Distribution Account in connection with the Mortgage Loan Seller’s purchase of the Mortgage Loans after the Cleanup Call, as described under “—Mandatory Principal Payment; Cleanup Call” below; and
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the amount of the Net Investment Loss required to be deposited by the Master Servicer in connection with losses incurred with respect to Permitted Investments of funds held in such Collection Account.
In addition, the Mortgage Loan Seller will be required to deposit the Initial Deposit Amount into the Collection Account on the Closing Date.
Within one Business Day of receipt of any of the foregoing amounts with respect to any Defaulted Loan, the Special Servicer will be required to remit such amounts to the Master Servicer for deposit into the Collection Account.
Withdrawals. The Master Servicer will be permitted to make withdrawals from the Collection Account to pay any Program Expenses; provided that during the Revolving Period, Program Expenses will be paid, on a pro rata basis, first from any amount received as a reimbursement or recovery of any such Program Expenses and then only from collections of interest received on the Mortgage Loans and provided, further, that after the Revolving Period, any unpaid or unreimbursed Program Expenses will be paid, on a pro rata basis, first from any amount received as a reimbursement or recovery of any such Program Expenses, second from collections received in respect of interest on the Mortgage Loans and then from Principal Collections. In addition, the Master Servicer will be permitted to make withdrawals from the Collection Account to pay any Prepayment Charges to Freddie Mac to the extent such Prepayment Charges have been received by the Master Servicer.
On each Master Servicer Remittance Date, the Master Servicer will be required to withdraw funds from the Collection Account to transfer the applicable Available Distribution Amount to the Distribution Account. In addition, the Master Servicer may from time to time withdraw funds from the Collection Account to (i) pay the Par Purchase Price for any additional Mortgage Loans that may be purchased by the Trust during the Revolving Period under the Trust and Servicing Agreement, (ii) transfer funds to the Distribution Account to pay down the Class A Certificates and/or the Mezzanine Certificates as described under “—Mandatory Principal Payment; Cleanup Call” below, (iii) recoup any amounts deposited in the Collection Account in error and (iv) clear and terminate the Collection Account upon the termination of the Trust and Servicing Agreement. In addition, in connection with any sale by the Mortgage Loan Seller of any Mortgage Loan to the Trust under the Trust and Servicing Agreement, the Mortgage Loan Seller will be entitled to receive any accrued and unpaid interest on such Mortgage Loan through and including the date of such sale, and the Master Servicer will be required to remit such amount received during any Collection Period to the Mortgage Loan Seller on the related Master Servicer Remittance Date. Any out-of-pocket expenses incurred by Freddie Mac in its capacity as the Master Servicer in connection with maintaining the Master Servicer Accounts will be reimbursed to Freddie Mac as a Program Expense and may be withdrawn from the Collection Account as described above.
Distribution Account
General. The Certificate Administrator will be required to establish and maintain an account in which it will hold funds pending their distribution on the Certificates and from which it will make those distributions (the “Distribution Account”). That Distribution Account must be maintained in a manner and with a depository institution that meets the requirements of the Trust and Servicing Agreement. Funds held in the Distribution Account may be held uninvested or, at the Certificate Administrator’s risk, invested in Permitted Investments. Subject to the limitations in the Trust and Servicing Agreement, any interest or other income earned on funds in the Distribution Account will be paid to the Certificate Administrator as additional compensation.
Deposits. On the Business Day prior to each Payment Date (the “Master Servicer Remittance Date”), the Master Servicer will be required to deliver to the Certificate Administrator for deposit in the Distribution Account the Available Distribution Amount for such Payment Date.
Withdrawals. On each Payment Date, the Certificate Administrator will be required to withdraw funds from the Distribution Account and apply such funds in accordance with the priority of distributions described under “—Distributions—Priority of Distributions” below. In addition, the Certificate Administrator may from time to time
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withdraw funds from the Distribution Account to recoup any amounts deposited in the Distribution Account in error and, at the termination of the Trust and Servicing Agreement, to clear and terminate the Distribution Account.
Principal Reserve Account
General. The Master Servicer must maintain an account (the “Principal Reserve Account”) that must be maintained in a manner and with a depository that satisfies the requirements set forth in the Trust and Servicing Agreement.
Deposits. On each Remaining Term Payment Date, the Certificate Administrator will be required to deposit 25% of the Available Principal Collections into the Principal Reserve Account for the benefit of the Holders of the Class A Certificates, the Mezzanine Certificates and the Class D Certificates, except in certain circumstances under “—Mandatory Principal Payment; Cleanup Call” below, until the total amount of funds on deposit in the Principal Reserve Account is sufficient to pay the Class Principal Balance of the Class A Certificates, the Mezzanine Certificates and the Class D Certificates in full. See “—Distributions—Priority of Distributions” below.
Withdrawals. The Master Servicer may, from time to time, make withdrawals of funds from the Principal Reserve Account and transfer such funds to the Distribution Account to pay down the Class A Certificates and the Mezzanine Certificates, as described under “—Mandatory Principal Payment; Cleanup Call” below. On the Master Servicer Remittance Date relating to the Final Remaining Term Payment Date, the Master Servicer will be required to withdraw all funds in the Principal Reserve Account and transfer such funds to the Collection Account. In addition, the Master Servicer may from time to time withdraw funds from the Principal Reserve Account to recoup any amounts deposited in the Principal Reserve Account in error and to clear and terminate the Principal Reserve Account in accordance with the Trust and Servicing Agreement.
Distributions
General. In general, during the Revolving Period, no Principal Collections will be available for distribution on the Certificates, and no Certificates will be entitled to receive any principal distributions, except in certain circumstances to cure an Asset Mismatch as described under “—Mandatory Principal Payment; Cleanup Call” below. After the end of the Revolving Period and prior to the Final Remaining Term Payment Date, 75% of Available Principal Collections will be applied to pay principal on the Class A Certificates to the extent funds are available for such purpose, and the remaining portion of Available Principal Collections will be deposited into the Principal Reserve Account and will not be available for distribution on the Certificates until the Final Remaining Term Payment Date, except in certain circumstances to cure an Asset Mismatch and/or an Interest Mismatch, as described under “—Mandatory Principal Payment; Cleanup Call” below.
The timely payment of interest on and the ultimate payment of principal of the Class A Certificates and the reimbursement of Realized Losses allocated to the Class A Certificates will be guaranteed by Freddie Mac, as described under “—Freddie Mac Guarantee” below. Any accrued interest on the Mezzanine Certificates will be due and payable only to the extent funds are available for such payment on each Payment Date, and no interest will accrue on any unpaid interest on the Mezzanine Certificates. See “Description of the Certificates—Distributions” in this offering circular.
Generally, the Class A Certificates will be senior to the other Classes of Certificates in right of payment, and the Class B Certificates will be senior to the Class C Certificates and the Class D Certificates in right of payment, and the Class C Certificates will be senior to the Class D Certificates in right of payment, as further described in this offering circular. However, if the aggregate current interest payments that the Trust is entitled to receive under the Mortgage Loans are insufficient to satisfy the current interest payment obligation on the Class A Certificates and the Mezzanine Certificates and other payment obligations of the Trust during any Revolving Period, a Waterfall Trigger Event will occur and any current accrued and unpaid interest on the Mezzanine Certificates will be paid first before any accrued and unpaid interest on the Class A Certificates are paid, except to the extent of any interest shortfalls caused by a default under the Mortgage Loans that are allocated to such Mezzanine Certificates, as further described below.
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Interest Distributions. The Class A Certificates and Mezzanine Certificates will bear interest.
During each Interest Accrual Period, (i) the Class A Certificates will bear interest that will accrue on an Actual/360 Basis and (ii) the Mezzanine Certificates will bear interest that will accrue on a 30/360 Basis, in each case, based on:
the interest rate with respect to such Class for such Interest Accrual Period as set forth on page 7; and
the daily weighted average of the outstanding principal balance of such Class during such Interest Accrual Period.
On each Payment Date, subject to the Available Distribution Amount for that date and the distribution priorities described under “—Priority of Distributions” below (and, in the case of the Class A Certificates, subject to the Freddie Mac Guarantee), the Holders of each interest-bearing Class of Certificates will be entitled to receive the total amount of interest accrued during the related Interest Accrual Period, with respect to that Class of Certificates.
If the Holders of any interest-bearing Class of Certificates do not receive all of the interest to which they are entitled on any Payment Date, as described in the prior two paragraphs (including by means of a Guarantor Payment), then they will continue to be entitled to receive the unpaid portion of that interest on future Payment Dates (such unpaid amount being referred to as “Unpaid Interest Shortfall”), subject to the Available Distribution Amount for those future Payment Dates and the distribution priorities described below.
Calculation of Interest Rate for the Class A Certificates. The interest rate for each interest-bearing Class of Certificates is identified in the table on page 7. With respect to the Class A Certificates, whose interest rate is a floating rate based on LIBOR, LIBOR will be determined by the Calculation Agent on each LIBOR Determination Date.
Principal Distributions. The Certificates will not receive distributions of principal during the Revolving Period and, except as described in “Description of the Certificates—Mandatory Principal Payment; Cleanup Call” in this offering circular, the Mezzanine Certificates will not receive any distributions of principal until the Final Remaining Term Payment Date. On each Remaining Term Payment Date (other than the Final Remaining Term Payment Date), the Certificate Administrator will be required to apply 75% of the Available Principal Collections collected during the related Collection Period to pay the principal of the Class A Certificates until the outstanding principal balance of the Class A Certificates has been reduced to zero. The remaining portion of the Available Principal Collections collected during the related Collection Period will be deposited into the Principal Reserve Account and will not be available for distribution on the Certificates until the Final Remaining Term Payment Date, except in certain circumstances to cure an Asset Mismatch and/or an Interest Mismatch, as described under “—Mandatory Principal Payment; Cleanup Calls” below. On the Final Remaining Term Payment Date and any Payment Date thereafter, subject to the distribution priorities described under “—Priority of Distributions” below, the Certificate Administrator will be required to apply the Available Distribution Amount to pay the principal of the Certificates until the Certificate Principal Balance of the Certificates has been reduced to zero, in accordance with the distribution priorities described under “—Priority of Distributions” below.
Freddie Mac Guarantee. On the Master Servicer Remittance Date relating to each Payment Date and the Final Certificate Maturity Date, following the receipt from the Certificate Administrator of a remittance report that indicates a Class A Certificate Deficiency Amount for the Class A Certificates for such Payment Date or the Final Certificate Maturity Date, respectively, the Guarantor will be required to make a payment in an amount equal to such Class A Certificate Deficiency Amount (each, a “Guarantee Payment”) to the Certificate Administrator, which will be required to pay such amount directly to the Holders of the Class A Certificates on such Payment Date or the Final Certificate Maturity Date, respectively.
The Guarantor will be entitled to a Guarantee Fee equal to 0.20% per annum multiplied by the outstanding principal balance of the Class A Certificates, calculated in the same manner in which interest is calculated in respect of the Class A Certificates. The Guarantee Fee will be paid to the Guarantor as a Program Expense. The Freddie Mac Guarantee is not backed by the full faith and credit of the United States. If the Guarantor were unable to pay under the Freddie Mac Guarantee, the Class A Certificates could be subject to losses.
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Priority of Distributions. On each Payment Date, the Certificate Administrator will apply the Available Distribution Amount for that date to make the following distributions in the following order of priority, in each case to the extent of the remaining portion of the Available Distribution Amount:
Revolving Payment Date. On each Payment Date during the Revolving Period (each, a “Revolving Payment Date”), the Certificate Administrator will withdraw the Available Distribution Amount in the Distribution Account for such Revolving Payment Date and apply such amount in the following order of priority:
first, (a) so long as no Waterfall Trigger Event has occurred and is continuing, to pay the Interest Distribution Amount to the Class A Certificates or (b) if a Waterfall Trigger Event has occurred and is continuing, first, to pay the Class B Certificates up to an amount equal to the Waterfall Trigger Class B Interest Distribution Amount and, then, to pay the Class C Certificates up to an amount equal to the Waterfall Trigger Class C Interest Distribution Amount;
second, (a) so long as no Waterfall Trigger Event has occurred and is continuing, first, to pay the Interest Distribution Amount to the Class B Certificates and, then, to pay the Interest Distribution Amount to the Class C Certificates or (b) if a Waterfall Trigger Event has occurred and is continuing, first, to pay the Interest Distribution Amount to the Class A Certificates and, then, to pay in respect of the Class B Certificates, any portion of the Interest Distribution Amount for such Payment Date that remains unpaid after the payment made pursuant to clause first above, and then to pay in respect of the Class C Certificates any portion of the Interest Distribution Amount for such Payment Date that that remains unpaid after the payment made pursuant to clause first above;
third, to pay to the Guarantor a portion of the Guarantor Reimbursement Interest Amount constituting interest accrued on any Waterfall Trigger Event Guarantee Payment;
fourth, to reimburse the Guarantor for any Waterfall Trigger Event Guarantee Payment that was paid by the Guarantor but not previously reimbursed to the Guarantor; and
fifth, to pay to the Class D Certificates any remaining amounts as an income distribution.
With respect to any Revolving Payment Date, the Available Distribution Amount will exclude the Principal Collections received during the applicable Collection Period.
Allocation of Interest Shortfalls Resulting from Payment Default under Mortgage Loans During the Revolving Period. Any interest shortfalls resulting from a payment default under the Mortgage Loans during the Revolving Period will reduce the amount of funds available for distribution first, on the Class D Certificates, then the Class C Certificates, then the Class B Certificates, and then the Class A Certificates, in that order. With respect to any Revolving Payment Date on which a Waterfall Trigger Event has occurred and is continuing, solely for purposes of determining the Waterfall Trigger Class B Interest Distribution Amount, the Waterfall Trigger Class C Interest Distribution Amount and the Waterfall Trigger Event Guarantee Payment, the Defaulted Loan Interest Shortfall Amount for such Revolving Payment Date will be allocated to notionally reduce the Interest Distribution Amount for each Class of Certificates in the following order of priority:
first, to notionally reduce the Interest Distribution Amount for the Class C Certificates, until such Interest Distribution Amount is notionally reduced to zero;
second, to notionally reduce the Interest Distribution Amount for the Class B Certificates, until such Interest Distribution Amount is notionally reduced to zero; and
third, to notionally reduce the Interest Distribution Amount for the Class A Certificates, until such Interest Distribution Amount is notionally reduced to zero.
Priority of Distributions After the Revolving Period. Subject to the obligation of the Trust to pay down the Class A Certificates and/or Mezzanine Certificates in certain limited circumstances described under “Description of the Certificates——Mandatory Principal Payment; Cleanup Call” in this offering circular, the Certificate Administrator will withdraw the Available Distribution Amount (other than the aggregate Par Purchase Prices that
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are required to be applied to satisfy such obligation of the Trust) in the Distribution Account for such Remaining Term Payment Date and apply such amount in the following order of priority:
first, to pay the Interest Distribution Amount to the Class A Certificates from any collections received in respect of interest on the Mortgage Loans during the related Collection Period remaining after the payment of Program Expenses as described in “—Collection Account” above;
second, to pay principal on the Class A Certificates in an amount equal to 75% of any Available Principal Collections received during the related Collection Period until the Class Principal Balance of the Class A Certificates is reduced to zero;
third, (A) to deposit into the Principal Reserve Account for the benefit of the Holders of the Class A Certificates, the Mezzanine Certificates and the Class D Certificates, 25% of any Available Principal Collections received during the related Collection Period until the total amount of funds on deposit in the Principal Reserve Account is sufficient to pay the Class Principal Balance of the Class A Certificates, the Mezzanine Certificates and the Class D Certificates in full; or (B) if the Mortgage Loan Seller delivers a Mezzanine Certificate Prepayment Direction to the Certificate Administrator under the Trust and Servicing Agreement, (x) first to pay the Holders of the Mezzanine Certificates in respect of principal of the Mezzanine Certificates on a pro rata basis, up to the lesser of (I) the Required Prepayment Amount or the Required Prepayment Shortfall Amount, as applicable, for such Remaining Term Payment Date and (II) 25% of any Available Principal Collections received during the related Collection Period, and then (y) to deposit into the Principal Reserve Account for the benefit of the Holders of the Class A Certificates, the Mezzanine Certificates and the Class D Certificates, up to any portion of Available Principal Collections received during the related Collection Period remaining after the payment of principal of the Mezzanine Certificates under clause (x) until the total amount of funds on deposit in the Principal Reserve Account is sufficient to pay the Class Principal Balance of the Class A Certificates, the Mezzanine Certificates and the Class D Certificates in full;
fourth, to pay the Interest Distribution Amount to the Class B Certificates for such Payment Date;
fifth, to pay the Interest Distribution Amount to the Class C Certificates for such Payment Date;
sixth, to pay to the Guarantor a portion of the Guarantor Reimbursement Interest Amount constituting interest accrued on any Waterfall Trigger Event Guarantee Payment;
seventh, to reimburse the Guarantor for any Waterfall Trigger Event Guarantee Payment that was paid by the Guarantor but not previously reimbursed to the Guarantor; and
eighth, to pay to the Class D Certificates any remaining amounts as an income distribution.
No Principal Collections in the Distribution Account may be applied to pay any interest due on the Class A Certificates or the Mezzanine Certificates on any Remaining Term Payment Date pursuant to the priority of distributions set forth above.
Priority of Distributions on the Final Remaining Term Payment Date. On the Final Remaining Term Payment Date and any Payment Date thereafter, the Certificate Administrator will withdraw the Available Distribution Amount in the Distribution Account for such Revolving Payment Date and apply such amount in the following order of priority:
first, to pay the Interest Distribution Amount to the Class A Certificates;
second, to pay principal on the Class A Certificates until the Class Principal Balance of the Class A Certificates is reduced to zero;
third, to reimburse the Guarantor for any Guarantee Payment (other than a Waterfall Trigger Event Guarantee Payment) made under the Freddie Mac Guarantee as a result of the amounts available to make payments pursuant to clause first or second above being insufficient to pay in full the amounts payable pursuant to such clauses;
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fourth, to pay the Interest Distribution Amount to the Class B Certificates;
fifth, to pay principal on the Class B Certificates until the Class Principal Balance of the Class B Certificates is reduced to zero;
sixth, to pay the Interest Distribution Amount to the Class C Certificates;
seventh, to pay principal on the Class C Certificates until the Class Principal Balance of the Class C Certificates is reduced to zero;
eighth, to pay to the Guarantor a portion of the Guarantor Reimbursement Interest Amount constituting interest accrued on any Waterfall Trigger Event Guarantee Payment;
ninth, to reimburse the Guarantor for any Waterfall Trigger Event Guarantee Payment that was paid by the Guarantor but not previously reimbursed to the Guarantor;
tenth, to pay the Class Principal Balance of the Class D Certificates; and
eleventh, to pay to the Class D Certificates any remaining amounts as an income distribution.
Reductions of Certificate Principal Balances in Connection with Realized Losses
In the event that any Defaulted Loan is modified in connection with a Workout or is sold or otherwise disposed of under the Trust and Servicing Agreement, the Special Servicer will calculate the amount, if any, by which (a) the Stated Principal Balance of such Defaulted Loan immediately prior to such Workout or sale or disposition exceeds (b) (x) the Stated Principal Balance of such Defaulted Loan (after giving effect to such modification) or (y) the portion of the Defaulted Loan Proceeds received in respect of principal of such Defaulted Loan in connection with such sale or disposition (such excess amount, a “Realized Loss”). Any allocation of Realized Losses to a Class of Certificates will be made by the Certificate Administrator by reducing the Class Principal Balance thereof by the amount so allocated as described in the following paragraph. Any Realized Losses allocated to a Class of Certificates will be allocated by the Certificate Administrator among the respective Certificates of such Class in proportion to the Percentage Interests evidenced thereby.
Any Realized Loss incurred during any related Collection Period will be allocated by the Certificate Administrator on the related Payment Date, first, to reduce the Class Principal Balance of the Class D Certificates until the Class Principal Balance of the Class D Certificates is equal to $1,000, second, to reduce the Class Principal Balance of the Class C Certificates until the Class Principal Balance of the Class C Certificates is equal to $0, third, to reduce the Class Principal Balance of the Class B Certificates until the Class Principal Balance of the Class B Certificates is equal to $0 and, fourth, to reduce the Class Principal Balance of the Class A Certificates.
In the event that any Realized Losses are allocated to the Class A Certificates on any Payment Date, the Guarantor is required to make a Guarantee Payment in respect of such Realized Losses on such Payment Date under the Freddie Mac Guarantee.
Mandatory Principal Payment; Cleanup Call
Interest Mismatch
If an Interest Mismatch will occur on any Remaining Term Payment Date, unless the Mortgage Loan Seller elects to exercise the option to purchase all of the Mortgage Loans as described under “—Cleanup Call” below, the Mortgage Loan Seller will be required to:
(i) purchase a sufficient number of Mortgage Loans at the Par Purchase Price on the related Master Servicer Remittance Date to pay down the Class A Certificates and the Mezzanine Certificates on a pro rata basis, in respect of principal, to cure the Interest Mismatch; and/or
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(ii) direct the Certificate Administrator to apply a portion of the Available Principal Collections received during the related Collection Period pursuant to paragraph third (B) of “—Distributions—Priority of Distributions—Priority of Distributions After the Revolving Period” above (such direction, a “Mezzanine Certificate Prepayment Direction”) and, to the extent necessary, direct the Master Servicer to transfer any Principal Collections in the Principal Reserve Account to the Distribution Account in accordance with the second succeeding paragraph, to pay the Mezzanine Certificates on a pro rata basis, in respect of principal, to cure the Interest Mismatch;
in each case, in an amount equal to the Required Prepayment Amount (which Required Prepayment Amount will be required to be set forth in such direction delivered by the Mortgage Loan Seller to the Certificate Administrator and the Master Servicer). Notwithstanding anything to the contrary in the Trust and Servicing Agreement, the Mortgage Loan Seller may exercise one of the two options set forth in clauses (i) and (ii) above or a combination of such two options in its sole discretion in order to cure an Interest Mismatch in accordance with this paragraph. The Mortgage Loan Seller will be required to notify the Certificate Administrator and the Master Servicer at least two Business Days prior to the applicable Payment Date as to which of the two options set forth in clauses (i) and (ii) above (or which combination of such options) it has elected to exercise in order to cure the Interest Mismatch and, if applicable, deliver the Mezzanine Certificate Prepayment Direction to the Certificate Administrator at least two Business Days prior to the applicable Payment Date.
In the event that the Mortgage Loan Seller elects to purchase Mortgage Loans from the Trust on the related Master Servicer Remittance Date to cure an Interest Mismatch, the Mortgage Loan Seller will be required to deposit into the Distribution Account the portion of the aggregate Par Purchase Prices (excluding the amounts referred to in clause (a)(iii) of the definition of “Par Purchase Price”) for such Mortgage Loans in an amount equal to the Required Prepayment Amount on such Master Servicer Remittance Date and notify the Certificate Administrator of such deposit of the Required Prepayment Amount on such Master Servicer Remittance Date. In the event that the amount deposited into the Distribution Account by the Mortgage Loan Seller pursuant to this paragraph is less than the Required Prepayment Amount (such deficiency amount, the “Required Prepayment Shortfall Amount”) on the applicable Master Servicer Remittance Date, the Mortgage Loan Seller will be required to send a Mezzanine Certificate Prepayment Direction to the Certificate Administrator (which Mezzanine Certificate Prepayment Direction will be required to set forth the amount of Available Principal Collections in the Distribution Account that the Certificate Administrator is required to apply to pay down the Mezzanine Certificates in accordance with the following paragraph). Notwithstanding anything to the contrary in “—Distributions—Priority of Distributions” above, the Certificate Administrator will be required to withdraw any such funds deposited by the Mortgage Loan Seller pursuant to this paragraph from the Distribution Account and apply them to pay to the Holders of the Class A Certificates and Mezzanine Certificates in respect of principal of such Certificates on a pro rata basis on the related Remaining Term Payment Date. On the applicable Master Servicer Remittance Date, the Mortgage Loan Seller will be required to deposit any remaining portion of the aggregate Par Purchase Prices (excluding the amounts referred to in clause (a)(iii) of the definition of “Par Purchase Price”) into the Principal Reserve Account and the amounts referred to in clause (a)(iii) of the definition of “Par Purchase Price” into the Collection Account.
On any Remaining Term Payment Date with respect to which the Mortgage Loan Seller delivers a Mezzanine Certificate Prepayment Direction to the Certificate Administrator, if 25% of Available Principal Collections (if any) for such Remaining Term Payment Date would be insufficient to pay down the Mezzanine Certificates in respect of principal in an amount equal to the Required Prepayment Amount or the Required Prepayment Shortfall Amount, as applicable, the Mortgage Loan Seller will also be required to direct the Master Servicer, by delivering notice to the Master Servicer on or prior to one Business Day prior to the Master Servicer Remittance Date, to withdraw funds from the Principal Reserve Account in an amount necessary to prepay the Mezzanine Certificates up to the Required Prepayment Amount (after giving effect to any prepayment made on such Remaining Term Payment Date using any sales proceeds of the Mortgage Loans and/or 25% of Available Principal Collections in the Distribution Account to cure an Interest Mismatch as described above), and the Master Servicer will be required to transfer such amount to the Distribution Account on such Master Servicer Remittance Date. Notwithstanding anything to the contrary in “—Distributions—Priority of Distributions—Priority of Distributions After the Revolving Period” above, the Certificate Administrator will be required to apply such amount transferred by the Master Servicer to pay down the Mezzanine Certificates, on a pro rata basis, in respect of principal on such Remaining Term Payment Date.
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Asset Mismatch
Subject to “—Distributions—Priority of Distributions” above, if an Asset Mismatch will occur on any Revolving Payment Date, then the Mortgage Loan Seller will be required to:
(i) first, transfer one or more additional Mortgage Loans to the Trust on such Revolving Payment Date if the Mortgage Loan Seller owns any Mortgage Loan that meets the Eligibility Criteria on such Revolving Payment Date and can be transferred on such Revolving Payment Date to the Trust, but only to the extent necessary to cause such Asset Mismatch to cease to exist; and
(ii) second, if such Asset Mismatch cannot be cured pursuant to clause (i), direct the Master Servicer, by delivering notice to the Master Servicer on or prior to two Business Days prior to the related Master Servicer Remittance Date, to transfer on such related Master Servicer Remittance Date any Principal Collections in the Collection Account that were received during the related Collection Period to the Distribution Account to prepay principal on the Class A Certificates and Mezzanine Certificates on a pro rata basis on such Payment Date in an amount necessary to cause such Asset Mismatch to cease to exist (which amount will be required to be set forth in such direction delivered to the Master Servicer).
If an Asset Mismatch will occur on any Remaining Term Payment Date, two Business Days prior to the related Master Servicer Remittance Date, the Mortgage Loan Seller will be required to direct the Master Servicer to transfer on such Master Servicer Remittance Date any Principal Collections in the Principal Reserve Account to the Certificate Administrator for deposit into the Distribution Account to prepay principal on the Class A Certificates and Mezzanine Certificates on a pro rata basis on such Remaining Term Payment Date (to the extent such funds are available for such prepayment) in an amount necessary to cause an Asset Mismatch to cease to exist (after giving effect to any prepayment of the Class A Certificates on such Remaining Term Payment Date using 75% of Available Principal Collections on such Remaining Term Payment Date and any prepayment of the Class A Certificates and/or the Mezzanine Certificates to cure an Interest Mismatch on such Remaining Term Payment Date), and such amount will be required to be set forth in the direction delivered to the Master Servicer. The Mortgage Loan Seller will be required to deliver a copy of such direction to the Certificate Administrator on such Master Servicer Remittance Date, and the Certificate Administrator will be required to apply such Principal Collections transferred to the Distribution Account to prepay principal on the Class A Certificates and Mezzanine Certificates on a pro rata basis on the applicable Remaining Term Payment Date.
An Asset Mismatch will cease to exist on any Payment Date if the aggregate Stated Principal Balance of the Mortgage Loans as of such Payment Date (as disclosed in the CREFC® loan periodic update file delivered by the Master Servicer with respect to such Payment Date and excluding Mortgage Loans that have been defeased and taking into account any Mortgage Loans purchased by the Trust on such Payment Date) is at least 80% of the Total Trust Assets as of such Payment Date (as disclosed in the CREFC® loan periodic update file and the account statement delivered by the Master Servicer with respect to such Payment Date and including Mortgage Loans that have been defeased and taking into account any Mortgage Loans purchased by the Trust on such Payment Date and any prepayment of the Class A Certificates and/or Mezzanine Certificates made on such Payment Date).
Cleanup Call
If on any Remaining Term Payment Date the aggregate Stated Principal Balance of the Mortgage Loans is less than 10% of the Program Size, then the Mortgage Loan Seller will have the option to purchase all of the Mortgage Loans owned by the Trust at the Par Purchase Price and terminate the Trust (the “Cleanup Call”), as described in “The Mortgage Loan Purchase Trust and Servicing Agreement—Termination—Termination Upon Repurchase or Liquidation of All Mortgage Loans” in this offering circular. “Program Size” means $1,000,000,000.
The aggregate Par Purchase Price received from the Mortgage Loan Seller (but excluding the amounts referred to in clause (a)(iii) of the definition of “Par Purchase Price”) for all of the Mortgage Loans owned by the Trust in connection with the exercise of the option described above will be required to be deposited into the Distribution Account and will be required to be applied in accordance with “—Distributions—Priority of Distributions—Priority of Distributions on the Final Remaining Term Payment Date” above.
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Reports to Certificateholders; Available Information
On each Payment Date, based solely upon the information regarding the Mortgage Loans delivered to the Certificate Administrator by the Master Servicer, the Certificate Administrator will prepare and make available on the Certificate Administrator’s Reporting Website to any Privileged Person, a statement substantially in the form of Exhibit C hereto (the “Statement to Certificateholders”), detailing the distributions on such Payment Date and the performance, both in the aggregate and individually to the extent available, of the Mortgage Loans and the Mortgaged Properties; provided that the Certificate Administrator need not make available to any Privileged Person any Statement to Certificateholders that has been made available to such Person via the Certificate Administrator’s Reporting Website; and provided, further, that the Certificate Administrator has no affirmative obligation to discover the identities of Certificate Owners and need only respond to Persons claiming to be Certificate Owners in accordance with the requirements of the Trust and Servicing Agreement. In addition, the Certificate Administrator will be required to make available to any Privileged Person, the Mortgage Loan Schedule, any Supplement to Mortgage Loan Schedule and, if applicable, a list of Approved Exceptions delivered by the Mortgage Loan Seller in connection with any sale or purchase of the Mortgage Loans under the Trust and Servicing Agreement. The Certificate Administrator makes no representation or warranty with respect to the information provided by the Master Servicer, and has no obligation to confirm the accuracy of such information.
On each Payment Date, the Certificate Administrator will make available electronically to each Privileged Person, each file and report comprising the CREFC Investor Reporting Package® and any other report at the direction of Freddie Mac, to the extent prepared by or received by the Certificate Administrator in electronic form since the prior Payment Date (or, in the case of the initial Payment Date, since the Closing Date) in accordance with the Trust and Servicing Agreement; provided, however, that the Certificate Administrator will not provide to (i) any Person that is a Borrower or an affiliate of a Borrower, unless such Person is the Directing Investor, (A) any Asset Status Report, inspection report, Appraisal or internal valuation, (B) the CREFC® Special Servicer Loan File or (C) the supplemental reports listed in clause (b) of the definition of “CREFC Investor Reporting Package®” or (ii) the Directing Investor, any Asset Status Report, inspection report, Appraisal or internal valuation relating to any Affiliated Borrower Loan. In making any determination as to whether any Person is a Borrower or an affiliate of a Borrower, the Certificate Administrator will be entitled to conclusively rely upon the representations contained in the investor certificate provided by such Person. The Certificate Administrator will be required to promptly notify the Master Servicer and the Special Servicer after it has been provided an investor certificate from any such Person representing that such Person is a Borrower or an affiliate of a Borrower and the Master Servicer and Special Servicer may conclusively rely on any such notice.
The Master Servicer will not be required to include information relating to any Excluded Loan in any servicing reports for the Payment Date immediately following the applicable Transfer Date, and information relating to such Excluded Loan will be first included in the servicing reports for the Payment Date immediately following such Payment Date.
Voting Rights
“Voting Rights” means the portion of the voting rights of all of the Certificates, which is allocated to any Certificate. At all times during the term of the Trust and Servicing Agreement and for any date of determination, the Voting Rights will be allocated among the Holders of the various Classes of Certificates as follows: in the case of any Class of Certificates (so long as any such Class of Certificates has been transferred by the Placement Agents or an affiliate thereof as part of the initial offering of the Certificates and therefore such Class of Certificates is not part of the Placement Agents’ unsold allotment), a percentage equal to the product of 100% and a fraction, the numerator of which is equal to the Class Principal Balance of such Class and the denominator of which is equal to the aggregate of the Class Principal Balances of all the Classes of Certificates, each determined as of the Payment Date immediately preceding such date of determination; provided that any Class of Certificates or any portion thereof, for as long as any such Class of Certificates or portion has not been transferred by the Placement Agents or an affiliate thereof as part of the initial offering of the Certificates and therefore such Class of Certificates is part of the Placement Agents’ unsold allotment, in each case, determined as of the Payment Date immediately preceding such date of determination, will not be included in the numerator or the denominator of such fraction. For purposes of determining Voting Rights, the Class Principal Balance of any Class will be deemed to be reduced by allocation of
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the Realized Losses to such Class. Voting Rights allocated to a Class of Certificateholders will be allocated among such Certificateholders in proportion to the Percentage Interests evidenced by their respective Certificates.
Registration and Denominations
The Offered Certificates will be Book-Entry Offered Certificates. The Offered Certificates will be issued in denominations of not less than $10,000 initial principal balance and in any whole dollar denomination in excess of $10,000.
DTC, Euroclear and Clearstream, Luxembourg
You will hold your Offered Certificates through DTC, in the United States, or Clearstream Banking, Luxembourg or The Euroclear System, in Europe, if you are a participating organization of the applicable system, or indirectly through organizations that are participants in the applicable system (“Participants”). Clearstream, Luxembourg and Euroclear will hold omnibus positions on behalf of organizations that are participants in either of these systems, through customers’ securities accounts in Clearstream, Luxembourg’s or Euroclear’s names on the books of their respective depositaries. Those depositaries will, in turn, hold those positions in customers’ securities accounts in the depositaries’ names on the books of DTC. DTC is a limited purpose trust company organized under the New York Banking Law, a “banking organization” within the meaning of the New York Banking Law, a member of the Federal Reserve System, a “clearing corporation” within the meaning of the New York Uniform Commercial Code and a “clearing agency” registered pursuant to Section 17A of the Exchange Act. DTC was created to hold securities for its Participants and to facilitate the clearance and settlement of securities transactions between Participants through electronic computerized book-entries, thereby eliminating the need for physical movement of certificates. Participants include securities brokers and dealers, banks, trust companies and clearing corporations. Indirect access to the DTC system also is available to others such as banks, brokers, dealers and trust companies that clear through or maintain a custodial relationship with a Participant, either directly or indirectly (“Indirect Participants”).
Transfers between DTC Participants will occur in accordance with DTC rules. Transfers between Clearstream Participants and Euroclear Participants will occur in accordance with the applicable rules and operating procedures of Clearstream and Euroclear.
Cross-market transfers between persons holding directly or indirectly through DTC, on the one hand, and directly through Clearstream Participants or Euroclear Participants, on the other, will be effected in DTC in accordance with DTC rules on behalf of the relevant European international clearing system by its Depositary; however, such cross-market transactions will require delivery of instructions to the relevant European international clearing system by the counterparty in such system in accordance with its rules and procedures and within its established deadlines (European time). The relevant European international clearing system will, if the transaction meets its settlement requirements, deliver instructions to its Depositary to take action to effect final settlement on its behalf by delivering or receiving securities in DTC, and making or receiving payment in accordance with normal procedures for same-day funds settlement applicable to DTC. Clearstream Participants and Euroclear Participants may not deliver instructions directly to the Depositaries.
Because of time-zone differences, credits of securities in Clearstream or Euroclear as a result of a transaction with a DTC Participant will be made during the subsequent securities settlement processing, dated the business day following the DTC settlement date, and such credits or any transactions in such securities settled during such processing will be reported to the relevant Clearstream Participant or Euroclear Participant on such business day. Cash received in Clearstream or Euroclear as a result of sales of securities by or through a Clearstream Participant or a Euroclear Participant to a DTC Participant will be received with value on the DTC settlement date but will be available in the relevant Clearstream or Euroclear cash account only as of the business day following settlement in DTC.
Certificateholders who are not Participants or Indirect Participants but desire to purchase, sell or otherwise transfer ownership of, or other interests in, such Offered Certificates may do so only through Participants and Indirect Participants. In addition, Holders of Offered Certificates in global form will receive all distributions of principal and interest from the Certificate Administrator through the Participants who in turn will receive them from DTC. Under a book-entry format, Holders of such Offered Certificates may experience some delay in their receipt
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of payments, since such payments will be forwarded by the Certificate Administrator to Cede & Co., as nominee for DTC. DTC will forward such payments to its Participants, which thereafter will forward them to Indirect Participants or such Certificateholders.
Under the rules, regulations and procedures creating and affecting DTC and its operations (the “Rules”), DTC is required to make book-entry transfers of Offered Certificates in global form among Participants on whose behalf it acts with respect to such Offered Certificates and to receive and transmit distributions of principal of, and interest on, such Offered Certificates. Participants and Indirect Participants with which the Certificateholders have accounts with respect to such Offered Certificates similarly are required to make book-entry transfers and receive and transmit such payments on behalf of their respective Holders of such Offered Certificates. Accordingly, although such Certificateholders will not possess the Offered Certificates, the Rules provide a mechanism by which Participants will receive payments on such Offered Certificates and will be able to transfer their interest.
Because DTC can only act on behalf of Participants, who in turn act on behalf of Indirect Participants and certain banks, the ability of a Holder of Offered Certificates in global form to pledge such Offered Certificates to persons or entities that do not participate in the DTC system, or to otherwise act with respect to such Offered Certificates, may be limited due to the lack of a physical certificate for such Offered Certificates.
DTC will take any action permitted to be taken by a Holder of an Offered Certificate in global form under the Trust and Servicing Agreement only at the direction of one or more Participants to whose accounts with DTC such Offered Certificates are credited. DTC may take conflicting actions with respect to other undivided interests to the extent that such actions are taken on behalf of Participants whose holdings include such undivided interests.
Except as required by law or provided for in the Trust and Servicing Agreement, none of the Mortgage Loan Seller, Freddie Mac, the Master Servicer, the Special Servicer, the Certificate Administrator, the Trustee or the Custodian will have any liability for any aspect of the records relating to or payments made on account of beneficial 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 interests.
Clearstream is incorporated under the laws of Luxembourg and is a global securities settlement clearing house. Clearstream holds securities for its participating organizations (“Clearstream Participants”) and facilitates the clearance and settlement of securities transactions between Clearstream Participants through electronic book-entry changes in accounts of Clearstream Participants, thereby eliminating the need for physical movement of certificates. Transactions may be settled in Clearstream in numerous currencies, including United States dollars. Clearstream provides to its Clearstream Participants, among other things, services for safekeeping, administration, clearance and settlement of internationally traded securities and securities lending and borrowing. Clearstream interfaces with domestic markets in several countries. Clearstream is regulated as a bank by the Luxembourg Monetary Institute. Clearstream Participants are recognized financial institutions around the world, including underwriters, securities brokers and dealers, banks, trust companies, clearing corporations and certain other organizations. Indirect access to Clearstream is also available to others, such as banks, brokers, dealers and trust companies that clear through or maintain a custodial relationship with a Clearstream Participant, either directly or indirectly.
Euroclear was created in 1968 to hold securities for participants of the Euroclear system (“Euroclear Participants”) and to clear and settle transactions between Euroclear Participants through simultaneous electronic book-entry delivery against payment, thereby eliminating the need for physical movement of certificates and any risk from lack of simultaneous transfers of securities and cash. Transactions may now be settled in any of numerous currencies, including United States dollars. The Euroclear system includes various other services, including securities lending and borrowing and interfaces with domestic markets in several countries generally similar to the arrangements for cross-market transfers with DTC described above. Euroclear is operated by Euroclear Bank S.A./N.V. (the “Euroclear Operator”). All operations are conducted by the Euroclear Operator, and all Euroclear securities clearance accounts and Euroclear cash accounts are accounts with the Euroclear Operator. Euroclear Participants include banks (including central banks), securities brokers and dealers and other professional financial intermediaries and may include the underwriters. Indirect access to the Euroclear system is also available to other firms that clear through or maintain a custodial relationship with a Euroclear Participant, either directly or indirectly.
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Securities clearance accounts and cash accounts with the Euroclear Operator are governed by the Euroclear Terms and Conditions. The Euroclear Terms and Conditions govern transfers of securities and cash within the Euroclear system, withdrawal of securities and cash from the Euroclear system, and receipts of payments with respect to securities in the Euroclear system. All securities in the Euroclear system are held on a fungible basis without attribution of specific securities to specific securities clearance accounts. The Euroclear Operator acts under the Euroclear Terms and Conditions only on behalf of member organizations of Euroclear and has no record of or relationship with persons holding through those member organizations.
The information in this offering circular concerning DTC, Euroclear and Clearstream, Luxembourg, and their book-entry systems, has been obtained from sources believed to be reliable, but we do not take any responsibility for the accuracy or completeness of that information.
Book-Entry Registration
The Offered Certificates offered and sold inside the United States will be issued in the form of one or more global certificates, in fully registered form without interest coupons (the “Book-Entry Offered Certificates”). Each such Offered Certificate will be—
deposited with the Certificate Administrator as custodian for DTC (in that capacity, the “DTC Custodian”), and
registered in the name of a nominee of DTC for credit to the respective accounts of the owners of those Offered Certificates at DTC.
The Book-Entry Offered Certificates offered and sold outside of the United States, its territories and possessions will be issued in the form of one or more global certificates, in fully registered form without coupons (together with the Certificates described in the preceding paragraph, the “Global Certificates”). Each such Global Certificate will be—
deposited with the DTC Custodian, and
registered in the name of a nominee of DTC for credit, on DTC’s book-entry system, to the Euroclear Operator, as operator of Euroclear, or to Clearstream, Luxembourg, for the respective accounts of the owners of those Offered Certificates.
Global Certificates will be held by the DTC Custodian on behalf of participating organizations in the DTC system. So long as DTC or its nominee is the registered owner or Holder of a Global Certificate, DTC or its nominee, as the case may be, will be considered the sole Holder of that Global Certificate for all purposes under the Trust and Servicing Agreement. DTC Participants will only be entitled to exercise rights with respect to the Book-Entry Offered Certificates credited to their DTC accounts through procedures established by DTC.
DTC’s practice is to credit direct participants’ accounts on the related Payment Date in accordance with their respective holdings shown on DTC’s records unless DTC has reason to believe that it will not receive payment on that date. Disbursement of those distributions by participants to beneficial owners of Book-Entry Offered Certificates will be governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers in bearer form or registered in “street name”, and will be the responsibility of each such participant (and not of DTC, Freddie Mac or any Trustee or any other party to the Trust and Servicing Agreement), subject to any statutory or regulatory requirements as may be in effect from time to time. Under a book-entry system, the beneficial owners of Book-Entry Offered Certificates may receive payments after the related Payment Date.
The only Holder of the Book-Entry Offered Certificates will be the nominee of DTC, and the beneficial owners of the Book-Entry Offered Certificates will not be recognized as Certificateholders under the Trust and Servicing Agreement. Beneficial owners of the Book-Entry Offered Certificates will be permitted to exercise the rights of Certificateholders under the Trust and Servicing Agreement only indirectly through the participants, which in turn will exercise their rights through DTC.
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DTC has advised us that it will take any action permitted to be taken by a Holder of a Book-Entry Offered Certificate, including the presentation of Book-Entry Offered Certificates for exchange as described below, only at the direction of one or more DTC Participants to whose DTC accounts interests in the related Global Certificates are credited, and only in respect of that portion of the aggregate principal amount of the Book-Entry Offered Certificates as to which each such DTC Participant has given such direction.
Although DTC, Euroclear and Clearstream, Luxembourg have implemented the foregoing procedures in order to facilitate transfers of interests in the Global Certificates among participants of DTC, Euroclear and Clearstream, Luxembourg, they are under no obligation to perform or continue to comply with those procedures, and such procedures may be discontinued at any time. Freddie Mac, the Master Servicer, the Special Servicer, the Trustee, the Custodian, the Certificate Administrator, the certificate registrar and the Placement Agents will not have any responsibility for the performance by DTC, Euroclear or Clearstream, Luxembourg or their respective direct or indirect participants of their respective obligations under the rules and procedures governing their operations.
The information in this offering circular concerning DTC, Euroclear and Clearstream, Luxembourg, and their book-entry systems, has been obtained from sources believed to be reliable. However, none of the Trust, Freddie Mac or the Placement Agents take any responsibility for the accuracy or completeness of the information obtained from these sources.
Offered Certificates initially issued in book-entry form will thereafter be issued in definitive form as “Definitive Offered Certificates” to applicable beneficial owners or their nominees, rather than to DTC or its nominee, only if—
we advise the Certificate Administrator in writing that DTC is no longer willing or able to properly discharge its responsibilities as depository with respect to those Certificates and we are unable to locate a qualified successor, or
we, at our option, elect to terminate the book-entry system through DTC with respect to those Certificates.
Upon the occurrence of either of the events described in the preceding sentence, the certificate registrar will be required to notify, in accordance with DTC’s procedures, all DTC Participants (as identified in a listing of DTC Participant accounts to which any Book-Entry Offered Certificates is credited) through DTC of the availability of definitive certificates with respect to the Book-Entry Offered Certificates. Upon surrender by DTC of the Book-Entry Offered Certificates, together with instructions for re-registration, the Certificate Administrator will execute, and the certificate registrar will authenticate and deliver, to the beneficial owners identified in those instructions the Definitive Offered Certificates to which they are entitled, and thereafter the Holders of those Definitive Offered Certificates will be recognized as Certificateholders under the Trust and Servicing Agreement.
To the extent that under the terms of the Trust and Servicing Agreement, it is necessary to determine whether any person is a beneficial owner of a Book-Entry Offered Certificate, the Certificate Administrator may make that determination based on a certificate of that person which must specify, in reasonable detail satisfactory to the Certificate Administrator, the Class and principal balance of the Book-Entry Offered Certificate beneficially owned. However, the Certificate Administrator may not knowingly recognize that person as a beneficial owner of a Book-Entry Offered Certificate if that person, to the actual knowledge of certain specified officers of the Certificate Administrator, acquired its interest in a Book-Entry Offered Certificate in violation of the restrictions set forth in the Trust and Servicing Agreement or if that person’s certification that it is a beneficial owner of a Book-Entry Offered Certificate is in direct conflict with information obtained by the Certificate Administrator from DTC and/or the DTC Participants.
Any Holder or beneficial owner of an Offered Certificate desiring to effect a sale, pledge or other transfer of that Certificate or any interest in that Certificate will be deemed to have agreed to indemnify the Mortgage Loan Seller, the Guarantor, the Placement Agents, the Trustee, the Custodian, the Certificate Administrator, the Master Servicer, the Special Servicer and the certificate registrar against any liability that may result if the sale, pledge or other transfer is not exempt from registration and/or qualification under the Securities Act and applicable state and foreign securities laws or is not made in accordance with such federal, state and foreign laws and the provisions of the Trust and Servicing Agreement.
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YIELD AND MATURITY CONSIDERATIONS
General
The yield on the Offered Certificates will depend on, among other things—
the price you pay for the Offered Certificates; and
the rate, timing and amount of distributions on the Offered Certificates.
The rate, timing and amount of payments on the Offered Certificates will depend on, among other things, and as applicable—
the Interest Rate for, and other payment terms of, the Offered Certificates;
the rate and timing of payments and collections on the Mortgage Loans;
the rate and timing of defaults, and the severity of losses, if any, on the Mortgage Loans;
the occurrence of an Asset Mismatch, an Interest Mismatch or a Termination Event;
the incurrence of any unanticipated Program Expenses;
the rate, timing, severity and allocation of other shortfalls and expenses that reduce amounts available for distribution on the Offered Certificates; and
servicing decisions with respect to the Mortgage Loans.
These factors cannot be predicted with any certainty. Accordingly, you may find it difficult to analyze the effect that these factors might have on the yield to maturity of the Offered Certificates.
The yield to maturity on the Offered Certificates will be highly sensitive to changes in the levels of LIBOR such that decreasing levels of LIBOR will have a negative effect on the yield to maturity of the Holders of such Certificates. In addition, prevailing market conditions may increase the interest rate margins above LIBOR at which comparable securities are being offered, which would cause the Offered Certificates to decline in value. Investors in the Offered Certificates should consider the risk that lower than anticipated levels of LIBOR could result in lower yield to investors than the anticipated yield and the risk that higher market interest rate margins above LIBOR could result in a lower value of the Offered Certificates. See “Risk Factors—Risks Related to the Certificates—Ongoing Investigations Concerning LIBOR Could Adversely Affect Your Investment in the Offered Certificates” in this offering circular.
In addition, the timing of a Workout or sale of the Defaulted Loans by the Special Servicer may adversely affect the yield to maturity on the Certificates. See “Risk Factors—Risks Related to the Certificates—Any Workout or Liquidation of a Defaulted Loan May Adversely Affect Your Investment in the Certificate” in this offering circular.
See also “Risk Factors—Risks Related to the Certificates—The Offered Certificates Have Uncertain Yields to Maturity” in this offering circular.
Rate and Timing of Principal Payments
The yield to maturity on any Offered Certificates purchased at a discount or a premium will be affected by the rate and timing of principal distributions made in reduction of the outstanding principal balances of those Certificates. In turn, the rate and timing of principal distributions that are paid or otherwise result in reduction of the outstanding principal balance of any Offered Certificates will be related, after the end of the Revolving Period, to the rate and timing of principal payments on or with respect to the Mortgage Loans. Finally, the rate and timing of principal payments on or with respect to the Mortgage Loans will be affected by amortization schedules of the Mortgage Loans, the dates on which balloon payments are due and the rate and timing of principal prepayments and other unscheduled collections on the Mortgage Loans, including for this purpose, collections made in connection with liquidations of the Mortgage Loans due to defaults, casualties or condemnations affecting the Mortgaged
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Properties, pay downs of the Mortgage Loans due to failure of the related Mortgaged Property to meet certain performance criteria or purchases or other removals of the Mortgage Loans from the Trust.
The extent to which the yields to maturity on the Offered Certificates may vary from the anticipated yields will depend upon the degree to which the Offered Certificates are purchased at a discount or premium and when, and to what degree payments of principal on the Mortgage Loans are in turn paid in a reduction of the outstanding principal balance of the Offered Certificates. If you purchase Offered Certificates at a discount, you should consider the risk that a slower than anticipated rate of principal payments on such certificates could result in an actual yield to you that is lower than your anticipated yield. If you purchase Offered Certificates at a premium, you should consider the risk that a faster than anticipated rate of principal payments on such certificates could result in an actual yield to you that is lower than your anticipated yield.
In general, the effect on an investor’s yield of principal payments on the Mortgage Loans occurring at a rate slower (or faster) than the rate anticipated by the investor during any particular period would not be fully offset by a subsequent like increase (or decrease) in the rate of those principal payments. Because the rate of principal payments on or with respect to the Mortgage Loans will depend on future events and a variety of factors, no particular assurance can be given as to that rate or the rate of principal prepayments in particular.
Delinquencies and Defaults on the Mortgage Loans
The rate and timing of delinquencies and defaults on the Mortgage Loans will affect—
the amount of distributions on your Offered Certificates,
the yield to maturity of your Offered Certificates,
the rate of principal distributions on your Offered Certificates, and
the weighted average lives of your Offered Certificates.
Delinquencies on the Mortgage Loans may result in shortfalls in distributions of interest and/or principal on your Offered Certificates for the current month. Although any shortfalls in distributions of interest may be made up on future Payment Dates, no interest would accrue on those shortfalls. Thus, any shortfalls in distributions of interest would adversely affect the yields to maturity of the Offered Certificates.
If—
you calculate the anticipated yield to maturity for your Offered Certificates based on an assumed rate of default and amount of losses on the Mortgage Loans that is lower than the default rate and amount of losses actually experienced, and
the additional losses result in a reduction of the total distributions on and/or the outstanding principal balance of your Offered Certificates,
then your actual yield to maturity will be lower than you calculated and could, under certain scenarios, be negative.
In addition, certain of the Mortgage Loans may have performance escrows or letters of credit pursuant to which the funds held in escrow or proceeds of such letters of credit may be applied to reduce the principal balance of such Mortgage Loans if certain performance triggers are not satisfied. This circumstance would have the same effect on the relevant Class of Offered Certificates as a partial prepayment on such Mortgage Loans without payment of a prepayment premium.
Relevant Factors
The following factors, among others, will affect the rate and timing of principal payments and defaults and the severity of losses on or in respect of the Mortgage Loans:
prevailing interest rates;
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the terms of the Mortgage Loans, including (i) provisions that impose prepayment lockout periods or require yield maintenance charges or static prepayment premiums, (ii) amortization terms that require balloon payments, (iii) due on sale/encumbrance provisions and (iv) any provisions requiring draws on letters of credit or escrowed funds to be applied to principal;
the demographics and relative economic vitality of the areas in which the Mortgaged Properties are located;
the general supply and demand for multifamily rental space of the type available at the Mortgaged Properties in the areas in which the Mortgaged Properties are located;
the quality of management of the Mortgaged Properties;
the servicing of the Mortgage Loans;
changes in tax laws; and
other opportunities for investment.
See “Risk Factors—Risks Related to the Mortgage Loans”, “Description of the Mortgage Loans”, “The Mortgage Loan Purchase, Trust and Servicing Agreement” and “Yield and Maturity Considerations” in this offering circular.
The rate of prepayment on the 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 the annual rate at which a Mortgage Loan accrues interest, the related Borrower may have an increased incentive to refinance the Mortgage Loan. Conversely, to the extent prevailing market interest rates exceed the annual rate at which a Mortgage Loan accrues interest, the related Borrower may be less likely to prepay the Mortgage Loan voluntarily.
Depending on prevailing market interest rates, the outlook for market interest rates and economic conditions generally, some Borrowers may sell their Mortgaged Properties in order to realize their equity in their Mortgaged Properties, to meet cash flow needs or to make other investments. In addition, some Borrowers may be motivated by U.S. federal and state tax laws, which are subject to change, to sell their Mortgaged Properties prior to the exhaustion of tax depreciation benefits.
Certain of the Borrowers may be partnerships. Under certain circumstances, the bankruptcy of the general partner in a partnership may result in the dissolution of the partnership. The dissolution of a Borrower partnership, the winding-up of its affairs and the distribution of its assets could result in an acceleration of its payment obligations under the related Mortgage Loan.
In addition, we may have the option to purchase all of the Mortgage Loans at the Par Purchase Price and terminate the Trust if on any Remaining Term Payment Date the aggregate Stated Principal Balance of the Mortgage Loans is less than 10% of the Program Size. The yield on the Offered Certificates will also be affected by our purchase of the Mortgage Loans.
The Trust nor any other party makes no representation or warranty regarding:
the particular factors that will affect the rate and timing of prepayments and defaults on the Mortgage Loans;
the relative importance of those factors;
the percentage of the total principal balance of the Mortgage Loans that will be prepaid or as to which a default will have occurred as of any particular date;
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whether the Mortgage Loans that are in a prepayment lockout period, including any part of that period when defeasance is allowed, will be prepaid as a result of involuntary liquidations upon default or otherwise during that period; or
the overall rate of prepayment or default on the Mortgage Loans.
THE MORTGAGE LOAN PURCHASE, TRUST AND SERVICING AGREEMENT
General
The Certificates will be issued, the Trust will be created and the Mortgage Loans will be purchased and sold by the Trust and serviced and administered under a Mortgage Loan Purchase, Trust and Servicing Agreement, to be dated as of February 1, 2017 (the “Trust and Servicing Agreement”), among the Mortgage Loan Seller, the Guarantor, the Master Servicer, the Special Servicer, the Trustee, the Custodian and the Certificate Administrator. Subject to meeting certain requirements, each originator has the right and is expected to appoint itself or its affiliate as the Sub-Servicer of the Mortgage Loans it originated.
The Certificate Administrator will provide a copy of the Trust and Servicing Agreement to a prospective or actual Holder or beneficial owner of a Certificate, upon written request from such party or a Placement Agent and the completion of an appropriate confidentiality agreement in the form attached to the Trust and Servicing Agreement and, at the Certificate Administrator’s discretion, payment of a reasonable fee for any expenses. The Trust and Servicing Agreement will also be made available by the Certificate Administrator on its website, at the address set forth under “Description of the Certificates—Reports to Certificateholders; Available Information” in this offering circular.
Master Servicer, Special Servicer, Trustee and Custodian.
Freddie Mac will initially act as Master Servicer, Special Servicer, Trustee and Custodian.
Freddie Mac, as the Master Servicer, will be generally responsible for the master servicing and primary servicing functions with respect to the Mortgage Loans and, if applicable, Defaulted Loans. Additionally, Freddie Mac may from time to time perform some of its servicing obligations under the Trust and Servicing Agreement through one or more third-party vendors that provide servicing functions such as appraisals, environmental assessments, property condition assessments, property management, real estate brokerage services and other services necessary in the routine course of acquiring, managing and disposing of Defaulted Loans. Freddie Mac will, in accordance with its internal procedures and applicable law, monitor and review the performance of any third-party vendors retained by it to perform servicing functions, and Freddie Mac will remain liable for its servicing obligations under the Trust and Servicing Agreement as if Freddie Mac had not retained any such vendors.
Freddie Mac, as the Special Servicer, will, among other things, oversee the resolution of Defaulted Loans, as described below.
Freddie Mac, as the Custodian, will hold the mortgage files related to the Mortgage Loans on behalf of the Trustee and the Certificateholders, and will have primary responsibility for custody services of original documents evidencing the Mortgage Loans. In connection with a sale of the Mortgage Loans to the Mortgage Loan Seller and the securitization of such Mortgage Loans, the Custodian will deliver the related mortgage file to a designee of the Mortgage Loan Seller that signs a bailee agreement in the form provided in the Trust and Servicing Agreement, as described under “—Mortgage Loan Seller Purchase Option” below.
See “Freddie Mac” in this offering circular.
Certificate Administrator U.S. Bank National Association (“U.S. Bank”) will act as Certificate Administrator (the “Certificate
Administrator”) under the Trust and Servicing Agreement. U.S. Bancorp, with total assets exceeding $454 billion as of September 30, 2016, is the parent company of U.S. Bank, the fifth largest commercial bank in the United States.
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As of September 30, 2016, U.S. Bancorp served approximately 18 million customers and operated over 3,000 branch offices in 25 states. A network of specialized U.S. Bancorp offices across the nation provides a comprehensive line of banking, brokerage, insurance, investment, mortgage, trust and payment services products to consumers, businesses, and institutions.
U.S. Bank has one of the largest corporate trust businesses in the country with office locations in 54
domestic and 2 international cities. The Trust and Servicing Agreement will be administered from U.S. Bank’s corporate trust office located at One Federal Street, 3rd Floor, Mail code EX-MA-FED, Boston, Massachusetts 02110 (and for certificate transfer services, 111 East Fillmore Avenue, St. Paul, Minnesota 55107, Attention: Bondholder Services – FMPRE 2017–KT01). U.S. Bank has provided corporate trust services since 1924. As of September 30, 2016, U.S. Bank was acting as trustee with respect to over 88,000 issuances of securities with an aggregate outstanding principal balance of over $3.5 trillion. This portfolio includes corporate and municipal bonds, mortgage-backed and asset-backed securities and collateralized debt obligations.
The Certificate Administrator is required to make each monthly statement available to the
Certificateholders via the Certificate Administrator’s Reporting Website at www.usbank.com/abs. Certificateholders with questions may direct them to the Certificate Administrator’s bondholder services group at (800) 934-6802. As of September 30, 2016, U.S. Bank (and its affiliate U.S. Bank Trust National Association) was acting as trustee, paying agent and certificate registrar on 324 issuances of commercial mortgage backed securities with an outstanding aggregate principal balance of approximately $162,014,200.
Since 2014 various plaintiffs or groups of plaintiffs, primarily investors, have filed claims against U.S.
Bank, in its capacity as trustee or successor trustee (as the case may be) under certain residential mortgage backed securities (“RMBS”) trusts. The plaintiffs or plaintiff groups have filed substantially similar complaints against other RMBS trustees, including Deutsche Bank, Citibank, HSBC, Bank of New York Mellon and Wells Fargo. The complaints against U.S. Bank allege the trustee caused losses to investors as a result of alleged failures by the sponsors, mortgage loan sellers and servicers for these RMBS trusts and assert causes of action based upon the trustee’s purported failure to enforce repurchase obligations of mortgage loan sellers for alleged breaches of representations and warranties concerning loan quality. The complaints also assert that the trustee failed to notify securityholders of purported events of default allegedly caused by breaches of servicing standards by mortgage loan servicers and that the trustee purportedly failed to abide by a heightened standard of care following alleged events of default.
Currently U.S. Bank is a defendant in multiple actions alleging individual or class action claims against the
trustee with respect to multiple trusts as described above with the most substantial case being: BlackRock Balanced Capital Portfolio et al v. U.S. Bank National Association, No. 605204/2015 (N.Y. Sup. Ct.) (class action alleging claims with respect to approximately 794 trusts) and its companion case BlackRock Core Bond Portfolio et al v. U.S. Bank National Association, No. 14-cv-9401 (S.D.N.Y.). Some of the trusts implicated in the aforementioned Blackrock cases, as well as other trusts, are involved in actions brought by separate groups of plaintiffs related to no more than 100 trusts per case.
U.S. Bank cannot make assurances as to the outcome of any of the litigation, or the possible impact of these
litigations on the Certificate Administrator or the RMBS trusts. However, U.S. Bank denies liability and believes that it has performed its obligations under the RMBS trusts in good faith, that its actions were not the cause of losses to investors and that it has meritorious defenses, and it intends to contest the plaintiffs’ claims vigorously.
Under the terms of the Trust and Servicing Agreement, U.S. Bank is responsible for certificate
administration, which includes pool performance calculations, distribution calculations and the preparation of monthly distribution reports. The distribution reports will be reviewed by an analyst and then by a supervisor using a transaction-specific review spreadsheet. Any corrections identified by the supervisor will be corrected by the analyst and reviewed by the supervisor. The supervisor also will be responsible for the timely delivery of reports to the administration unit for processing all cashflow items. As Certificate Administrator, U.S. Bank is also responsible for the preparation and reporting of information required by U.S. federal tax law on behalf of the issuing entity. In the past three years, the Certificate Administrator has not made material changes to the policies and procedures of its certificate administration services for commercial mortgage backed securities.
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The foregoing information set forth in this section “—Certificate Administrator” has been provided by U.S. Bank. Neither we nor any other person other than U.S. Bank makes any representation or warranty as to the accuracy or completeness of such information.
Assignment of Mortgage Loans on the Closing Date and During the Revolving Period
On the Closing Date, in consideration for the Certificates, the Mortgage Loan Seller will transfer the Mortgage Loans in the Initial Pool to the Trustee (in trust for the benefit of the Certificateholders) and deposit the Initial Deposit Amount into the Collection Account. After the Closing Date and during the remainder of the Revolving Period, the Master Servicer may apply the Principal Collections to purchase additional Mortgage Loans on behalf of the Trust; provided that such purchase may not cause the aggregate outstanding principal balance of the Mortgage Pool to exceed the Program Size.
In connection with each such transfer, on the applicable Transfer Date, the Mortgage Loan Seller will be required to deliver to the Master Servicer, the Special Servicer, the Trustee, the Custodian and the Certificate Administrator the Mortgage Loan Schedule or a Supplement to Mortgage Loan Schedule, setting forth information relating to such Mortgage Loans that will be transferred to the Trust, and the Mortgage Loan Seller will be required to deliver to the Custodian the mortgage files for such Mortgage Loans that will be transferred to the Trust. The Custodian will be required to deliver to the Certificate Administrator, the Trustee, the Master Servicer and the Special Servicer a Custodial Exception Report setting forth any Defects and the nature of such Defects with respect to such Mortgage Loans within 90 days after each such Transfer Date. The Custodian will not be required to verify the conformity of any documents with the Mortgage Loan Schedule or Supplement to Mortgage Loan Schedule delivered in connection with any such transfer, except that such documents have been properly executed or received, have been recorded or filed (if recordation is specified for such document in the Trust and Servicing Agreement), appear to be related to the Mortgage Loans identified on the Mortgage Loan Schedule or Supplement to Mortgage Loan Schedule, appear to be what they purport to be, or have not been torn, mutilated or otherwise defaced.
In connection with each such transfer of the Mortgage Loans, the Mortgage Loan Seller will make (or will
be deemed to have made) the representation and warranty that each applicable Mortgage Loan meets the Eligibility Criteria and all of the representations and warranties set forth on Exhibit D to this offering circular, subject to, if applicable, any Approved Exceptions with respect to the related Mortgage Loans, and transfer (or will be deemed to have transferred) to the Trustee, without recourse, for the benefit of the Certificateholders, all the right, title and interest of the Mortgage Loan Seller to the Mortgage Loans identified on the Mortgage Loan Schedule or such Supplement to Mortgage Loan Schedule, as applicable, as more specifically provided for in the Trust and Servicing Agreement. In connection with any transfer of additional Mortgage Loans to the Trust during the Revolving Period, the Master Servicer will be required to withdraw Principal Collections in the Collection Account and pay to the Mortgage Loan Seller the Par Purchase Price for such additional Mortgage Loans. The Certificate Administrator will post the Mortgage Loan Schedule, each Supplement to Mortgage Loan Schedule and, if applicable, a list of Approved Exceptions on the Certificate Administrator’s Reporting Website. Mortgage Loan Seller Purchase Option
The Mortgage Loan Seller may at its option purchase all or any portion of the Mortgage Loans from the Trust from time to time at a price equal to the Par Purchase Price (the “Mortgage Loan Seller Purchase Option”) by delivering a notice of such purchase to the Master Servicer, the Trustee, the Custodian, the Certificate Administrator and the Special Servicer at least two Business Days prior to such purchase. The Mortgage Loan Seller will be required to deliver to the Certificate Administrator, the Trustee, the Custodian, the Master Servicer and the Special Servicer a copy of a Supplement to Mortgage Loan Schedule reflecting the purchase of the applicable Mortgage Loans on the applicable purchase date, and the Custodian will be required to release the related mortgage file to the Mortgage Loan Seller with respect to the Mortgage Loans upon confirmation of the deposit of the applicable Par Purchase Prices into the Collection Account on such purchase date. The Master Servicer will be required to take all commercially reasonable actions to cooperate with the Mortgage Loan Seller to effectuate its exercise of the Mortgage Loan Seller Purchase Option. Any Par Purchase Price for the Mortgage Loans paid by the Mortgage Loan Seller during the Revolving Period will not be available for distribution on the Certificates during the Revolving Period and will be applied by the Master Servicer to acquire additional Mortgage Loans on behalf of the Trust and the Certificateholders. In connection with a sale of the Mortgage Loans to the Mortgage Loan Seller and the
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securitization of such Mortgage Loans, the Custodian will deliver the related mortgage file to a designee of the Mortgage Loan Seller that signs a bailee agreement in the form provided in the Trust and Servicing Agreement.
Repurchase and Substitution of Mortgage Loans by the Mortgage Loan Seller Ineligible Loans. In the event that (i) the Directing Third Party, acting in a commercially reasonable
manner, determines that any Loan transferred to the Trust does not meet the Eligibility Criteria and delivers to the Mortgage Loan Seller, the Directing Investor (if the Directing Third Party is not the Directing Investor), the Master Servicer and the Special Servicer a notice of such determination and evidence supporting such determination within 30 days after the applicable Transfer Date and (ii) the Directing Investor (if the Directing Third Party is not the Directing Investor), acting in a commercially reasonable manner, does not disagree with such determination within 5 Business Days after receipt of all evidence supporting the Directing Third Party’s determination (such Mortgage Loan, an “Ineligible Loan” ), the Mortgage Loan Seller shall repurchase such Ineligible Loan or substitute such Ineligible Loan with one or more Qualified Substitute Mortgage Loans and pay any Substitution Shortfall Amount within 30 days after receiving such notice and evidence. Upon request from the Mortgage Loan Seller and/or the Directing Investor, the Directing Third Party shall promptly deliver to the Mortgage Loan Seller and/or the Directing Investor any additional evidence supporting its determination that any particular Loan does not meet the Eligibility Criteria. If the Directing Third Party does not request that the Mortgage Loan Seller repurchase or substitute an Ineligible Loan within 30 days after the applicable Transfer Date, as applicable, (i) such Mortgage Loan may not become an Ineligible Loan after such 30-day period, (ii) the Mortgage Loan Seller’s representation that such Mortgage Loan meets the Eligibility Criteria will be deemed to be true and correct, and (iii) the Mortgage Loan Seller will not be required to repurchase or substitute such Mortgage Loan due to any breach or alleged breach of such representation after such 30-day period. See “Description of the Mortgage Loans—Eligibility Criteria” in this offering circular.
Permitted Kick Out Loans. During the Revolving Period, the Directing Third Party may, within 30 days
after the Closing Date (in the case of the Mortgage Loans transferred to the Trust on the Closing Date) or the applicable Subsequent Transfer Date (in the case of any additional Mortgage Loans purchased by the Trust after the Closing Date), for any reason, require the Mortgage Loan Seller to repurchase any Mortgage Loans that, in the aggregate, do not equal more than the Permitted Kick Out Percentage of the total number of the Mortgage Loans (excluding any Ineligible Loans) purchased by the Trust (each, a “Permitted Kick Out Loan”) by delivering such request to the Mortgage Loan Seller (with a copy of such request to the Master Servicer, the Special Servicer, the Trustee and the Custodian). The Mortgage Loan Seller will be required to repurchase such Mortgage Loans or replace such Mortgage Loans with one or more Qualified Substitute Mortgage Loans and pay any Substitution Shortfall Amount within 30 days after receipt of such request from the Directing Third Party. Notwithstanding anything to the contrary in the Trust and Servicing Agreement, if the Directing Third Party does not request that the Mortgage Loan Seller repurchase or substitute a Mortgage Loan within 30 days after the Closing Date or the applicable Subsequent Transfer Date as described above, such Mortgage Loan may not become a Permitted Kick Out Loan after such 30-day period.
Defective Loans. If the Directing Third Party, the Master Servicer, the Special Servicer, the Trustee, the
Certificate Administrator, the Custodian or the Mortgage Loan Seller (A) discovers or receives notice alleging a Defect or (B) discovers or receives notice alleging a breach of any representation or warranty made with respect to a Mortgage Loan by the Mortgage Loan Seller under the Trust and Servicing Agreement (a “Breach”), such Person will be required to give written notice of such Defect or Breach to the Directing Third Party, the Master Servicer, the Special Servicer, the Trustee, the Certificate Administrator, the Custodian and the Mortgage Loan Seller. If such Defect or Breach materially and adversely affects the value of any Mortgage Loan or the interests of the Holders of any Class of Certificates as determined by the Directing Third Party (any such Defect or Breach, a “Material Document Defect” or a “Material Breach”, respectively), the Mortgage Loan Seller will be required, not later than (x) 90 days after receipt by the Mortgage Loan Seller of the related Repurchase Communication or (y) with respect to any Material Document Defect arising from a missing document as to which the Custodian mistakenly certified its possession of such document on the applicable Transfer Date under the Trust and Servicing Agreement, 30 days after receipt by the Mortgage Loan Seller of a Repurchase Communication (the periods specified in clauses (x) and (y) above, as applicable, the “Initial Resolution Period”), (1) to cure such Material Document Defect or Material Breach in all material respects, (2) to repurchase the affected Mortgage Loan at the applicable Par Purchase Price or
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(3) to substitute one or more Qualified Substitute Mortgage Loans for such affected Mortgage Loan and pay to the Master Servicer for deposit into the Collection Account any Substitution Shortfall Amount in connection therewith.
If (A) a Material Document Defect or Material Breach is capable of being cured, but not within the Initial
Resolution Period, (B) the Mortgage Loan Seller has commenced and is diligently proceeding with the cure of such Material Document Defect or Material Breach within the Initial Resolution Period, (C) such Material Document Defect or Material Breach is not with respect to any Mortgage Note (or lost note affidavit, indemnity or endorsement to the Mortgage Note), (D) the Mortgage Loan Seller has delivered to the Master Servicer, the Special Servicer, the Trustee and the Certificate Administrator, an officer’s certificate describing the reasons that the cure was not effected within the Initial Resolution Period and the actions that the Mortgage Loan Seller proposes to take to effect the cure and that states that the Mortgage Loan Seller anticipates the cure will be effected within the additional 90 day period, and (E) with respect to a Material Document Defect, such Mortgage Loan is not then a Defaulted Loan and the missing or defective document is not needed to adequately pursue the mortgagee’s rights prior to such time, then the Mortgage Loan Seller will be permitted an additional 90 days to cure such Material Document Defect or Material Breach.
The obligations of the Mortgage Loan Seller to cure, repurchase or substitute a Repurchase Loan pursuant
to the terms of the Trust and Servicing Agreement will be the sole remedies available to the Certificateholders, or the Trustee on behalf of the Certificateholders, with respect to any Repurchase Loan. The Master Servicer (if such Repurchase Loan is not a Defaulted Loan) or the Special Servicer (if such Repurchase Loan is a Defaulted Loan) will be required to, at the direction of the Directing Third Party, enforce the obligations of the Mortgage Loan Seller with respect to any Repurchase Loan described above. Any reasonable costs incurred by the Master Servicer in connection with such enforcement will be reimbursable to the Master Servicer as Program Expenses.
The Custodian will be required to review the mortgage files delivered in connection with any substitution of Mortgage Loans described in this “—Repurchase and Substitution of Mortgage Loans by the Mortgage Loan Seller” section and deliver a Custodial Exception Report setting forth the nature of any Defect with respect to any such Mortgage Loan to the Certificate Administrator, the Trustee, the Master Servicer and the Special Servicer. The Custodian will not be required to verify the conformity of any document with the Supplement to Mortgage Loan Schedule delivered in connection with any such substitution, except that such documents have been properly executed or received, have been recorded or filed (if recordation is specified for such document in the Trust and Servicing Agreement), appear to be related to the Mortgage Loans identified on the Supplement to Mortgage Loan Schedule, appear to be what they purport to be, or have not been torn, mutilated or otherwise defaced.
The Certificate Administrator will not monitor or be required to monitor the satisfaction of any of the requirements related to Ineligible Loans, Permitted Kick Out Loans or Defective Loans.
Servicing Responsibilities
The Master Servicer and the Special Servicer, as applicable, must diligently service and administer the Mortgage Loans owned by the Trust for which it is responsible under the Trust and Servicing Agreement directly, through sub servicers or through an affiliate as provided in the Trust and Servicing Agreement, in accordance with—
any and all applicable laws,
the express terms of the Trust and Servicing Agreement,
the express terms of the respective Mortgage Loans and any applicable intercreditor, co-lender or similar agreements, and
to the extent consistent with the foregoing, the Servicing Standard.
In general, the Master Servicer will be responsible for the servicing and administration of—
all Mortgage Loans as to which no Servicing Transfer Event has occurred, and
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all Corrected Loans as to which no new Servicing Transfer Event has occurred.
If a Servicing Transfer Event occurs with respect to any Mortgage Loan, that Mortgage Loan will not be considered to be a Corrected Loan until all applicable Servicing Transfer Events have ceased to exist.
In general, subject to specified requirements and certain consultations, consents and approvals of the directing investor contained in the Trust and Servicing Agreement, the Special Servicer will be responsible for the servicing and administration of each Mortgage Loan as to which a Servicing Transfer Event has occurred and is continuing. The Special Servicer will also be responsible for the administration of each Defaulted Loan in the Trust.
Despite the foregoing, the Trust and Servicing Agreement will require the Master Servicer:
to continue to make all calculations and, subject to the Master Servicer’s timely receipt of information from the Special Servicer, prepare and deliver to the Certificate Administrator all reports required with respect to any specially serviced assets; and
otherwise, to render other incidental services with respect to any specially serviced assets. The Master Servicer will transfer servicing of a Mortgage Loan to the Special Servicer upon the occurrence
of a Servicing Transfer Event with respect to that Mortgage Loan. The Special Servicer will return the servicing of that Mortgage Loan to the Master Servicer, and that Mortgage Loan will be considered to be a Corrected Loan, if and when all Servicing Transfer Events with respect to that Mortgage Loan cease to exist and that Mortgage Loan has become a Corrected Loan.
For a more detailed description of the Freddie Mac Servicing Practices, see “Mortgage Loan Purchase and
Servicing” in this offering circular.
Servicing and Other Compensation and Payment of Expenses
The Servicing Fee. The principal compensation to be paid to the Master Servicer with respect to its master servicing activities will be a Servicing Fee consisting of a Master Servicing Fee and a Sub-Servicing Fee. With respect to each Mortgage Loan, the Servicing Fee will accrue at the Servicing Fee Rate, computed on the basis of the Stated Principal Balance of such Mortgage Loan and for the same period respecting which any related interest payment due on such Mortgage Loan (or any portion of such interest payment) to which the Trust is entitled is computed. The Servicing Fee will be payable monthly, on a Mortgage Loan-by-Mortgage Loan basis, as a Program Expense.
Special Servicing Fee. The principal compensation to be paid to the Special Servicer with respect to its special servicing activities will be the Special Servicing Fee. With respect to each Defaulted Loan, the Special Servicing Fee will accrue at the Special Servicing Fee Rate and will be computed on the basis of the Stated Principal Balance of such Defaulted Loan and for the same period respecting which any related interest payment due on such Defaulted Loan (or any portion of such interest payment) to which the Trust is entitled is computed. The Special Servicing Fee will be payable monthly, on a Mortgage Loan-by-Mortgage Loan basis, as a Program Expense. The right of the Special Servicer to receive the Special Servicing Fees may not be transferred in whole or in part except in connection with the transfer of all of the Special Servicer’s responsibilities and obligations under the Trust and Servicing Agreement.
Workout Fee. As compensation, the Special Servicer will also be entitled to servicing compensation in the form of a Workout Fee with respect to each Corrected Loan at the Workout Fee Rate.
If the Special Servicer is terminated (other than for cause), it will retain the right to receive any and all Workout Fees otherwise payable to it with respect to any Mortgage Loan:
(1) that became a Corrected Loan during the period that it acted as Special Servicer and that was a Corrected Loan at the time of such termination; or
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(2) that becomes a Corrected Loan subsequent to the time of such termination if the Special Servicer resolved the circumstances and/or conditions (including by way of a modification of the Mortgage Loan) which caused the subject Mortgage Loan to become a Defaulted Loan but the Mortgage Loan had not, when the Special Servicer was terminated, become a Corrected Loan because the related Borrower had not then made three consecutive monthly debt service payments (but the related Borrower then makes those three monthly debt service payments, and the Mortgage Loan subsequently becomes a Corrected Loan as a result of the Borrower making those three monthly debt service payments);
in each case until the Workout Fee for any such Mortgage Loan ceases to be payable in accordance with the terms under the Trust and Servicing Agreement (and the successor Special Servicer will not be entitled to any portion of such Workout Fees).
Although workout fees are intended to provide the Special Servicer with an incentive to better perform its duties, any Workout Fee will be paid as a Program Expense, and the payment of any Workout Fee will reduce amounts payable to the Certificateholders.
Liquidation Fee. The Special Servicer will also be entitled to a Liquidation Fee, which will be payable to the Special Servicer with respect to each Defaulted Loan as to which the Special Servicer receives any Defaulted Loan Proceeds, subject to the exceptions set forth in the definition of Liquidation Fee. As to each Defaulted Loan, the Liquidation Fee will be payable out of, and will be calculated by application of a Liquidation Fee Rate of the Defaulted Loan Proceeds received with respect to such Defaulted Loan (net of related costs and expenses).
Although Liquidation Fees are intended to provide the Special Servicer with an incentive to better perform its duties, any Liquidation Fee will be paid as a Program Expense, and the payment of any Liquidation Fee will reduce amounts payable to the Certificateholders.
Additional Servicing Compensation. As compensation for its activities hereunder, the Special Servicer will also be entitled to additional fees in the form of Penalty Charges on each Defaulted Loan (A) when and to the extent that all amounts then due and payable with respect to such Defaulted Loan have been paid and (B) the Trust Fund has been reimbursed for any Program Expenses (including any Special Servicing Fees, Workout Fees and Liquidation Fees) incurred since the Closing Date with respect to such Defaulted Loan and previously paid from a source other than Penalty Charges on such Defaulted Loan. The Special Servicer will be required to pay out of its own funds all expenses incurred by it in connection with its servicing activities under the Trust and Servicing Agreement (including, without limitation, payment of any amounts due and owing to any of its sub-servicers), if and to the extent such expenses are not payable directly out of the Collection Account, and the Special Servicer will not be entitled to reimbursement therefor except as expressly provided under the Trust and Servicing Agreement.
The Special Servicer will be entitled to that portion, if any, of a Penalty Charge collected on a Defaulted Loan to the extent accrued subsequent to a Servicing Transfer Event and prior to the date such Defaulted Loan became a Corrected Loan and (B) if the Master Servicer has partially waived any Penalty Charge part of which accrued subsequent to the occurrence of a Servicing Transfer Event and prior to the date such Mortgage Loan became a Corrected Loan, any collections in respect of such Penalty Charge will be shared pro rata by the Master Servicer and the Special Servicer based on the respective portions of such Penalty Charge to which they would otherwise have been entitled.
The Master Servicer will be entitled to collect from the related Borrower and retain and will not be required to deposit in the Collection Account the following as additional servicing compensation: (A) any Transfer Fees, Transfer Processing Fees, defeasance fees or collateral substitution fees collected on or with respect to any Mortgage Loans, (B) 100% of all Penalty Charges actually collected on each Mortgage Loan that is not a Defaulted Loan and (C) all charges for beneficiary statements or demands, assumption fees, modification fees, extension fees and amounts collected for checks returned for insufficient funds.
Removal of a Sub-Servicer
Freddie Mac, in its capacity as Master Servicer, may terminate any Sub-Servicer pursuant to the Guide. If Freddie Mac is not then acting as Master Servicer, Freddie Mac will have the right to direct any Third Party Master
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Servicer to, terminate any Sub-Servicer with respect to any Mortgage Loan if (A) Freddie Mac determines, in accordance with the provisions of the Guide that such Sub-Servicer should not service such Mortgage Loan or (B) Freddie Mac determines, in its reasonable discretion, that a conflict of interest exists between the Sub-Servicer and the related Borrower such that the Sub-Servicer should not service the related Mortgage Loan. If a Sub-Servicer is terminated pursuant to clauses (A) or (B) above, then such Sub-Servicer will have the right to sell its sub-servicing to either such Third Party Master Servicer or another sub-servicer acceptable to Freddie Mac, which acceptance may not be unreasonably withheld or delayed. Except as otherwise expressly set forth in the Trust and Servicing Agreement, the Trust will not be liable for any costs or expenses associated with the termination of any Sub-Servicer.
Investment of Funds in the Accounts
The Master Servicer may direct any depository institution maintaining any Master Servicer Account for the Master Servicer and the Certificate Administrator may direct any depository institution maintaining the Distribution Account, to invest the funds held therein solely in one or more Permitted Investments. All such Permitted Investments will be required to be held to maturity, unless payable on demand.
Interest and investment income realized on funds and deposited in each of the Master Servicer Accounts to the extent of the Net Investment Earnings, if any, with respect to such account for each period from any Payment Date to the immediately succeeding Master Servicer Remittance Date will be for the sole and exclusive benefit of the Master Servicer to the extent not required to be paid to the related Borrower and will be subject to its withdrawal, or withdrawal at its direction. Interest and investment income realized on funds and deposited in the Distribution Account, to the extent of the Net Investment Earnings, if any, with respect to such account for each period from any Payment Date to the immediately succeeding Master Servicer Remittance Date, will be for the sole and exclusive benefit of the Certificate Administrator and will be subject to its withdrawal on the immediately succeeding Payment Date. If any loss is incurred in respect of any Permitted Investment directed to be made by the Master Servicer or the Certificate Administrator, as applicable, in connection with funds on deposit in any of the Master Servicer Accounts (in the case of the Master Servicer) or the Distribution Account (in the case of the Certificate Administrator) maintained by the Master Servicer or the Certificate Administrator, then the Master Servicer or the Certificate Administrator, as applicable, will be required to deposit therein, no later than the next succeeding Master Servicer Remittance Date (or, in the case of the Certificate Administrator and the Distribution Account, no later than the next succeeding Payment Date), without right of reimbursement, the amount of the Net Investment Loss, if any, with respect to such account for the period from and including the immediately preceding Payment Date (or, in the case of the Certificate Administrator and the Distribution Account, from and including the first Business Day following the immediately preceding Payment Date) to and including the Master Servicer Remittance Date (or, in the case of the Certificate Administrator and the Distribution Account, to and including the subject Payment Date). However, neither the Master Servicer or the Certificate Administrator will be required to deposit the amount of the Net Investment Loss in accordance with the immediately preceding sentence if such loss is incurred solely as a result of the insolvency of the federal or state chartered depository institution or trust company that holds such Investment Account, so long as (i) the depository institution or trust company holding such account (A) satisfied the requirements set forth in the definition of “Eligible Account” at the time such investment was made and (B) is neither the party required to maintain such account nor an affiliate thereof and (ii) such insolvency occurs within 30 days of the date on which such depository institution or trust company no longer satisfies the requirements set forth in the definition of “Eligible Account”.
Transfer of Servicing Between Master Servicer and Special Servicer
Defaulted Loans. With respect to any Mortgage Loan as to which a Servicing Transfer Event has occurred (such Mortgage Loan, “Defaulted Loan”), the Master Servicer will transfer its servicing responsibilities to the Special Servicer, but will continue to receive payments on such Mortgage Loan (including amounts collected by the Special Servicer), to make certain calculations with respect to such Mortgage Loan and to make remittances and prepare and deliver certain reports to the Certificate Administrator with respect to such Mortgage Loan.
The Special Servicer will return the full servicing of a Defaulted Loan to the Master Servicer when such Defaulted Loan becomes a Corrected Loan.
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Purchase Option; Sale of Defaulted Loans. Upon determining that a Servicing Transfer Event has occurred with respect to any Mortgage Loan, the Master Servicer will be required to promptly give notice thereof to the Mortgage Loan Seller, the Special Servicer, the Trustee, Freddie Mac and the Directing Investor, and the Mortgage Loan Seller will have the right to purchase such Defaulted Loan at the Par Purchase Price within five Business Days of receipt of such notice from the Master Servicer. In the event that the Mortgage Loan Seller does not purchase such Defaulted Loan within such time period, the Special Servicer may, with the consent of the Directing Investor, implement workout procedures consistent with the Asset Status Report and the Freddie Mac Servicing Practices (each, a “Workout”) or may sell such Mortgage Loan at an auction conducted in accordance with the Auction Procedures (each, a “Standard Auction”). Freddie Mac, any Certificateholder or any beneficial owner of Certificates will have the right to bid in any such Standard Auction. If (i) the Special Servicer is unable to obtain a buyer for a Defaulted Loan pursuant to a Standard Auction within 90 days after the commencement of such Standard Auction or (ii) the Directing Investor waives the requirement that the Special Servicer conduct a Standard Auction, the Special Servicer will be permitted offer to sell such Mortgage Loan to a single purchaser or may dispose of such Mortgage Loan pursuant to a process agreed upon by the Special Servicer and the Directing Investor (the “Defaulted Loan Provision”).
Directing Investor and Directing Third Party
As and to the extent described under “The Mortgage Loan Purchase, Trust and Servicing Agreement—Asset Status Report” in this offering circular, the Directing Investor will have the right to consent to a Workout of a Defaulted Loan in accordance with the Trust and Servicing Agreement. However, so long as an Affiliated Borrower Loan Event exists with respect to any Mortgage Loan, the Directing Investor will not have any consent right with respect to any matters related to the related Affiliated Borrower Loan and the Directing Investor’s right to access certain information relating to the related Affiliated Borrower Loan will be restricted, as described under “Description of the Certificates” in this offering circular.
The “Directing Investor” will be:
(a) the Holder or Holders of a majority of the Class D Certificates (including Certificates held by Freddie Mac) by Certificate Principal Balance or their designee, until the Class Principal Balance of the Class D Certificates is less than 25% of the Original Class Principal Balance of the Class D Certificates;
(b) if the Class Principal Balance of the Class D Certificates is less than 25% of the Original Class Principal Balance of the Class D Certificates, (i) the Holder or Holders of a majority of the Class C Certificates (excluding Certificates held by Freddie Mac) by Certificate Principal Balance or their designee or (ii) if Freddie Mac is the sole Holder of the Class C Certificates, Freddie Mac, in each case, until the Class Principal Balance of the Class C Certificates is less than 25% of the Original Class Principal Balance of the Class C Certificates;
(c) if the Class Principal Balance of the Class C Certificates is less than 25% of the Original Class Principal Balance of the Class C Certificates, (i) the Holder or Holders of a majority of the Class B Certificates (excluding Certificates held by Freddie Mac) by Certificate Principal Balance or their designee or (ii) if Freddie Mac is the sole Holder of the Class B Certificates, Freddie Mac, in each case, until the Class Principal Balance of the Class B Certificates is less than 25% of the Original Class Principal Balance of the Class B Certificates; and
(d) if the Class Principal Balance of the Class B Certificates is less than 25% of the Original Class Principal Balance of the Class B Certificates, Freddie Mac.
Except as described in the following paragraph, the Directing Investor will have consent rights to a Workout with respect to a Defaulted Loan in accordance with the Trust and Servicing Agreement.
However, or so long as an Affiliated Borrower Loan Event exists with respect to any Mortgage Loan, (i) none of the Trustee, the Certificate Administrator, the Master Servicer or the Special Servicer will be permitted to seek, accept or take any action based on the approval, consent or consultation of the Directing Investor with respect to any matters related to the related Affiliated Borrower Loan and (ii) the Certificate Administrator will not be permitted to provide to the Directing Investor any Asset Status Report, inspection report, Appraisal or internal valuation related to such Affiliated Borrower Loan, and the Master Servicer, except as otherwise provided in the Trust and Servicing Agreement. In addition, for so long as an Affiliated Borrower Loan Event exists with respect to
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any Mortgage Loan, the Trustee, the Certificate Administrator, the Master Servicer and the Special Servicer may withhold from the Directing Investor any information with respect to such Mortgage Loan not generally available to all Certificateholders that the Trustee, the Certificate Administrator, the Master Servicer or the Special Servicer, as applicable, determines, in its sole discretion, is related to the Workout of such Mortgage Loan.
An “Affiliated Borrower Loan Event” will exist with respect to a Mortgage Loan (an “Affiliated Borrower Loan”) if at any time the Directing Investor, any of its managing members or any of its affiliates becomes or is a Borrower (or any proposed replacement borrower) or a Restricted Mezzanine Holder or becomes aware that the Directing Investor, any of its managing members or any of its affiliates is an affiliate of any Borrower (or any proposed replacement borrower) or a Restricted Mezzanine Holder with respect to any Mortgage Loan.
It is anticipated that the initial Directing Investor will be Freddie Mac. As of the Closing Date, no Affiliated Borrower Loan Event is expected to exist with respect to the initial Directing Investor.
The Directing Third Party will have certain rights under the Trust and Servicing Agreement, including the right to require the Mortgage Loan Seller to repurchase or substitute a Repurchase Loan.
The “Directing Third Party” will be the Directing Investor; provided that if Freddie Mac is the Directing Investor, the Directing Third Party will be (i) the Holder or Holders of a majority of the Class C Certificates (excluding Certificates held by Freddie Mac) by Certificate Principal Balance or their designee until the Class Principal Balance of the Class C Certificates is less than 25% of the Original Class Principal Balance of the Class C Certificates, (ii) if the Class Principal Balance of the Class C Certificates is less than 25% of the Original Class Principal Balance of the Class C Certificates, the Holder or Holders of a majority of the Class B Certificates (excluding Certificates held by Freddie Mac) by Certificate Principal Balance or their designee, until the Class Principal Balance of the Class B Certificates is less than 25% of the Original Class Principal Balance of the Class B Certificates, and (iii) if the Class Principal Balance of the Class B Certificates is less than 25% of the Original Class Principal Balance of the Class B Certificates, Freddie Mac. It is expected that the initial Directing Third Party will be a fund affiliated with Cerberus Capital Management.
Asset Status Report
The Special Servicer will be required, within 60 days after receipt by the Special Servicer of the information reasonably required by the Special Servicer after a Servicing Transfer Event for a Mortgage Loan to deliver to the Master Servicer, the Directing Investor and Freddie Mac (if Freddie Mac is not then acting as Master Servicer) (together with all reports documents and other materials the Special Servicer utilized or relied upon in preparing such report) a report (the “Asset Status Report”) with respect to such defaulted Loan and the related Mortgaged Property; provided that so long as Freddie Mac is acting as Special Servicer, the Special Servicer will be required to prepare and deliver such Asset Status Report only if (i) such Defaulted Loan has not been sold to the Mortgage Loan Seller or has not been sold at the Standard Auction or pursuant to the Defaulted Loan Provision and (ii) the Directing Investor’s consent to a Workout of such Defaulted Loan is pending.
Such Asset Status Report will set forth the following information, to the extent reasonably determinable:
summary of the status of such Defaulted Loan;
a discussion of the legal and environmental considerations reasonably known to such Special Servicer, consistent with the Servicing Standard, that are applicable to the exercise of remedies as aforesaid and to the enforcement of any related guaranties or other collateral for the related Mortgage Loan and whether outside legal counsel has been retained;
the most current rent roll and income or operating statement available for the related Mortgaged Property;
the Appraised Value of the Mortgaged Property, together with the assumptions used in the calculation thereof to the extent the Appraisal is less than 12 months old;
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a recommendation by such Special Servicer as to how such Defaulted Loan might be returned to performing status, returned to the Master Servicer for regular servicing or otherwise realized upon;
a summary of any proposed actions and a discussion of whether or not taking such action is reasonably likely to produce a greater recovery on a present value basis than not taking such action;
a status report on any foreclosure actions or other proceedings undertaken with respect to such Mortgaged Property, any proposed workouts with respect thereto and the status of any negotiations with respect to such workouts, and an assessment of the likelihood of additional events of default thereon; and
such other information as such Special Servicer deems relevant in light of the Servicing Standard.
Subject to the limitations described under “—Directing Investor and Directing Third Party” above in the case of any Affiliated Borrower Loan, if, within ten Business Days of receiving an Asset Status Report, the Directing Investor such Asset Status Report in writing or, upon delivery of a finalized Asset Status Report as described in the following paragraph, the Special Servicer will be required to implement the recommended action as outlined in such Asset Status Report; provided, however, that in the event that Freddie Mac is not acting as Special Servicer, the Third Party Special Servicer will not be permitted to implement the recommended action as outlined in such Asset Status Report without Freddie Mac’s written approval; provided, further, that such Third Party Special Servicer may not take any action that is contrary to applicable law or the terms of the applicable Loan Documents. If the Directing Investor or Freddie Mac (if Freddie Mac is not acting as Special Servicer) disapproves such Asset Status Report in writing within such ten Business Days, the Special Servicer will be required to revise such Asset Status Report and deliver to the Directing Investor, Freddie Mac (if Freddie Mac is not acting as Master Servicer or Special Servicer) and the Master Servicer a new Asset Status Report as soon as practicable, but in no event later than 30 days after such disapproval.
The Special Servicer will be required to revise such Asset Status Report as described in the previous paragraph until the earliest of (i) the failure of the Directing Investor or Freddie Mac (in the case of any Third Party Special Servicer) to disapprove such revised Asset Status Report in writing within ten Business Days of receiving such revised Asset Status Report; (ii) a determination by the Special Servicer that an extraordinary event has occurred with respect to the related Mortgaged Property or (iii) the passage of 60 days from the date of preparation of the first Asset Status Report, at which time the most recent Asset Status Report will be deemed approved as final. The Special Servicer will be required to deliver such finalized Asset Status Report to the Directing Investor, Freddie Mac, the Master Servicer, the Trustee and the Certificate Administrator. The Special Servicer may, from time to time, modify any Asset Status Report it has previously delivered and implement such report, provided such report must have been prepared, reviewed and not rejected as described above. However, the Special Servicer (A) may, following the occurrence of an extraordinary event with respect to the related Mortgaged Property, take any action set forth in such Asset Status Report before the expiration of a ten Business Day period if the Special Servicer has reasonably determined that failure to take such action would materially and adversely affect the interests of the Certificateholders and it has made a reasonable effort to contact the Directing Investor and (B) in any case, may determine whether any affirmative disapproval by the Directing Investor described above is not in the best interest of all the Certificateholders under the Servicing Standard.
The Special Servicer will generally have the authority to meet with the Borrower of any Defaulted Loan and take such actions consistent with the Servicing Standard and any related Asset Status Report. The Special Servicer generally may not take any action inconsistent with the related Asset Status Report without the consent of the Directing Investor, unless such action would be required in order to act in accordance with the Servicing Standard.
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Evidence as to Compliance
No later than the date specified below of each year, commencing in 2018, each of the Master Servicer and the Special Servicer must deliver or cause to be delivered, as applicable, to the Certificate Administrator, the Trustee, the Custodian and Freddie Mac,
by March 15th of each year, a statement of compliance signed by an officer of the Master Servicer or the Special Servicer, as the case may be, to the effect that, among other things, (i) a review of the activities of the Master Servicer or the Special Servicer, as the case may be, during the preceding calendar year—or, in the case of the first such certification, during the period from the Closing Date through December 31, 2017 inclusive—and of its performance under the Trust and Servicing Agreement, has been made under such officer’s supervision; (ii) to the best of such officer’s knowledge, based on such review, the Master Servicer or the Special Servicer, as the case may be, has fulfilled its obligations under the Trust and Servicing Agreement in all material respects throughout such year or the portion of such year during which the Certificates were outstanding (or, if there has been a failure to fulfill any such obligation in any material respect, specifying each such failure known to such officer and the nature and status of each such failure); (iii) that the Master Servicer or the Special Servicer, as the case may be, has maintained an effective internal control system over the servicing of mortgage loans, including the Mortgage Loans; and (iv) in the case of the Master Servicer only, to the best of such officer’s knowledge, each sub-servicer, if any, has fulfilled its obligations under its Sub-Servicing Agreement in all material respects or, if there has been a failure to fulfill any such obligation in any material respect, specifying each such failure known to such officer and the nature and status of each such failure and proposed actions with respect to the default; provided, however, that the Master Servicer will be entitled to conclusively rely on a review of the activities of such sub-servicer conducted by Freddie Mac, so long as the Master Servicer does not have any actual knowledge of such sub-servicer’s material non-fulfillment or material default (Freddie Mac will provide the Master Servicer access to such sub-servicer reviews by March 1 of each year beginning with March 1, 2018), and
as to each annual statement of compliance delivered by the Master Servicer or the Special Servicer, as the case may be, as described in the preceding bullet, by April 15th of each year, an accountant’s statement from a registered public accounting firm to the effect that the asserting party complied with the minimum servicing standards identified in (a) Item 1122 of Regulation AB or (b) the Uniform Single Attestation Program for Mortgage Bankers: provided that if Freddie Mac is then acting as Master Servicer and Special Servicer under the Trust and Servicing Agreement, the Master Servicer and Special Servicer will not be required to provide such accountant’s statement to Freddie Mac. For purposes of determining compliance with the minimum standards identified in clauses (a) or (b) above, the Master Servicer and its accountants will be entitled to rely on the sub-servicer reviews delivered by Freddie Mac pursuant to the preceding bullet point, subject to the limitations set forth in the preceding bullet point.
Events of Default
An “Event of Default” under the Trust and Servicing Agreement means any one of the following events:
(i) any failure by the Master Servicer to deposit into the Collection Account or a Servicing Account any amount required to be so deposited by it pursuant to the Trust and Servicing Agreement, which failure is not cured within two Business Days after such deposit was required to be made; or
(ii) any failure by the Special Servicer to deposit into, or to remit to the Master Servicer for deposit into, the Collection Account or a Servicing Account, any amount required to be so deposited or remitted by the Special Servicer pursuant to the terms of the Trust and Servicing Agreement, which failure is not cured within two Business Days after such deposit or remittance was required to be made; or
(iii) any failure on the part of the Master Servicer or the Special Servicer to duly observe or perform in any material respect any other of the covenants or agreements on the part of the Master Servicer or the Special Servicer, as the case may be, contained in the Trust and Servicing Agreement which continues unremedied for a period of 30 days (15 days in the case of a failure to pay the premium for any insurance policy required to be maintained under the Trust and Servicing Agreement) after the date on which written notice of such failure,
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requiring the same to be remedied, will have been given to the Master Servicer or the Special Servicer, as the case may be, by any other party hereto, or to the Master Servicer or the Special Servicer, as the case may be, the Mortgage Loan Seller and the Trustee (with a copy to the Certificate Administrator) by the Holders of Certificates of any Class evidencing, as to such Class, Percentage Interests aggregating not less than 25%; provided, however, that with respect to any such failure (other than a failure to pay insurance policy premiums) which is not curable within such 30 day period, the Master Servicer or the Special Servicer, as the case may be, will have an additional cure period of 30 days to effect such cure so long as the Master Servicer or the Special Servicer, as the case may be, has commenced to cure such failure within such initial 30 day period and has diligently pursued, and is continuing to diligently pursue, a full cure; or
(iv) any breach on the part of the Master Servicer or the Special Servicer of certain representations or warranties contained in the Trust and Servicing Agreement, which materially and adversely affects the interests of any Class of Certificateholders and which continues unremedied for a period of 30 days after the date on which notice of such breach, requiring the same to be remedied, will have been given to the Master Servicer or the Special Servicer, as the case may be, by any other party hereto, or to the Master Servicer or the Special Servicer, as the case may be, the Mortgage Loan Seller and the Trustee (with a copy to the Certificate Administrator) by the Holders of Certificates of any Class evidencing, as to such Class, Percentage Interests aggregating not less than 25%; provided, however, that with respect to any such breach which is not curable within such 30 day period, the Master Servicer or the Special Servicer, as the case may be, will have an additional cure period of 30 days to effect such cure so long as the Master Servicer or the Special Servicer, as the case may be, has commenced to cure such breach within the initial 30 day period and has diligently pursued, and is continuing to diligently pursue, a full cure; or
(v) a decree or order of a court or agency or supervisory authority having jurisdiction in the premises in an involuntary case under any present or future federal or state bankruptcy, insolvency or similar law for the appointment of a conservator, receiver, liquidator, trustee or similar official in any bankruptcy, insolvency, readjustment of debt, marshaling of assets and liabilities or similar proceedings, or for the winding up or liquidation of its affairs, will have been entered against the Master Servicer or the Special Servicer and such decree or order will have remained in force undischarged or unstayed for a period of 60 days; provided that the current appointment of as Freddie Mac’s conservator will not constitute an event of default with respect to Freddie Mac; or
(vi) a consent by the Master Servicer or the Special Servicer to the appointment of a conservator, receiver, liquidator, trustee or similar official in any bankruptcy, insolvency, readjustment of debt, marshaling of assets and liabilities or similar proceedings of or relating to the Master Servicer or the Special Servicer or relating to all or substantially all of its property; provided that the current appointment of the FHFA as Freddie Mac’s conservator will not constitute an Event of Default with respect to Freddie Mac; or
(vii) an admission by the Master Servicer or the Special Servicer in writing of its inability to pay its debts generally as they become due, the filing of a petition to take advantage of any applicable bankruptcy, insolvency or reorganization statute, the making of an assignment for the benefit of its creditors, the voluntary suspension of payment of its obligations or the taking of any corporate action in furtherance of the foregoing; or
(viii) the failure of any Third Party Master Servicer to provide the Certificate Administrator with the CREFC® loan periodic update file more than three times in a rolling 12-month period within one Business Day following the date on which it is due, unless such failure is due to force majeure or an act of God or such failure is waived by Freddie Mac; provided that Freddie Mac will not be permitted to grant more than one waiver in such rolling 12-month period without the consent of the Directing Investor, which consent may not be unreasonably withheld or delayed; provided, further, that a report will not be considered to have been provided more than one Business Day following the date on which it is due unless Freddie Mac provides the Master Servicer with written notice, with a copy to the Certificate Administrator, that the report was late within five days after the related Payment Date.
Rights Upon Event of Default
If any Event of Default with respect to the Master Servicer or the Special Servicer (in either case, the “Defaulting Party”) occurs and is continuing, then, and in each and every such case, so long as such Event of Default has not been remedied, the Certificate Administrator, at the written direction of the Directing Third Party or Freddie Mac (in the case of any Third Party Master Servicer or Third Party Special Servicer), will be required to
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terminate, by notice in writing to the Defaulting Party (a “Termination Notice”), with a copy of such notice to Freddie Mac, the Certificate Administrator and the certificate registrar, all of the rights and obligations of the Defaulting Party under the Trust and Servicing Agreement and in and to the Mortgage Loans and the proceeds thereof (other than as a Holder of any Certificate) and appoint a successor master servicer or special servicer that is reasonably acceptable to Freddie Mac in accordance with the terms of the Trust and Servicing Agreement; provided, however, that the Defaulting Party will be entitled to the payment of any and all compensation, indemnities and reimbursements accrued by or owing to it on or prior to the date of such termination, as well as such similar amounts due to it thereafter, if any, as provided for under the Trust and Servicing Agreement for services rendered and expenses incurred; provided, further, that no such termination will become effective until a successor master servicer or special servicer has been appointed by the Certificate Administrator at the direction of the Directing Third Party or Freddie Mac (in the case of any Third Party Master Servicer or Third Party Special Servicer).
The Master Servicer and the Special Servicer each agree that if it is terminated in connection with the occurrence of an Event of Default, it will promptly (and in any event no later than 20 Business Days after its receipt of the notice of termination) provide a successor master servicer or special servicer, as applicable, with all documents and records requested by it and in the possession of the Master Servicer or Special Servicer, as the case may be, to enable such successor to assume the Master Servicer’s or the Special Servicer’s, as the case may be, functions under the Trust and Servicing Agreement, and will reasonably cooperate with the Certificate Administrator in effecting the termination of the Master Servicer’s or the Special Servicer’s, as the case may be, responsibilities and rights under the Trust and Servicing Agreement, including the transfer within five Business Days to such successor for administration by it of all cash amounts that will at the time be or should have been credited by the Master Servicer to the Collection Account or Servicing Account or thereafter be received with respect to any Mortgage Loan (provided, however, that the Master Servicer or the Special Servicer, as the case may be, will, if terminated in connection with the occurrence of an Event of Default, continue to be entitled to receive all amounts accrued or owing to it under the Trust and Servicing Agreement on or prior to the date of such termination, as well as amounts due to it thereafter, if any, and it and its affiliates, directors, partners, members, managers, shareholders, officers, employees and agents will continue to be entitled to the benefits under the Trust and Servicing Agreement notwithstanding any such termination).
No penalty or fee will be payable to any Special Servicer with respect to any termination in connection with the occurrence of an Event of Default; provided, however, that any Special Servicer will be entitled to receive any accrued Special Servicing Fees, Liquidation Fees and, for any Mortgage Loan which is a Corrected Loan or which, upon receipt of three Monthly Payments, would be a Corrected Loan, Workout Fees. Any expenses of the Trust as a result of any termination in connection with the occurrence of an Event of Default will be paid by the Persons who effected such termination, if the termination was without cause, and otherwise by the terminated Special Servicer.
The Holders of Certificates representing at least 662/3% of the Percentage Interests of each Class of Certificates affected by any Event of Default hereunder may waive such Event of Default within 90 days of the receipt of notice from the Certificate Administrator of the occurrence of such Event of Default; provided, however, that an Event of Default under clauses (i) or (ii) of the definition of “Event of Default” may only be waived by 100% of the Certificateholders of the affected Classes, the Trustee and Freddie Mac. Furthermore, if the Certificate Administrator or the Trustee is required to spend any out-of-pocket expenses in connection with any Event of Default or any waiver thereof, then that Event of Default may not be waived unless and until the Certificate Administrator or the Trustee has been reimbursed for such amounts by the party requesting the waiver. Upon any such waiver of an Event of Default, such Event of Default will cease to exist and will be deemed to have been remedied for every purpose under the Trust and Servicing Agreement. No such waiver will extend to any subsequent or other Event of Default or impair any right consequent thereon except to the extent expressly so waived.
No Certificateholder will have any right by virtue of any provision of the Trust and Servicing Agreement to institute any suit, action or proceeding in equity or at law upon or under or with respect to the Trust and Servicing Agreement, any Mortgage Loan or the Certificates, unless with respect to any suit, action or proceeding upon or under or with respect to the Trust and Servicing Agreement, such Holder previously has given to the Trustee a written notice of default under the Trust and Servicing Agreement, and of the continuance thereof, and unless also (except in the case of a default by the Trustee) the Holders of Certificates of any Class evidencing not less than 25%
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of the related Percentage Interests in such Class has made written request upon the Trustee to institute such action, suit or proceeding in its own name as Trustee under the Trust and Servicing Agreement and has offered to the Trustee such reasonable security or indemnity as it may require against the costs, expenses and liabilities to be incurred therein or thereby, and the Trustee, for 60 days after its receipt of such notice, request and offer of indemnity, has neglected or refused to institute any such action, suit or proceeding.
Each Certificateholder will be deemed under the Trust and Servicing Agreement to have expressly covenanted with every other Certificateholder and the Trustee, that no one or more Certificateholders will have any right in any manner whatsoever by virtue of any provision of the Trust and Servicing Agreement or the Certificates to affect, disturb or prejudice the rights of the Holders of any other Certificates, or to obtain or seek to obtain priority over or preference to any other Certificateholder, or to enforce any right under the Trust and Servicing Agreement or the Certificates, except in the manner provided in the Trust and Servicing Agreement or the Certificates and for the equal, ratable and common benefit of all Certificateholders.
None of the Certificate Administrator, the Custodian or the Trustee will be under any obligation to exercise any of the Trusts or powers vested in it by the Trust and Servicing Agreement or the Certificates or to make any investigation of matters arising thereunder or under the Certificates or to institute, conduct or defend any litigation under or in relation to the Trust and Servicing Agreement or the Certificates at the request, order or direction of any of the Certificateholders, unless in the Certificate Administrator’s, the Custodian’s or the Trustee’s opinion, as applicable, those Certificateholders have offered to the Certificate Administrator, the Custodian or the Trustee, as applicable, reasonable security or indemnity against the costs, expenses and liabilities which may be incurred by the Certificate Administrator, the Custodian or the Trustee as a result.
Liability of the Mortgage Loan Seller, the Master Servicer, the Special Servicer, the Trustee, the Certificate Administrator and Custodian
None of the Mortgage Loan Seller, the Trustee, the Certificate Administrator, the Custodian, the Master Servicer, the Special Servicer or any of the officers, directors, general or limited partners, shareholders, members, managers, employees, agents or affiliates of any of them will have any liability to the Trust, the Placement Agents, the parties hereto, the Certificateholders or any other Person for any action taken or for refraining from the taking of any action in good faith pursuant to the Trust and Servicing Agreement, or for errors in judgment; provided, however, that this provision will not protect the Mortgage Loan Seller, the Trustee, the Certificate Administrator, the Custodian, the Master Servicer or the Special Servicer against any breach of warranties or representations made herein or protect the Mortgage Loan Seller, the Trustee, the Certificate Administrator, the Custodian, the Master Servicer or the Special Servicer from any liability which would otherwise be imposed by reason of the Mortgage Loan Seller’s, the Trustee’s, the Certificate Administrator’s, the Custodian’s, the Master Servicer’s or the Special Servicer’s willful misconduct, bad faith, fraud or negligence in the performance of its respective duties hereunder or negligent disregard of its respective obligations and duties under the Trust and Servicing Agreement. In addition, none of the foregoing parties will be responsible for delays or failures in performance due to force majeure or acts of God.
The Mortgage Loan Seller, the Master Servicer (either in its own right or on behalf of an Indemnified Sub-Servicer), the Special Servicer, the Trustee, the Certificate Administrator, the Custodian and certain related persons and entities will be entitled to be indemnified by the Trust for certain losses and liabilities incurred by the Mortgage Loan Seller, the Master Servicer, the Special Servicer, the Trustee, the Certificate Administrator and Custodian, as applicable, as described under “—Certain Indemnities” below.
The Mortgage Loans will not be an obligation of, or be insured or guaranteed by the Master Servicer or the Special Servicer. In addition, the Master Servicer and the Special Servicer will be under no liability to the Trust, the Placement Agents, the other parties to the Trust and Servicing Agreement or the Certificateholders for any action taken, or not taken, in good faith pursuant to the Trust and Servicing Agreement or for errors in judgment. However, the Master Servicer and the Special Servicer will not be protected against any breach of warranties or representations made in the Trust and Servicing Agreement or from any liability which would otherwise be imposed by reason of willful misconduct, bad faith, fraud or negligence in the performance of its duties or negligent disregard of obligations and duties under the Trust and Servicing Agreement.
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The Master Servicer and the Special Servicer each will be required to maintain at its own expense, fidelity insurance, in the form of a financial institution bond, fidelity bond or its equivalent (“Fidelity Insurance”) consistent with the Servicing Standard and errors and omissions insurance with an insurer that meets the qualifications set forth in the Trust and Servicing Agreement with coverage amounts consistent with the Servicing Standard.
Solely in the event that Accepted Servicing Practices is the applicable Servicing Standard, each of the Master Servicer and the Special Servicer will be required to maintain Fidelity Insurance and errors and omissions insurance with an insurer that meets the qualifications set forth in the Trust and Servicing Agreement. Such policy must meet certain requirements as to coverage set forth in the Trust and Servicing Agreement. Coverage of the Master Servicer or the Special Servicer under a policy or bond obtained by an affiliate of the Master Servicer or the Special Servicer, as applicable, that meets the same requirements as a policy obtained directly by the Master Servicer or the Special Servicer will be permitted under the Trust and Servicing Agreement. In lieu of obtaining such a policy or bond, the Master Servicer or the Special Servicer will be permitted to provide self-insurance with respect to Fidelity Insurance or errors and omissions insurance, subject to satisfaction of certain credit ratings requirements by the Master Servicer, the Special Servicer, or their respective immediate or remote parent companies.
Resignation, Removal and Replacement of Servicers; Transfer of Servicing Duties
Master Servicer and Special Servicer Not to Resign. Neither the Master Servicer nor the Special Servicer may resign from its obligations and duties under the Trust and Servicing Agreement except (a) upon a determination that such party’s duties under the Trust and Servicing Agreement will no longer be permissible under applicable law or (b) upon the appointment of, and the acceptance of such appointment by, a successor to the resigning Master Servicer or the resigning Special Servicer. However, no such resignation pursuant to clause (a) in the preceding sentence by the Master Servicer or the Special Servicer will become effective until the Certificate Administrator or another successor thereto has assumed the resigning Master Servicer’s or the Special Servicer’s, as applicable, responsibilities and obligations.
Certificate Administrator to Act; Appointment of Successor. On and after the time the Master Servicer or the Special Servicer, as the case may be, either resigns as described under “—Master Servicer and Special Servicer Not to Resign” above or receives a notice of termination for cause in connection with the occurrence of an Event of Default, and provided that no acceptable successor has been appointed by the Certificate Administrator, the Certificate Administrator will be and become the successor to the Master Servicer or the Special Servicer, as the case may be, in all respects in its capacity as the Master Servicer or the Special Servicer, as applicable, under the Trust and Servicing Agreement and will be subject to all the responsibilities, duties, liabilities and limitations on liability relating thereto and that arise thereafter placed on or for the benefit of the Master Servicer or the Special Servicer by the terms and provisions thereof; provided, however, that any failure to perform such duties or responsibilities caused by the terminated party’s failure to provide information or moneys required under the Trust and Servicing Agreement will not be considered a default by such successor under the Trust and Servicing Agreement.
Transfer of Servicing Duties. The appointment of a successor Master Servicer will not affect any liability or indemnification rights of the predecessor Master Servicer which may have arisen prior to its resignation or termination as the Master Servicer, and the appointment of a successor Special Servicer will not affect any liability or indemnification rights of the predecessor Special Servicer which may have arisen prior to its resignation or termination as the Special Servicer. The Certificate Administrator in its capacity as successor to the Master Servicer or the Special Servicer will not be liable for any of the representations and warranties of the Master Servicer or the Special Servicer, as the case may be, therein or in any related document or agreement, for any acts or omissions of the predecessor Master Servicer or Special Servicer, as the case may be, or for any losses incurred by the predecessor Master Servicer or the Special Servicer, as the case may be, relating to the investment of funds under the Trust and Servicing Agreement.
As compensation therefor, the Certificate Administrator as a successor Master Servicer will be entitled to all Master Servicing Fees and other compensation relating to the applicable Mortgage Loans to which the predecessor Master Servicer would have been entitled to if the Master Servicer had continued to act under the Trust and Servicing Agreement (including but not limited to any income or other benefit from any Permitted Investment
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of funds in the Master Servicer Account maintained thereby), and as successor to the Special Servicer will be entitled to the Special Servicing Fees to which the predecessor Special Servicer would have been entitled if the Special Servicer had continued to act under the Trust and Servicing Agreement, in each case other than compensation that accrued to the Master Servicer or the Special Servicer, as applicable, prior to the date of such Master Servicer’s or Special Servicer’s termination or resignation. If the Certificate Administrator succeeds to the capacity of the Master Servicer or the Special Servicer under the Trust and Servicing Agreement, the Certificate Administrator will be afforded the same standard of care and liability under the Trust and Servicing Agreement as the Master Servicer or the Special Servicer, as the case may be, but only with respect to actions taken by it in its role as a successor Master Servicer or successor Special Servicer as the case may be, and not with respect to its role as Certificate Administrator under the Trust and Servicing Agreement.
Notwithstanding the above, the Certificate Administrator may, if it is unwilling or unable to act as permanent successor to the Master Servicer or the Special Servicer, as applicable, or will, at the written request of Freddie Mac, promptly appoint, or petition a court of competent jurisdiction to appoint as such successor, any established mortgage loan servicing institution that is reasonably acceptable to Freddie Mac. Pending the appointment of a successor to the Master Servicer or the Special Servicer under the Trust and Servicing Agreement, unless the Certificate Administrator is prohibited by law from so acting, the Certificate Administrator will act in such capacity.
In connection with such appointment and assumption of a successor to the Master Servicer or the Special Servicer, the Certificate Administrator may make such arrangements for the compensation of such successor out of payments on Mortgage Loans as it and such successor will agree; provided, however, that no such compensation with respect to a successor Master Servicer or successor Special Servicer, as the case may be, may be in excess of the compensation received by the terminated Master Servicer or Special Servicer, as the case may be, under the Trust and Servicing Agreement without the consent of Freddie Mac. The Certificate Administrator, the Master Servicer, the Special Servicer and such successor will be required to take such action, consistent with the Trust and Servicing Agreement (including the prompt and safe transfer of all remaining servicing files and records to such successor Master Servicer or Special Servicer, as applicable), as will be necessary to effectuate any such succession. Any reasonable costs and expenses associated with the transfer of the servicing function (other than with respect to a termination without cause) under the Trust and Servicing Agreement will be borne by the predecessor Master Servicer or the Special Servicer; provided that if such predecessor Master Servicer or Special Servicer, as applicable, fails to pay such costs and expenses after reasonable efforts to obtain payment, then such costs and expenses will be a Program Expense.
Resignation and Removal of the Trustee, the Custodian and the Certificate Administrator
Resignation and Removal. The Trustee, the Custodian and the Certificate Administrator may resign at any time by giving prior written notice thereof to the Mortgage Loan Seller, the Master Servicer, the Special Servicer, the Certificate Administrator, the Custodian or the Trustee, as the case may be, and all Certificateholders. Upon receiving such notice of resignation, the Mortgage Loan Seller will be required to use its best efforts to promptly appoint a successor Trustee, Custodian or Certificate Administrator, as applicable, acceptable to the Master Servicer and Freddie Mac, in their reasonable discretion. If no successor Trustee, Custodian or Certificate Administrator, as applicable, has been so appointed or accepted appointment within 30 days after the giving of such notice of resignation, the resigning Trustee, Custodian or Certificate Administrator, as applicable, may petition any court of competent jurisdiction for the appointment of a successor Trustee, Custodian or Certificate Administrator, as applicable. The resigning Trustee, Custodian or Certificate Administrator, as applicable, will be responsible for the payment of all reasonable expenses incurred in connection with such resignation and discharge and the appointment of a successor Trustee, Custodian or Certificate Administrator, as applicable.
If at any time the Trustee becomes incapable of acting, or is adjudged bankrupt or insolvent, or a receiver of the Trustee’s property is appointed, or any public officer takes charge or control of the Trustee or of its property or affairs for the purpose of rehabilitation, conservation or liquidation (except in connection with the appointment of FHFA as Freddie Mac’s conservator), the Holders of Certificates entitled to at least 51% of the Voting Rights of all Classes of Certificates may at any time remove the Trustee and appoint a successor Trustee acceptable to Freddie Mac. If at any time the Custodian becomes incapable of acting, or is adjudged bankrupt or insolvent, or a receiver of the Custodian’s property is appointed, or any public officer takes charge or control of the Custodian or of its
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property or affairs for the purpose of rehabilitation, conservation or liquidation (except in connection with the appointment of FHFA as Freddie Mac’s conservator), the Holders of Certificates entitled to at least 51% of the Voting Rights of all Classes of Certificates may at any time remove the Custodian and appoint a successor Custodian acceptable to Freddie Mac.
Freddie Mac or the Holders of Certificates entitled to at least 51% of the Voting Rights of all Classes of Certificates may with cause (at any time) or without cause (at any time upon at least 30 days’ prior written notice) remove the Certificate Administrator and appoint a successor Certificate Administrator, as applicable, acceptable to Freddie Mac. The Certificate Administrator will be reimbursed for all costs and expenses incurred by it in connection with such removal upon demand therefor as Program Expenses (provided the Certificate Administrator was removed without cause).
Any resignation or removal of the Trustee, the Custodian or the Certificate Administrator and appointment of a successor Trustee, Custodian or Certificate Administrator as described under this heading “—Resignation and Removal of the Trustee, the Custodian and the Certificate Administrator” will not become effective until acceptance of appointment by the successor Trustee, Custodian or Certificate Administrator, as applicable.
In the event of any resignation or removal of the Certificate Administrator under the Trust and Servicing Agreement, such resignation or removal will be effective with respect to such party’s capacities as Certificate Administrator, Calculation Agent, certificate registrar and authenticating agent, as the case may be.
Within 30 days following any succession of the Trustee, the Custodian or the Certificate Administrator under the Trust and Servicing Agreement, the predecessor Trustee, Custodian or Certificate Administrator will be paid all accrued and unpaid compensation and reimbursements as provided for under the Trust and Servicing Agreement. No Trustee, Custodian or Certificate Administrator will be liable for any action or omission of any successor Trustee, Custodian or Certificate Administrator.
Successor Trustee, Custodian or Certificate Administrator. Any successor Trustee, Custodian or Certificate Administrator, as applicable, appointed as provided above will be required to execute, acknowledge and deliver to Freddie Mac, the Master Servicer, the Special Servicer and to its predecessor, an instrument accepting such appointment under the Trust and Servicing Agreement, and thereupon the resignation or removal of the predecessor, will become effective and such successor Trustee, Custodian or Certificate Administrator, as applicable, without any further act, deed or conveyance, will become fully vested with all the rights, powers, duties and obligations of its predecessor under the Trust and Servicing Agreement, with the same effect as if originally named as Trustee, Custodian or Certificate Administrator, as applicable, under the Trust and Servicing Agreement. The predecessor Trustee or Custodian, as applicable, will be required to deliver or cause to be delivered to the successor Trustee or Custodian, as applicable, all mortgage files and related documents and statements held by it (or in the case of the Trustee, the applicable Custodian on its behalf) under the Trust and Servicing Agreement, and the Mortgage Loan Seller, Freddie Mac, the Master Servicer, the Special Servicer and the predecessor Trustee or Custodian, as applicable, will be required to execute and deliver such instruments and do such other things as may reasonably be required to (i) transfer to, or more fully and certainly vest and confirm in, the successor Trustee or Custodian, as applicable, all such rights, powers, duties and obligations of the predecessor Trustee or Custodian, as applicable, to enable the successor Trustee or Custodian, as applicable, to perform its obligations under the Trust and Servicing Agreement and (ii) (A) assign and endorse, as applicable (to the extent that such Loan Documents were assigned to the predecessor Trustee or Custodian, as applicable) the applicable Loan Documents to the successor Trustee or Custodian, as applicable, and (B) record and file such Loan Documents as may reasonably be required. Any successor Trustee or Custodian, as applicable, will be required to review the documents delivered to such successor Trustee or Custodian with respect to each Mortgage Loan, and certify in writing that, as to each Mortgage Loan then subject to the Trust and Servicing Agreement, such endorsements, assignments and such other actions have been made or taken, or in the event such endorsement, assignment or such other action cannot be made or taken for any reason, such successor Trustee or Custodian, as applicable, will be required to note the same in such certification.
No successor Trustee, Custodian or Certificate Administrator will be permitted to accept appointment unless at the time of such acceptance such successor Trustee, Custodian or Certificate Administrator is eligible under the Trust and Servicing Agreement and is approved by Freddie Mac.
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Matters Regarding the Trustee, the Certificate Administrator and the Custodian
Each of the Trustee, the Custodian and the Certificate Administrator, in its individual capacity and not as Trustee, Custodian or Certificate Administrator, may become the owner or pledgee of Certificates, and may deal with the Placement Agents in banking transactions, with the same rights it would have if it were not Trustee, Custodian or Certificate Administrator, respectively. In addition, for purposes of meeting the legal requirements of some local jurisdictions, the Master Servicer and the Trustee acting jointly will have the power to appoint a co-trustee or separate trustee of all or any part of the assets of the Trust. All rights, powers, duties and obligations conferred or imposed upon the Trustee will be conferred or imposed upon the Trustee and the separate trustee or co-trustee jointly or, in any jurisdiction in which the Trustee is incompetent or unqualified to perform some acts, singly upon the separate trustee or co-trustee, who may exercise and perform its rights, powers, duties and obligations at the direction of the Trustee.
As compensation for the performance of its duties, the Trustee will be paid the Trustee Fee with respect to each Mortgage Loan including, if applicable, Defaulted Loans, at the Trustee Fee Rate, computed on the basis of the Stated Principal Balance of such Mortgage Loan and for the same period respecting which any related interest payment due on such Mortgage Loan (or any portion of such interest payment) which the Trust is entitled to is computed. The Trustee Fee will be payable monthly, on a Mortgage Loan-by-Mortgage Loan basis, as a Program Expense. As compensation for the performance of its duties, the Certificate Administrator will be paid the Certificate Administrator Fee, equal to the Certificate Administrator Fee Rate on the sum of (x) the Stated Principal Balance of each Mortgage Loan and (y) during the Revolving Period, the balance of the Principal Collections on deposit in the Collection Account, in each case, as of the first day of the applicable Loan Interest Accrual Period, computed on the same basis and in the same manner as interest is computed on such Mortgage Loan for such Loan Interest Accrual Period (regardless of whether or not the Trust is entitled to such interest payment). The Certificate Administrator Fee will be payable monthly as a Program Expense.
Freddie Mac will be the initial Custodian of the mortgage files. The Trustee may appoint, at the Trustee’s own expense, one or more additional Custodians to hold all or a portion of the mortgage files on behalf of the Trustee; however the Trustee will be required to inform the Master Servicer (in the case of any Third Party Master Servicer) and Freddie Mac (if Freddie Mac is not the Trustee) of such appointment and the appointment of any such additional Custodians will require the approval of Freddie Mac if Freddie Mac is not the Custodian. Each Custodian (unless Freddie Mac is the Custodian) will be required to be a depository institution supervised and regulated by a federal or state banking authority, have combined capital and surplus of at least $10,000,000, be qualified to do business in the jurisdiction in which it holds any mortgage file and have in place Fidelity Insurance and errors and omissions insurance, each in such form and amount as is customarily required of custodians acting on behalf of Freddie Mac or Fannie Mae. Each Custodian will be subject to the same obligations, standard of care, protections and indemnities as would be imposed on, or would protect, the Trustee under the Trust and Servicing Agreement in connection with the retention of mortgage files directly by the Trustee. The appointment of one or more additional Custodians will not relieve the Custodian from any of its obligations under the Trust and Servicing Agreement, and the Custodian will remain responsible for all acts and omissions of any additional Custodians.
Certain Indemnities
The Mortgage Loan Seller, the Master Servicer (either in its own right or on behalf of an Indemnified Sub-Servicer), the Special Servicer, and any officer, director, shareholder, general or limited partner, member, manager, employee, agent, affiliate or controlling person of the Mortgage Loan Seller, the Master Servicer or the Special Servicer will be indemnified and held harmless by the Trust against any and all losses, liabilities, damages, claims, judgments, costs, fees, penalties, fines, forfeitures or other expenses (including reasonable legal fees and expenses) that may be imposed on, incurred by or asserted against them in connection with, related to, or arising out of, the Trust and Servicing Agreement, the transactions contemplated by the Trust and Servicing Agreement or the Certificates, other than any loss, liability, damage, claim, judgment, cost, fee, penalty, fine, forfeiture or other expense (including reasonable legal fees and expenses) (i) that is specifically required to be borne by the party seeking indemnification, without right of reimbursement pursuant to the terms of the Trust and Servicing Agreement or (ii) incurred by reason of a breach of any representation or warranty by the Mortgage Loan Seller, the Master Servicer or the Special Servicer, as applicable, under the Trust and Servicing Agreement, or by reason of the willful misconduct, bad faith, fraud or negligence of the Mortgage Loan Seller, the Master Servicer or the Special Servicer,
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as applicable, in the performance of its respective duties under the Trust and Servicing Agreement or negligent disregard of its respective obligations or duties under the Trust and Servicing Agreement. For the avoidance of doubt, the indemnification provided by the Trust pursuant to the preceding sentence will not entitle the Master Servicer or the Special Servicer, as applicable, to reimbursement for ordinary costs and expenses incurred by the Master Servicer or the Special Servicer, as applicable, in connection with its usual and customary performance of its duties and obligations under the Trust and Servicing Agreement that are not expressly payable or reimbursable to the Master Servicer or the Special Servicer, as applicable, under the Trust and Servicing Agreement. The Master Servicer, on behalf of an Indemnified Sub-Servicer, will be entitled to pursue the Trust under the Trust and Servicing Agreement for any indemnification due to an Indemnified Sub-Servicer under the terms of the related Sub-Servicing Agreement.
The Master Servicer will be required to promptly upon receipt and identification of indemnification amounts remit such indemnification amounts to the affected Indemnified Sub-Servicer upon reimbursement of such amounts from the Collection Account or (upon receipt from the Certificate Administrator) the Distribution Account, as applicable. The Mortgage Loan Seller, the Master Servicer or the Special Servicer will not be under any obligation to appear in, prosecute or defend any legal action unless such action is related to its respective duties under the Trust and Servicing Agreement and in its opinion does not expose it to any expense or liability; provided, however, that each of the Mortgage Loan Seller, the Master Servicer and the Special Servicer (in the case of any Third Party Master Servicer or any Third Party Special Servicer, with the consent of Freddie Mac, which consent will not be unreasonably withheld) may undertake any action related to its obligations under the Trust and Servicing Agreement which it may deem necessary or desirable with respect to the Trust and Servicing Agreement and the rights and duties of the parties thereto and the interests of the Certificateholders under the Trust and Servicing Agreement. In such event, and subject to certain conditions set forth in the Trust and Servicing Agreement, the legal expenses and costs of such action and any liability resulting therefrom (except any loss, liability, damage, claim, judgment, cost, fee, penalty, fine, forfeiture or other expense (including reasonable legal fees and expenses) incurred by reason of a breach of any representation or warranty, willful misconduct, bad faith, fraud or negligence in the performance of its duties under the Trust and Servicing Agreement or negligent disregard of its respective obligations and duties under the Trust and Servicing Agreement) will constitute Program Expenses, and the Mortgage Loan Seller, the Master Servicer and the Special Servicer will be entitled to be reimbursed therefor from the Collection Account, any such right of reimbursement being prior to the rights of the Certificateholders to receive any amount in the Collection Account.
The Trustee, the Custodian, the Certificate Administrator (in each of its capacities as the Certificate Administrator, the Calculation Agent, the authenticating agent and the certificate registrar) and their respective officers, directors, general or limited partners, shareholders, members, managers, employees, agents, affiliates and controlling persons will be indemnified and held harmless by the Trust against any and all losses, liabilities, damages, claims, judgments, costs, fees, penalties, fines, forfeitures or other expenses (including reasonable legal fees and expenses) that may be imposed on, incurred by or asserted against the Trustee, the Custodian or the Certificate Administrator (in each of its capacities as the Certificate Administrator, the Calculation Agent, the authenticating agent or the certificate registrar, as applicable) in connection with, related to, or arising out of the Trust and Servicing Agreement, the transactions contemplated by the Trust and Servicing Agreement or the Certificates other than any loss, liability, damage, claim, judgment, cost, fee, penalty, fine, forfeiture or other expense (including reasonable legal fees and expenses) (1) that constitutes a specific liability of the Trustee, the Custodian or the Certificate Administrator (in any of its capacities as the Certificate Administrator, the Calculation Agent, the authenticating agent or the certificate registrar), as applicable, under the Trust and Servicing Agreement or (2) incurred by reason of any breach of any representation or warranty by the Trustee, the Custodian or the Certificate Administrator (in any of its capacities as the Certificate Administrator, the Calculation Agent, the authenticating agent or the certificate registrar), as applicable, under the Trust and Servicing Agreement or by reason of the willful misconduct, bad faith, fraud or negligence of the Trustee, the Custodian or the Certificate Administrator (in any of its capacities as the Certificate Administrator, the Calculation Agent, the authenticating agent or the certificate registrar), as applicable, in the performance of its duties under the Trust and Servicing Agreement or negligent disregard of its obligations or duties under the Trust and Servicing Agreement. The indemnification obligations described in this paragraph will survive the termination of the Trust and Servicing Agreement, the payment of the outstanding Certificates and the resignation or removal of the Master Servicer, the Special Servicer, the Trustee, the Certificate Administrator or the Custodian.
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Notwithstanding the above, the Certificate Administrator will not be entitled to any amount of indemnification or extraordinary expenses in any given calendar year from the Trust to the extent that such indemnification expenses or extraordinary expenses exceed $150,000 per annum (the “Certificate Administrator Aggregate Annual Cap”); provided that any amounts in excess of the Certificate Administrator Aggregate Annual Cap will accrue interest at the Prime Rate (from the date on which such amount would have been paid under the terms of the Trust and Servicing Agreement had the Certificate Administrator Aggregate Annual Cap not been applicable to (but not including) the date on which such amount is paid) and will be required to be paid, to the extent funds are available, in the subsequent calendar year or years (subject to the Certificate Administrator Aggregate Annual Cap for such subsequent year or years) until paid in full. However, after the Certificate Administrator Aggregate Annual Cap Termination Date, reimbursement for any such expenses still outstanding or later incurred will no longer be subject to the Certificate Administrator Aggregate Annual Cap. Promptly after receipt of written notice of the commencement of any action, the Certificate Administrator will be required to notify Freddie Mac in writing of the commencement thereof and, at such time as the Certificate Administrator believes that the costs or expenses arising from any such action will exceed 50% of the Certificate Administrator Aggregate Annual Cap, the Certificate Administrator will notify Freddie Mac in writing. Freddie Mac and the Directing Investor will have the right, in their sole and absolute discretion, to waive (as evidenced by a waiver signed by both Freddie Mac and the Directing Certificateholder) the Certificate Administrator Aggregate Annual Cap with respect to any such action upon the written request of the Certificate Administrator.
Termination
Final Sale. No later than the earliest to occur of (1) the Payment Date in February 2020, (2) 30 days after the occurrence of a Termination Event or (3) 30 days following the exercise of the option to purchase the Mortgage Loans by the Mortgage Loan Seller in connection with the Cleanup Call, the Mortgage Loan Seller will be required to purchase each Mortgage Loan, other than any Defaulted Loan, from the Trust at a price equal to the respective Par Purchase Price (such sale by the Trust, the “Final Sale”).
Defaulted Loan Provision. The Special Servicer will be required to sell all of the Defaulted Loans pursuant to the Defaulted Loan Provision within six months after the Final Remaining Term Payment Date. If the Special Servicer is unable to sell all of the Defaulted Loans pursuant to the Defaulted Loan Provision within six months after the Final Remaining Term Payment Date, the Special Servicer will be required to sell the remaining Defaulted Loans to Freddie Mac at fair value, as determined by a third party mutually agreed to by Freddie Mac and the Directing Third Party (if any Realized Losses resulting from such sale would be allocated to all or any portion of the Certificates held by the Directing Third Party as described in “Description of the Certificates—Reductions of Certificate Principal Balances in Connection with Realized Losses” in this offering circular).
Any Par Purchase Price relating to the Final Sale and Defaulted Loan Proceeds received by the Master Servicer will be deposited into the Collection Account, and the Master Servicer will withdraw the Available Distribution Amount from the Collection Account and transfer such amounts to the Distribution Account on the Master Servicer Remittance Date immediately following such receipt.
Termination Upon Repurchase or Liquidation of All Mortgage Loans. The Trust and the respective obligations and responsibilities of the Mortgage Loan Seller, the Master Servicer, the Special Servicer, the Custodian, the Trustee and the Certificate Administrator under the Trust and Servicing Agreement (other than the obligations of the Certificate Administrator to provide for and make payments to Certificateholders) will terminate upon payment (or provision for payment) to the Certificateholders of all amounts held by or on behalf of the Certificate Administrator and required thereunder to be so paid on the Final Certificate Maturity Date or, if later, the Payment Date on which the proceeds of the final payment or other liquidation of the last Loan remaining in the Trust Fund are distributed as described under “Description of the Certificates—Distributions—Priority of Distributions” in this offering circular. All amounts due on the Certificates will be reduced to zero after the final distribution of the proceeds of the final payment or other liquidation of the last Loan remaining in the Trust Fund and the termination of the Trust Fund.
Upon presentation and surrender of the Certificates by the Certificateholders on the final Payment Date, the Certificate Administrator will distribute to each Certificateholder so presenting and surrendering its Certificates such Certificateholder’s Percentage Interest of that portion of the amounts then on deposit in the Distribution Account
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that are allocable to payments on the Class of Certificates so presented and surrendered. Amounts distributed from the Distribution Account as of the final Payment Date will be allocated for the purposes, in the amounts and as described under “Description of the Certificates—Distributions—Priority of Distributions—Priority of Distributions on the Final Remaining Term Payment Date” in this offering circular.
Amendment
The Trust and Servicing Agreement may be amended by the mutual agreement of the parties thereto, without the consent of any of the Certificateholders (other than as set forth in clause (viii) and the proviso below), (i) to cure any ambiguity, (ii) to correct, modify or supplement any provision therein which may be inconsistent with the final versions of this offering circular and the private offering memorandum relating to the Mezzanine Certificates and the Class D Certificates, (iii) to correct, modify or supplement any provision therein which may be inconsistent with any other provision therein or to correct any error, (iv) to make any other provisions with respect to matters or questions arising thereunder which would not be inconsistent with the then existing provisions thereof, (v) as evidenced by an opinion of counsel delivered to the Trustee, the Certificate Administrator, the Master Servicer and the Special Servicer, to relax or eliminate any transfer restriction imposed on the Certificates thereunder (if applicable law is amended or clarified such that any such restriction may be relaxed or eliminated), (vi) with the consent of the Directing Investor, to allow the Mortgage Loan Seller and its affiliates to obtain accounting “sale” treatment for the Mortgage Loans sold by the Mortgage Loan Seller to the Trust under applicable accounting standards, (vii) to modify the procedures therein relating to Rule 15Ga-1 or (viii) to modify, alter, amend, add to or rescind any of the provisions contained in the Trust and Servicing Agreement to comply with any rules or regulations promulgated by the Commission from time to time; provided that no such amendment for the specific purposes described in clauses (iii), (iv) or (vi) above may adversely affect in any material respect the interests of any Certificateholder or any third party beneficiary to the Trust and Servicing Agreement.
The Trust and Servicing Agreement may also be amended from time to time by the mutual agreement of the parties thereto, with the consent of the Holders of Certificates entitled to not less than 51% of the Voting Rights allocated to all of the Classes that are materially affected by the amendment, for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of the Trust and Servicing Agreement or of modifying in any manner the rights of the Holders of Certificates; provided, however, that no such amendment may (i) reduce in any manner the amount of, or delay the timing of, payments received or advanced on Mortgage Loans which are required to be distributed on any Certificate, without the consent of the Holder of such Certificate, (ii) adversely affect in any material respect the interests of the Holders of any Class of Certificates in a manner other than as described in clause (i) above, without the consent of the Holders of all Certificates of such Class, (iii) modify the amendment modification provisions of the Trust and Servicing Agreement or the definitions of “Accepted Servicing Practices,” “Freddie Mac Servicing Practices” or “Servicing Standard” without the consent of the Holders of all Certificates then outstanding, (iv) modify the obligations of the Guarantor, (v) significantly change the activities of the Trust, without the consent of the Holders of Certificates entitled to not less than 66-2/3% of all the Voting Rights (not taking into account Certificates held by the Mortgage Loan Seller or any of its affiliates or agents or Freddie Mac), or (vi) adversely affect in any material respect the interests of any third party beneficiary to the Trust and Servicing Agreement, without the consent of such third party beneficiary.
The manner of obtaining consents and of evidencing the authorization, execution and delivery thereof by Certificateholders will be subject to such reasonable regulations as the Trustee and the Certificate Administrator may prescribe.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
General
The following is a general discussion of certain anticipated material federal income tax consequences of the purchase, ownership and disposition of the Offered Certificates. This discussion is based on U.S. tax laws, the U.S. Treasury Regulations (“Regulations”) and decisions now in effect, all of which are subject to change, potentially with retroactive effect, or to differing interpretations. No rulings have been or will be sought from the Internal Revenue Service (the “IRS”) with respect to any of the matters discussed below, and no assurance can be given that the views of the IRS with respect to those matters will not differ from that described below.
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This discussion addresses only Offered Certificates held by Beneficial Owners (as defined below) as “capital assets” within the meaning of Section 1221 of the Internal Revenue Code of 1986, as amended (the “Code”). The discussion does not purport to cover all federal income tax consequences that may be relevant to a Beneficial Owner in light of its particular circumstances or to Beneficial Owners subject to special rules, such as certain financial institutions, insurance companies, certain former citizens or residents of the United States, traders in securities that elect to use a mark-to-market method of accounting for their securities holdings, dealers, Beneficial Owners holding Offered Certificates as part of a hedging transaction, straddle, conversion transaction or synthetic security transaction, U.S. Beneficial Owners (as defined below) whose functional currency (as defined in Section 985 of the Code) is not the U.S. dollar, partnerships or other pass-through entities, tax-exempt persons, regulated investment companies, or Beneficial Owners subject to the alternative minimum tax or Medicare tax on net investment income. In all cases, you are advised to consult your own tax advisors regarding the U.S. federal tax consequences to you of purchasing, owning and disposing of Offered Certificates, including the advisability of making any of the elections described below and the need to make any disclosures in connection with relevant tax filings, as well as any tax consequences arising under the laws of any state, local, foreign or other taxing jurisdiction. In addition, this summary of certain U.S. federal tax consequences is for general information only and is not tax advice for any particular Beneficial Owner.
In addition, this discussion does not address the state, local or other tax consequences of the purchase, ownership and disposition of Offered Certificates. We recommend that you consult your own tax advisor in determining the state, local and other tax consequences of the purchase, ownership and disposition of Offered Certificates.
For purposes of this summary, “U.S. Person” means:
an individual who, for U.S. federal income tax purposes, is a citizen or resident of the United States;
a corporation (or other business entity treated as a corporation for U.S. federal income tax purposes) created or organized in or under the laws of the United States, any state thereof, or the District of Columbia;
an estate the income of which is subject to U.S. federal income taxation regardless of its source; or
a trust if a court within the United States is able to exercise primary supervision over the administration of the trust and one or more U.S. persons have the authority to control all substantial decisions of the trust. Certain trusts in existence on or before August 20, 1996 that were treated as U.S. persons under the law in effect on such date but fail to qualify as U.S. persons under current law may elect to continue to be treated as U.S. persons to the extent prescribed in the applicable Regulations.
“U.S. Beneficial Owner” means a U.S. Person that beneficially owns an Offered Certificate. “Non-U.S. Beneficial Owner” means a Beneficial Owner of an Offered Certificate that is not a U.S. Person or a partnership. “Beneficial Owner” means either a U.S. Beneficial Owner or a Non-U.S. Beneficial Owner.
If a partnership (or other entity treated as a partnership for U.S. federal income tax purposes) holds Offered Certificates, the treatment of a partner generally will depend upon the status of the particular partner and the activities of the partnership. Partners in such partnerships should consult their own tax advisors.
Tax Treatment of the Trust
In the opinion of Shearman & Sterling LLP, U.S. federal tax counsel to Freddie Mac, although the matter is not free from doubt, neither the Trust nor any portion thereof will be classified as an association taxable as a corporation, a publicly traded partnership taxable as a corporation or a taxable mortgage pool taxable as a corporation for U.S. federal income tax purposes. The Trust and Servicing Agreement contains certain restrictions on transfers of the Class D Certificate that are designed to prevent the Trust from being classified as a publicly traded partnership or a taxable mortgage pool. Accordingly, the opinion will be based on the assumption that all terms of the Trust and Servicing Agreement and related documents will be complied with.
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Tax Treatment of the Certificates
Treatment of the Offered Certificates as Indebtedness. In the opinion of Shearman & Sterling LLP, the Offered Certificates will be treated as indebtedness for U.S. federal income tax purposes. The Trust will agree, and the beneficial owners of the Offered Certificates will agree by their purchase or other acquisition of such Offered Certificates, to treat the Offered Certificates as debt instruments for U.S. federal income tax purposes. Neither such agreement nor an opinion of counsel is binding on the IRS or the courts.
Status as Real Property Loans or Government Securities. Although principal on the Offered Certificates, in some periods, is payable in relation to principal payments made with respect to the Mortgage Loans, the Offered Certificates do not, for U.S. federal income tax purposes, represent ownership interests in the Mortgage Loans. Offered Certificates held by a domestic building and loan association will not constitute “loans . . . secured by an interest in real property” within the meaning of Section 7701(a)(19)(C)(v) of the Code. Offered Certificates held by a real estate investment trust will not constitute “real estate assets” within the meaning of Section 856(c)(5)(B) of the Code and interest on Offered Certificates will not be considered “interest on obligations secured by mortgages on real property” within the meaning of Section 856(c)(3)(B) of the Code. In addition, the Offered Certificates will not be “qualified mortgages” within the meaning of Section 860G(a)(3) of the Code. Accordingly, the Offered Certificates will not be appropriate investments for any potential investor requiring that the Offered Certificates be afforded the treatment provided by these sections of the Code. Nevertheless, Freddie Mac is an instrumentality of the United States for purposes of Section 7701(a)(19) of the Code and because the Offered Certificates are guaranteed by Freddie Mac, Offered Certificates held by a real estate investment trust will constitute “Government securities” within the meaning of Section 856(c)(4)(A) of the Code, Offered Certificates held by a regulated investment company will constitute “Government securities” within the meaning of Section 851(b)(3) of the Code, and Offered Certificates will constitute “government securities” for purposes of Section 1.860G-2(a)(8)(ii) of the Regulations.
Interest and OID. The Regulations governing contingent payment debt instruments (the “CPDI Regulations”) do not currently provide tax accounting rules for instruments, like the Offered Certificates, that have timing contingencies. Accordingly, while the matter is unclear, Freddie Mac intends to tax account for the Offered Certificates in the manner described below and not in the manner described in the CPDI Regulations. The IRS could disagree with this tax accounting methodology and require U.S. Beneficial Owners to accrue interest on the Offered Certificates under a different tax accounting regime, including the CPDI Regulations, in which case the timing, amount and character of income recognized by a U.S. Beneficial Owner with respect to the Offered Certificates could be materially different than under the method that Freddie Mac intends to use that is described below.
Section 1272(a)(6) of the Code provides rules for the accrual of original issue discount (“OID”) in cases when principal payments for a debt instrument are accelerated because of prepayments on other obligations securing the debt instrument. The remainder of this discussion assumes that the tax accounting methodology for the Offered Certificates set forth below, based on the principles of Section 1272(a)(6) of the Code, will be respected for U.S. federal income tax purposes other than as specifically discussed otherwise in this Offering Circular. U.S. Beneficial Owners should consult their tax advisors regarding the proper manner of tax accounting for the Offered Certificates for U.S. federal income tax purposes, including the potential application of the CPDI Regulations.
A U.S. Beneficial Owner of an Offered Certificate must include interest payable on the Offered Certificate in income according to its normal method of accounting, to the extent such interest constitutes “qualified stated interest” as defined below. A debt instrument is issued with OID to the extent its stated redemption price at maturity exceeds its issue price. If the amount of OID on the Offered Certificates is less than a statutorily defined de minimis amount, the Offered Certificates will be treated as having been issued without OID. The de minimis amount equals the product of: (a) 0.25%, (b) the stated redemption price at maturity, and (c) the weighted average maturity of the Offered Certificates. The issue price of an issue of debt instruments issued for money is the first price at which a substantial portion of the issue is sold to investors (not including persons acting in the capacity of placement agents, underwriters, or wholesalers). The stated redemption price at maturity of a debt instrument includes all payments, other than interest unconditionally payable at fixed intervals of one year or less at either a fixed rate or a variable rate (“Qualified Stated Interest”). Interest is unconditionally payable only if either (a) reasonable legal remedies exist to compel the timely payment of interest or (b) the terms or conditions under which the debt instrument is issued make the late payment or nonpayment of interest a remote likelihood. Because stated interest on the Offered
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Certificates is expected to be treated as Qualified Stated Interest, the Offered Certificates are not expected to be treated as issued with OID except on the basis of their issue price.
If the Offered Certificates are treated as having been issued with OID, a U.S. Beneficial Owner must include its proportionate share of such OID in income as it accrues, which may be prior to the receipt of the cash attributable to that income. Although not free from doubt, any OID accruals on the Offered Certificates should be computed under the method set out in Section 1272(a)(6) of the Code. Section 1272(a)(6) of the Code requires that a prepayment assumption (the “Prepayment Assumption”) be used with respect to the collateral underlying debt instruments in computing the accrual of discount if payments under such debt instruments may be accelerated by reason of prepayments of other obligations securing such debt instruments, 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 U.S. Beneficial Owner’s inclusion in gross income under Section 1272(a)(6) of the Code for an accrual period (the “Section 1272(a)(6) Inclusion”) will equal the excess, if any, of (i) the sum of (A) the present value of all payments remaining to be made on the Offered Certificate as of the end of the accrual period and (B) the payments made on the Offered Certificate during the accrual period of amounts included in the stated redemption price, over (ii) the adjusted issue price of such Offered Certificate at the beginning of the accrual period. The present value of remaining payments will be calculated based on (i) the original yield to maturity of the Offered Certificate, calculated as of the issue date, (ii) events (including actual prepayments) that have occurred prior to the end of the accrual period, and (iii) the Prepayment Assumption. The adjusted issue price of an Offered Certificate is the sum of its issue price and the aggregate amount of previously accrued OID, less any prior payments of amounts included in its stated redemption price at maturity. The original yield to maturity of an Offered Certificate and all remaining payments to be made on an Offered Certificate as of the end of an Interest Accrual Period will be determined by projecting a level of future payments assuming that the variable rate is a fixed rate equal to the value of the variable rate as of the issue date.
Under Section 1272(a)(6), accruals of OID will increase or decrease (but never below zero) to reflect the fact that payments on the collateral are occurring at a rate that is faster or slower than that assumed under the Prepayment Assumption. If a Section 1272(a)(6) Inclusion with respect to the Offered Certificates is negative for any period, a U.S. Beneficial Owner generally will not be permitted to deduct such amount currently and will be entitled only to offset such amount against future positive Section 1272(a)(6) Inclusions with respect to the Offered Certificates, and Freddie Mac intends to report income to the IRS in all cases in this manner. Subject to the discussion below, all or a portion of such a U.S. Beneficial Owner’s loss may be treated as a capital loss on the disposition of an Offered Certificate or upon the retirement of an Offered Certificate on the Final Certificate Maturity Date if such U.S. Beneficial Owner holds the Offered Certificate as a capital asset. The timing and character of such losses is not entirely clear, and U.S. Beneficial Owners should consult their tax advisors regarding an Offered Certificate that has a negative Section 1272(a)(6) Inclusion during any accrual period.
Market Discount and Premium. A U.S. Beneficial Owner that purchases an Offered Certificate at a “market discount” (i.e., at a price less than its stated redemption price at maturity or, for an obligation issued with OID, its adjusted issue price) will be required (unless such difference is a de minimis amount) to treat any principal payments on, or any gain realized in a taxable disposition or retirement of, such Offered Certificate as ordinary income to the extent of the market discount that accrued while such U.S. Beneficial Owner held such Offered Certificate, unless the U.S. Beneficial Owner elects to include such market discount in income on a current basis. A U.S. Beneficial Owner of an Offered Certificate that acquired it at a market discount and that does not elect under Section 1278(b) of the Code to include market discount in income on a current basis also may be required to defer the deduction for a portion of the interest expense on any indebtedness incurred or continued to purchase or carry the Offered Certificate until the deferred income is realized. A U.S. Beneficial Owner who elects to include market discount in income currently must accrue market discount on all debt instruments that it acquires in the taxable year or thereafter and may revoke such election only with the consent of the IRS.
A U.S. Beneficial Owner that purchases an Offered Certificate for an amount in excess of its remaining stated redemption price at maturity will be treated as having premium with respect to such Offered Certificate in the amount of such excess. A U.S. Beneficial Owner that purchases an Offered Certificate at a premium is not required to include in income any OID with respect to such Offered Certificate. If such a U.S. Beneficial Owner makes an election under Section 171(c)(2) of the Code to treat such premium as “amortizable bond premium,” the amount of interest on an Offered Certificate that must be included in such U.S. Beneficial Owner’s income for each accrual
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period will be reduced (but not below zero) by the portion of the premium allocable to such period based on the Offered Certificate’s yield to maturity. If a U.S. Beneficial Owner makes this election, the election will also apply to all taxable bonds held by the U.S. Beneficial Owner at the beginning of, or acquired during and after, the first taxable year to which the election applies, and this election is irrevocable without the consent of the IRS. If this election is not made, such a U.S. Beneficial Owner must include the full amount of each interest payment in income in accordance with its regular method of accounting and will take the premium into account in computing its gain or loss upon the sale or other disposition or retirement of the Offered Certificate. Thus, the premium may reduce capital gain or increase capital loss realized on the disposition or retirement of the Offered Certificate. See “—Disposition or Retirement of the Offered Certificates” below.
Market discount and premium on a debt instrument to which Section 1272(a)(6) of the Code applies may be treated as accruing either (a) on the basis of a constant interest rate or (b)(1) in the case of an Offered Certificate issued without OID, in the ratio of stated interest payable in the relevant period to the total stated interest remaining to be paid from the beginning of such period (computed taking into account the Prepayment Assumption) or (2) in the case of an Offered Certificate issued with OID, in the ratio of original issue discount accrued for the relevant period to the total remaining OID at the beginning of such period. U.S. Beneficial Owners should consult their own tax advisors regarding the application of the market discount and premium rules and the advisability of making the elections described above for their investments in the Offered Certificates.
Accrual Method Election for the Offered Certificates. A U.S. Beneficial Owner of an Offered Certificate is permitted to elect to include in gross income its entire return on the Offered Certificate (i.e., the excess of all remaining payments to be received on the Offered Certificate over the amount paid for the Offered Certificate by such U.S. Beneficial Owner) based on the compounding of interest at a constant rate (an “Accrual Method Election”). In some instances, the Accrual Method Election may mitigate the amount of potential negative Section 1272(a)(6) Inclusion that may arise with respect to the Offered Certificates. However, if a U.S. Beneficial Owner makes this election with respect to an Offered Certificate acquired with market discount or premium, respectively, it will be deemed to have made the elections under Section 1278(b) or 171(c)(2) of the Code, respectively. U.S. Beneficial Owners are urged to consult their own tax advisors regarding the consequences of making this election in their particular circumstances.
Disposition or Retirement of the Offered Certificates. Upon the sale, exchange or other disposition of an Offered Certificate, or upon the retirement of an Offered Certificate, a U.S. Beneficial Owner will recognize gain or loss in an amount equal to the difference, if any, between the amount realized upon the disposition or retirement (not including any amount attributable to accrued but unpaid interest, which will be taxable separately as ordinary interest income to the extent not previously included in gross income) and the U.S. Beneficial Owner’s adjusted tax basis in the Offered Certificate.
A U.S. Beneficial Owner’s adjusted tax basis in an Offered Certificate for determining gain or loss on the disposition or retirement of the Offered Certificate generally is the U.S. Beneficial Owner’s purchase price of the Offered Certificate, increased by the amount of any OID and any market discount previously included in such U.S. Beneficial Owner’s gross income with respect to such Offered Certificate, and decreased (but not below zero) by (i) the amount of any payments on the Offered Certificate that are part of its stated redemption price at maturity (i.e., payments other than qualified stated interest); and (ii) the portion of any premium applied to reduce interest payments as described above.
Gain or loss recognized upon the disposition or retirement of an Offered Certificate will be capital gain or loss, except to the extent the gain represents accrued market discount on such Offered Certificate not previously included in gross income, to which extent such gain or loss would be treated as ordinary income. Any capital gain or loss upon the disposition or retirement of such Offered Certificate will be long-term capital gain or loss if at the time of disposition or retirement the U.S. Beneficial Owner held the Offered Certificate for more than one year. Certain noncorporate U.S. Beneficial Owners (including individuals) are eligible for preferential rates of U.S. federal income taxation in respect of long-term capital gains. The deductibility of capital losses is subject to limitations under the Code.
Non-U.S. Beneficial Owners. Subject to the following discussion, payments on the Offered Certificates to a Non-U.S. Beneficial Owner will not be subject to U.S. withholding tax.
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Interest (including OID) on an Offered Certificate held by a Non-U.S. Beneficial Owner will be subject to a 30-percent U.S. federal income and withholding tax, unless an exemption applies. The following exemptions generally exist: (1) an exemption for “portfolio interest,” (2) an exemption or reduced rate for Non-U.S. Beneficial Owners entitled to the benefits of a treaty and (3) an exemption for Non-U.S. Beneficial Owners with “effectively connected income.”
Interest on an Offered Certificate held by a Non-U.S. Beneficial Owner that is not effectively connected with a trade or business of the Non-U.S. Beneficial Owner within the United States (or if an income tax treaty applies, such interest is not attributable to a U.S. permanent establishment) generally will be exempt from U.S. federal income and withholding taxes under the “portfolio interest exemption” if the person otherwise required to withhold receives, in the manner provided by U.S. tax authorities, a certification that the Non-U.S. Beneficial Owner is not a U.S. Person. A Non-U.S. Beneficial Owner may provide this certification by providing a properly completed Form W-8BEN, Form W-8BEN-E or other documentation as may be prescribed by U.S. tax authorities. The portfolio interest exemption will not apply if the Non-U.S. Beneficial Owner is a bank that receives payments on the Offered Certificates that are described in Section 881(c)(3)(A) of the Code. Moreover, the portfolio interest exemption also may not apply in situations in which a Beneficial Owner is affiliated in any way with a beneficial owner of the Class D Certificate. In such circumstances, a Beneficial Owner should consult with its tax advisor to determine the applicability of the portfolio interest exemption.
In addition, the portfolio interest exemption will not apply if the interest payable on the Offered Certificates is “contingent interest” within the meaning of Section 871(h)(4)(A) of the Code. Among the types of interest treated as contingent for this purpose is interest determined by reference to the income or profits of the issuer or a related person, or a change in value of any property of the issuer or a related person. Certain types of interest that would otherwise be considered contingent are excluded from the definition of contingent interest, such as interest on nonrecourse indebtedness or interest that is determined by reference to interest and/or principal payments on other debt instruments that do not pay contingent interest. Shearman & Sterling LLP is of the opinion that interest payable on the Offered Certificates will not be contingent interest for this purpose.
Interest on an Offered Certificate held by a Non-U.S. Beneficial Owner may be exempt from U.S. federal income and withholding taxes (or subject to such tax at a reduced rate) under an income tax treaty between the United States and a foreign jurisdiction. In general, the exemption (or reduced rate) applies only if the Non-U.S. Beneficial Owner provides a properly completed Form W-8BEN, Form W-8BEN-E or other documentation as may be prescribed by U.S. tax authorities.
Interest on an Offered Certificate held by a Non-U.S. Beneficial Owner will be exempt from the 30-percent U.S. withholding tax if it is effectively connected with the conduct of a trade or business within the United States (and if an income tax treaty applies, such interest is attributable to a U.S. permanent establishment) and the Non U.S. Beneficial Owner establishes this exemption by providing a properly completed Form W-8ECI or other documentation as may be prescribed by U.S. tax authorities. Interest on an Offered Certificate that is, or is deemed to be, effectively connected with the conduct of a trade or business within the United States by a Non-U.S. Beneficial Owner (and if an income tax treaty applies, such interest is attributable to a U.S. permanent establishment), although exempt from the 30-percent U.S. withholding tax, generally will be subject to U.S. federal income tax at graduated rates and, in the case of a Non-U.S. Beneficial Owner that is a foreign corporation, may also be subject to U.S. federal branch profits tax.
Except as provided in the discussion of backup withholding below, a Non-U.S. Beneficial Owner of an Offered Certificate will not be subject to U.S. federal income and withholding taxes on any gain realized on the sale, exchange, retirement or other disposition of the Offered Certificate (other than amounts attributable to accrued interest) unless (i) such gain is, or is deemed to be, effectively connected with a trade or business within the United States of the Non-U.S. Beneficial Owner (and, if an income tax treaty applies, such gain is attributable to a U.S. permanent establishment); or (ii) such Non-U.S. Beneficial Owner is an individual who is present in the United States for 183 days or more in the taxable year of the sale, exchange, retirement or other disposition and certain conditions are met. Except as provided in the discussion of backup withholding below, gain on the sale of an Offered Certificate that is, or is deemed to be, effectively connected with the conduct of a trade or business within the United States by a Non-U.S. Beneficial Owner (and, if an income tax treaty applies, such gain is attributable to a U.S. permanent establishment), although exempt from U.S. withholding tax, generally will be subject to U.S. federal
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income tax at graduated rates, and in the case of a Non-U.S. Beneficial Owner that is a foreign corporation, may also be subject to U.S. federal branch profits tax.
If U.S. federal income tax is withheld on a payment with respect to the Offered Certificates, Freddie Mac has no obligation to pay additional interest or other amounts as a consequence thereof or to redeem any Offered Certificate before its stated maturity.
Debt-Equity Regulations. The IRS has recently issued final and temporary regulations under Section 385 of the Code that in certain circumstances treat an instrument that otherwise would be treated as debt for U.S. federal income tax purposes as equity during periods in which the instrument is held by a member of an “expanded group” that includes the issuer of the instrument. An expanded group is generally a group of corporations or controlled partnerships connected through 80 percent or greater direct or indirect ownership links with a common parent corporation that is not a real estate investment trust, regulated investment company or corporation subject to taxation under subchapter S of the Code.
It is not expected that these regulations will apply to the Offered Certificates except in limited circumstances in which the beneficial owners of the Class D Certificates are highly related to a Beneficial Owner of an Offered Certificate. To the extent a Beneficial Owner of an Offered Certificate is affiliated in any way with a beneficial owner of a Class D Certificate, the Beneficial Owner of such Offered Certificate should consult its tax advisor. The regulations are complex, and the IRS has reserved certain portions of the regulations pending its further consideration. If the Offered Certificates were characterized as equity under these rules, they may thereafter be treated as newly issued debt when acquired by a holder that is not a member of an expanded group including a beneficial owner of the Class D Certificates. Offered Certificates treated as newly issued under this rule may have tax characteristics differing from Offered Certificates that were not characterized as equity. In the event of such recharacterization, it is not expected that such Offered Certificates will be tracked separately.
Potential investors in the Offered Certificates should consult with their own tax advisors regarding the possible effect of the Section 385 regulations on them.
Information Reporting and Backup Withholding
Payments of interest (including OID, if any) on an Offered Certificate to a U.S. Beneficial Owner are required to be reported to the IRS and the U.S. Beneficial Owner. Payments of interest (including OID, if any) on an Offered Certificate to a Non-U.S. Beneficial Owner generally will be reported to U.S. tax authorities and the Non-U.S. Beneficial Owner. Form W-8BEN, Form W-8BEN-E, Form W-8ECI or other documentation or information about a Non-U.S. Beneficial Owner may be provided to U.S. tax authorities.
Backup withholding of U.S. federal income tax at the applicable rate may apply to a payment made in respect of an Offered Certificate, as well as a payment of proceeds from the sale of an Offered Certificate, to a Beneficial Owner (other than certain corporations or other exempt recipients), unless the Beneficial Owner provides certain information. Any amount withheld under these rules will be creditable against the Beneficial Owner’s U.S. federal income tax liability, and if withholding results in an overpayment of taxes, the Beneficial Owner may apply for a refund from the IRS. If a Beneficial Owner (other than certain corporations or other exempt recipients) sells an Offered Certificate before the Final Certificate Maturity Date to (or through) certain brokers, the broker must report the sale to the IRS and the Beneficial Owner unless, in the case of a Non-U.S. Beneficial Owner, the Non-U.S. Beneficial Owner certifies that it is not a U.S. Person (and certain other conditions are met). The broker may be required to withhold U.S. federal income tax at the applicable rate on the entire sale price unless the Beneficial Owner provides certain information and, in the case of a Non-U.S. Beneficial Owner, the Non-U.S. Beneficial Owner certifies that it is not a U.S. Person (and certain other conditions are met).
FATCA Withholding
Final regulations have been promulgated to implement the Foreign Account Tax Compliance Act (“FATCA”) provisions of the Hiring Incentives to Restore Employment Act (the “FATCA Regulations”). The FATCA provisions impose a 30 percent withholding tax on foreign financial institutions and certain nonfinancial foreign entities that have not entered into an agreement with the U.S. Treasury Department to provide information regarding U.S. individuals who have accounts with, or equity interests in, such institutions or entities. If the required
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information is not provided, Beneficial Owners holding obligations through such institutions or entities may be subject to withholding under FATCA. Currently, the FATCA Regulations generally apply to certain withholdable payments made to non-U.S. entities. The FATCA Regulations will also apply to certain gross proceeds on sales and dispositions occurring after December 31, 2018, and certain pass-thru payments made after December 31, 2018. Beneficial Owners should consult their tax advisors regarding the potential application and impact of the FATCA withholding rules based on their particular circumstances, including the applicability of any intergovernmental agreement modifying these rules.
In the event that a withholding tax under FATCA is imposed on any payment on, or gross proceeds from the disposition or redemption of, an Offered Certificate, Freddie Mac has no obligation to pay additional interest or other amounts as a consequence thereof or to redeem any Offered Certificate before its stated maturity.
THE U.S. FEDERAL TAX DISCUSSION SET FORTH ABOVE IS INCLUDED FOR GENERAL INFORMATION ONLY AND MAY NOT BE APPLICABLE DEPENDING UPON A BENEFICIAL OWNER’S PARTICULAR SITUATION. BENEFICIAL OWNERS SHOULD CONSULT THEIR OWN TAX ADVISORS REGARDING THE TAX CONSEQUENCES TO THEM OF THE OWNERSHIP AND DISPOSITION OF THE OFFERED CERTIFICATES, INCLUDING THE TAX CONSEQUENCES UNDER THE TAX LAWS OF THE UNITED STATES, STATES, LOCALITIES, COUNTRIES OTHER THAN THE UNITED STATES AND ANY OTHER TAXING JURISDICTIONS AND THE POSSIBLE EFFECTS OF CHANGES IN SUCH TAX LAWS.
CERTAIN ERISA CONSIDERATIONS
If you are—
a fiduciary of a Plan or
any other person investing “plan assets” of any Plan,
you should carefully review with your legal advisors whether the acquisition or holding of a Certificate would be a “prohibited transaction” or would otherwise be impermissible under ERISA or Code Section 4975.
The Plan Asset Regulations provide that if a Plan acquires a “guaranteed governmental mortgage pool certificate,” then, for purposes of the fiduciary responsibility and prohibited transaction provisions of ERISA and the Code, the Plan’s assets include the certificate and all of its rights in the certificate, but do not, solely by reason of the Plan’s holding of the certificate, include any of the mortgages underlying the certificate. Under the Plan Asset Regulations, the term “guaranteed governmental mortgage pool certificate” includes a certificate “backed by, or evidencing an interest in, specified mortgages or participation interests therein” if Freddie Mac guarantees the interest and principal payable on the certificate. The Plan Asset Regulations make it clear that Freddie Mac and other persons, in providing services for the assets in the pool, would not be subject to the fiduciary responsibility provisions of Title I of ERISA, or the prohibited transaction provisions of Section 406 of ERISA or Code Section 4975, merely by reason of the plan’s investment in a certificate. Although there is little authority in this regard, because (i) each Mortgage Loan that is an asset of the Trust will be specified in the Mortgage Loan Schedule or the Supplement to Mortgage Loan Schedule, (ii) the Class A Certificates are backed by the Mortgage Loans and (iii) Freddie Mac is guaranteeing payment of the interest and principal on the Class A Certificates, Freddie Mac believes that the Class A Certificates should qualify as “guaranteed governmental mortgage pool certificates” and thus generally may be purchased and held by, on behalf of, or with the assets of Plans.
THE SALE OF CLASS A CERTIFICATES TO A PLAN IS IN NO RESPECT A REPRESENTATION BY THE TRUST OR ANY PLACEMENT AGENT THAT THIS INVESTMENT MEETS ANY RELEVANT LEGAL REQUIREMENTS WITH RESPECT TO INVESTMENTS BY PLANS GENERALLY OR ANY PARTICULAR PLAN, OR THAT THIS INVESTMENT IS APPROPRIATE FOR PLANS GENERALLY OR ANY PARTICULAR PLAN.
Exempt Plan
A governmental plan as defined in Section 3(32) of ERISA and certain other employee benefit plans and arrangements are not subject to ERISA or Code Section 4975. However, such plans may be subject to Similar Law
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or other legal restrictions. In addition, prospective investors in the Offered Certificates should note that equity interests in the Borrowers with respect to certain Mortgage Loans may be directly or indirectly owned by one or more governmental plans. A fiduciary of any such plan should make its own determination as to the need for and the availability of any exemptive relief under Similar Law or other law.
LEGAL INVESTMENT
The Offered Certificates will not constitute “mortgage related securities” for purposes of SMMEA. The appropriate characterization of the Offered Certificates under various legal investment restrictions, and thus the ability of investors subject to these restrictions to purchase the Offered Certificates, are subject to significant interpretive uncertainties. 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 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 and market value of the Offered Certificates.
We have not engaged any nationally recognized statistical rating organization, as defined in Section 3(a)(62) of the Exchange Act, to rate the Certificates. The absence of ratings may adversely affect the ability of an investor to purchase or retain, or otherwise impact the liquidity, market value and regulatory characteristics of, the Certificates.
Accordingly, all investors whose investment activities are subject to legal investment laws and regulations, regulatory capital requirements or review by regulatory authorities should consult with their own legal advisors in determining whether and to what extent the Offered Certificates will constitute legal investments for them or are subject to investment, capital, or other regulatory restrictions.
PLAN OF DISTRIBUTION
Subject to the terms and conditions set forth in the Placement Agency Agreement, dated January 24, 2017 (the “Placement Agency Agreement”), as amended by the Amendment Number 1 to the Placement Agency Agreement, dated January 31, 2017, each among Freddie Mac and the applicable Placement Agents, each of the Placement Agents has agreed to use commercially reasonable efforts to place the Offered Certificates. The Placement Agents will offer the Offered Certificates to prospective investors from time to time in negotiated transactions or otherwise at varying prices determined at the time of sale. Except as set forth in the Placement Agency Agreement, we will have the sole right to accept or reject any or all offers to purchase the Offered Certificates, in consideration for which (with respect to Offered Certificates sold) the Placement Agents will receive a fee based on the initial principal balance of the Offered Certificates sold to the Placement Agents or investors. Each Placement Agent may purchase the Offered Certificates but has no obligation to do so. In the event the Offered Certificates are placed with investors, the Placement Agents may purchase such Offered Certificates for resale to the investors.
The Offered Certificates have not been and will not be registered or qualified under the Securities Act, or under the securities or blue sky laws of any state in the United States or any foreign securities laws, nor has the SEC or a regulatory authority of any such state or foreign jurisdiction passed upon the accuracy or adequacy of this offering circular. This offering circular does not constitute an offer to sell or a solicitation of an offer to buy the Offered Certificates in any jurisdiction where such offer or solicitation is unlawful.
In connection with the offering, the Placement Agents may purchase and sell the Offered Certificates in the open market. These transactions may include stabilizing transactions and purchases to cover short positions created by the Placement Agents in connection with the offering. Stabilizing transactions consist of certain bids or purchases for the purpose of preventing or retarding a decline in the market price of the Offered Certificates and short positions created by a Placement Agent involve the sale by a Placement Agent of a greater number of Offered Certificates than it purchases in the offering, if it purchases any Offered Certificates. The Placement Agents also may impose a penalty bid, whereby selling concessions allowed to broker-dealers in respect of the Offered Certificates sold in this offering may be reclaimed by the Placement Agents if such Offered Certificates are
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purchased by the Placement Agents in stabilizing or covering transactions. These activities may stabilize, maintain or otherwise affect the market price of the Offered Certificates, which may be higher than the price that might otherwise prevail in the open market and these activities, if commenced, may be discontinued at any time. These transactions may be effected in the over-the-counter market or otherwise.
Each Placement Agent has represented and agreed that:
(a) in the United Kingdom, it has only communicated or caused to be communicated and will only communicate or cause to be communicated an invitation or inducement to engage in investment activity (within the meaning of Section 21 of the FSMA) received by it in connection with the issue or sale of the Offered Certificates in circumstances in which Section 21(1) of the FSMA does not apply to the Trust; and
(b) it has complied and will comply with all applicable provisions of the FSMA with respect to anything done by it in relation to the Offered Certificates in, from or otherwise involving the United Kingdom.
In relation to each member state of the European Economic Area which has implemented the Prospectus Directive (each, a “Relevant Member State”), each Placement Agent has represented and agreed that with effect from and including the date on which the Prospectus Directive is implemented in that Relevant Member State (the “Relevant Implementation Date”) it has not made and will not make an offer of Offered Certificates to the public in that Relevant Member State other than:
(a) to any legal entity which is a qualified investor as defined in the Prospectus Directive;
(b) to fewer than 150 natural or legal persons (other than qualified investors as defined in the Prospectus Directive), as permitted under the Prospectus Directive, subject to obtaining the prior consent of the Trust for any such offer; or
(c) in any other circumstances falling within Article 3(2) of the Prospectus Directive,
provided, that no such offer of Offered Certificates will require the Trust or either Placement Agent to publish a prospectus pursuant to Article 3 of the Prospectus Directive.
For the purposes of this provision, the expression “an offer of Offered Certificates to the public” in relation to any Offered Certificates in any Relevant Member State means the communication in any form and by any means of sufficient information on the terms of the offer and the Offered Certificates to be offered so as to enable an investor to decide to purchase or subscribe for the Offered Certificates, as the same may be varied in that Relevant Member State by any measure implementing the Prospectus Directive in that Relevant Member State, the expression “Prospectus Directive” means Directive 2003/71/EC (as amended, including by Directive 2010/73/EU), and includes any relevant implementing measure in the Relevant Member State.
Freddie Mac has agreed in the Placement Agency Agreement to indemnify the Placement Agents and their controlling persons against liabilities in connection with the offer and sale of the Offered Certificates, including liabilities under the Securities Act, and to contribute to payments that the Placement Agents may be required to make in respect of such liabilities.
The Offered Certificates are a new issue of securities with no established trading market, and we cannot assure you that a secondary market for the Offered Certificates will develop. The Placement Agents currently intend to make a market in the Offered Certificates, but they are under no obligation to do so and may discontinue their market-making activities at any time without notice. If a secondary market does develop, we cannot assure you that it will provide Holders of Offered Certificates with liquidity of investment or that it will continue for the life of the Offered Certificates.
The primary source of ongoing information available to investors concerning the Offered Certificates will be the monthly statements under “Description of the Certificates—Reports to Certificateholders; Available Information” in this offering circular, which will include information as to the outstanding principal balances of the Offered Certificates and the status of the applicable form of credit enhancement. Except as described under “Description of the Certificates—Reports to Certificateholders; Available Information” in this offering circular, we
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cannot assure you that any additional information regarding the Offered Certificates will be available through any other source. 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
The validity of the Certificates will be passed upon for the Trust and the Mortgage Loan Seller by Cadwalader, Wickersham & Taft LLP, New York, New York. Certain legal matters will be passed upon for the Placement Agents by Dechert LLP.
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GLOSSARY
“30/360 Basis” means the accrual of interest based on a 360-day year consisting of 12 months, each consisting of 30 days.
“Accepted Servicing Practices” means, servicing and administering the Mortgage Loans:
(a) (i) in the same manner in which, and with the same care, skill, prudence and diligence with which the Master Servicer or the Special Servicer, as the case may be, services and administers similar mortgage loans for other third party portfolios, giving due consideration to the customary and usual standards of practice of prudent institutional commercial and multifamily mortgage loan servicers servicing mortgage loans for third parties, which includes, for purposes of this clause (a)(i), Freddie Mac Servicing Practices, and (ii) with the same care, skill, prudence and diligence with which the Master Servicer or the Special Servicer, as the case may be, services and administers similar commercial and multifamily mortgage loans owned by it, whichever is higher;
(b) with a view to the timely collection of all scheduled payments of principal and interest under the Mortgage Loans and, in the case of the Special Servicer, if a Mortgage Loan comes into and continues in default and if, in the judgment of the Special Servicer, no satisfactory arrangements can be made for the collection of the delinquent payments, the maximization of the recovery on that Mortgage Loan to the Certificateholders (as a collective whole), on a net present value basis; but
(c) without regard to—
(i) any relationship that the Master Servicer or the Special Servicer, as the case may be, or any affiliate thereof may have with the related Borrower, the Mortgage Loan Seller or any other party to the Trust and Servicing Agreement;
(ii) the ownership of any Certificate or subordinate debt by the Master Servicer or the Special Servicer, as the case may be, or by any affiliate thereof;
(iii) the right of the Master Servicer (or any affiliate thereof) or the Special Servicer (or any affiliate thereof), as the case may be, to receive reimbursement of costs, or the sufficiency of any compensation payable to it, or with respect to any particular transaction;
(iv) any potential conflict of interest arising from the ownership, servicing or management for others of any other mortgage loans or mortgaged properties by the Master Servicer or the Special Servicer, as the case may be, or any affiliate thereof, as applicable; and
(v) any debt that the Master Servicer or the Special Servicer, as the case may be, or any affiliate thereof has extended to any Borrower or any of its affiliates.
“Actual/360 Basis” means the accrual of interest based on the actual number of days elapsed during each one-month accrual period in a year assumed to consist of 360 days.
“Additional Servicing Compensation” means any fees and other amounts that the Master Servicer or the Special Servicer is entitled to receive or retain as additional servicing compensation under the Trust and Servicing Agreement.
“Approved Exceptions” means (i) with respect to any Mortgage Loan transferred on the Closing Date, any exceptions to the representations and warranties set forth in Exhibit D to this offering circular that were approved by Freddie Mac during the origination process for such Mortgage Loan, as set forth in Exhibit E to this offering circular, and (ii) with respect to any Mortgage Loan transferred after the Closing Date, any exceptions to the representations and warranties set forth in Exhibit D to this offering circular that were approved by Freddie Mac during the origination process for such Mortgage Loan, as set forth in a schedule to the Trust and Servicing Agreement.
“Asset Mismatch” means, with respect to any Payment Date, the occurrence of the aggregate Stated
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Principal Balance of the Mortgage Loans (excluding Mortgage Loans that have been defeased) as of such Payment Date (as disclosed in the CREFC® loan periodic update file delivered by the Master Servicer with respect to such Payment Date) being less than 80% of the Total Trust Assets as of such Payment Date (as disclosed in the CREFC® loan periodic update file and the account statement delivered by the Master Servicer with respect to such Payment Date).
“Auction Procedures” means the procedures set forth in Exhibit F to this offering circular, as such procedures may be modified from time to time by the Special Servicer in accordance with the Servicing Standard.
“Available Distribution Amount” means:
(a) With respect to any Revolving Payment Date, an amount equal to the sum (without duplication) of the aggregate amount received on or with respect to the Mortgage Loans during the related Collection Period (including any Net Investment Loss deposited into the Collection Account under the Trust and Servicing Agreement) and on deposit in the Collection Account as of the close of business on the second Business Day preceding the related Master Servicer Remittance Date (after giving effect to any withdrawal of funds in the Collection Account to pay any Program Expenses on such Business Day), exclusive of any portion of such aggregate amount that is comprised of one or more of the following amounts (without duplication):
(i) all Monthly Payments collected but due on a Due Date after the end of the related Collection Period;
(ii) any Principal Collections;
(iii) all amounts deposited in the Collection Account in error;
(iv) any Net Investment Earnings on deposit in the Collection Account;
(v) any Prepayment Charges received in respect of any Mortgage Loan;
(vi) any Additional Servicing Compensation that the applicable servicer is entitled to retain or receive under the Trust and Servicing Agreement; and
(vii) any amount received in respect of the interest that accrued on any Mortgage Loan on or prior to the date of the sale by the Mortgage Loan Seller of such Mortgage Loan to the Trust.
Notwithstanding the foregoing, any amounts received on or with respect to any Excluded Loan during any period commencing on the 1st day of the month in which such Excluded Loan was transferred to the Trust and ending on and including the Determination Date in such month will not be included in the Available Distribution Amount for the Payment Date relating to such Determination Date and will be included in the Available Distribution Amount for the Payment Date immediately following such Payment Date.
(b) With respect to any Remaining Term Payment Date, an amount equal to the sum (without duplication) of the aggregate amount received on or with respect to the Mortgage Loans during the related Collection Period (including any Net Investment Loss deposited into the Collection Account under the Trust and Servicing Agreement) and on deposit in the Collection Account as of the close of business on the second Business Day preceding the Master Servicer Remittance Date (after giving effect to any withdrawal of funds in the Collection Account to pay any Program Expenses on such Business Day), exclusive of:
(i) all Monthly Payments collected but due on a Due Date after the end of the related Collection Period.
(ii) all amounts deposited in the Collection Account in error;
(iii) any Net Investment Earnings on funds on deposit in the Collection Account;
(iv) any Prepayment Charges received in respect of any Mortgage Loan;
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(v) any Additional Servicing Compensation that the Applicable Servicer is entitled to retain or receive under the Trust and Servicing Agreement; and
(vi) any amount received in respect of the interest that accrued on any Mortgage Loan on or prior to the date of the sale by the Mortgage Loan Seller of such Mortgage Loan to the Trust.
“Available Principal Collections” means, with respect to any Remaining Term Payment Date, all or any portion of the Principal Collections received during the related Collection Period that have been deposited into the Distribution Account on the related Master Servicer Remittance Date.
“Balloon Payment” means, with respect to any Mortgage Loan and any date of determination, the scheduled payment of principal due on the Maturity Date of such Mortgage Loan (less principal included in the applicable amortization schedule or scheduled Monthly Payment).
“Borrower” means, with respect to any Mortgage Loan, the obligor or obligors on any related Mortgage Note or Mortgage Notes, including, without limitation, any Person that has acquired the related Mortgaged Property and assumed the obligations of the original obligor under the Mortgage Note or Mortgage Notes.
“Business Day” means any day other than a Saturday, a Sunday or any day on which banking institutions in the City and State of New York, or the cities in which (x) the offices at which the Certificate Administrator will administer the Trust and Servicing Agreement or exchange Certificates, or (y) the principal offices of Freddie Mac, the Trustee, the Certificate Administrator, the Custodian, any Third Party Master Servicer or any Third Party Special Servicer are located, are authorized or obligated by law, executive order or governmental decree to remain closed.
“Calculation Agent” means, for so long as any of the Class A Certificates remain outstanding, the Certificate Administrator or its designee.
“Certificate Administrator Aggregate Annual Cap Termination Date” means the first Determination Date following the date on which the Revolving Period ends.
“Certificate Administrator Fee” means the fee payable to the Certificate Administrator with respect to each Payment Date, accrued at the Certificate Administrator Fee Rate, on the Stated Principal Balance of each Mortgage Loan and, during the Revolving Period, the balance of the Principal Collections on deposit in the Collection Account, in each case, as of the first day of the applicable Loan Interest Accrual Period, computed on the same basis and in the same manner as interest is computed on such Mortgage Loan, as described under “The Mortgage Loan Purchase, Trust and Servicing Agreement—Matters Regarding the Trustee, the Certificate Administrator and the Custodian”.
“Certificate Administrator Fee Rate” means, with respect to each Mortgage Loan, 0.00650% per annum.
“Certificate Owner” means, with respect to a book-entry Certificate, the Person who is the beneficial owner of such Certificate as reflected on the books of the Depository or on the books of a Depository Participant or on the books of an indirect participating brokerage firm for which a Depository Participant acts as agent.
“Certificate Principal Balance” means with respect to each Certificate, as of any date of determination, the then current principal balance of such Certificate equal to the product of (a) the Percentage Interest evidenced by such Certificate, multiplied by (b) the then current Class Principal Balance of the related Class of Certificates.
“Certificateholder” or “Holder” means the Person in whose name a Certificate is registered in the certificate register; provided, however, that solely for the purposes of giving any consent, approval or waiver under the Trust and Servicing Agreement with respect to the rights, obligations or liabilities of the Trustee, the Custodian, the Certificate Administrator, the Master Servicer, the Special Servicer or the Guarantor, the Mortgage Loan Seller, any Certificate registered in the name of such Trustee, Custodian, Certificate Administrator, Master Servicer, Special Servicer, Guarantor, Mortgage Loan Seller or any affiliate of any of them, as applicable, will be deemed not to be outstanding, and the Voting Rights to which it is entitled will not be taken into account in determining whether the requisite percentage of Voting Rights necessary to effect any such consent, approval or waiver has been obtained;
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provided, further, that (a) such restrictions will not apply to the determination of the Directing Investor (except as otherwise provided in the definition of “Directing Investor”) and (b) except with respect to increases in compensation or material reductions in obligations, the foregoing will not apply if the Trustee, the Custodian, the Certificate Administrator, the Master Servicer, the Special Servicer, the Mortgage Loan Seller or the Guarantor, as the case may be, and/or their affiliates, own the entire Class of Certificates affected by such action, vote, consent or waiver. The Trustee, the Custodian and the Certificate Administrator will be entitled to request and conclusively rely upon a certificate of the Master Servicer, the Special Servicer, the Mortgage Loan Seller or the Guarantor in determining whether a Certificate is registered in the name of an affiliate of such Person. All references in the Trust and Servicing Agreement to “Holders” or “Certificateholders” will reflect the rights of Certificate Owners as they may indirectly exercise such rights through the Depository and the Depository Participants, if applicable, except as otherwise specified in the Trust and Servicing Agreement; provided, however, that except as otherwise expressly provided in the Trust and Servicing Agreement, the parties to the Trust and Servicing Agreement will be required to recognize as a “Holder” or “Certificateholder” only the Person in whose name a Certificate is registered in the certificate register.
“Class” means, all of the Certificates bearing the same designation as the “Class A Certificates”, the “Class B Certificates”, the “Class C Certificates” or the “Class D Certificates”, as applicable.
“Class A Certificate Deficiency Amount” means (a) with respect to any Payment Date other than the Final Certificate Maturity Date, the sum of (i) the Class A Interest Deficiency Amount for such Payment Date and (ii) any Realized Losses allocated to the Class A Certificates on such Payment Date as described in “Description of the Certificates—Reductions of Certificate Principal Balances in Connection with Realized Losses” in this offering circular; and (b) with respect to the Final Certificate Maturity Date, the sum of (i) the Class A Interest Deficiency Amount for the Final Certificate Maturity Date and (ii) the Class Principal Balance of the Class A Certificates on the Final Certificate Maturity Date (after giving effect to all amounts distributable and allocable to principal on the Class A Certificates but prior to giving effect to any Guarantor Payment on the Final Certificate Maturity Date).
“Class A Interest Deficiency Amount” means with respect to each Payment Date, the amount, if any, by which the Current Interest Distribution Amount for the Class A Certificates exceeds the amount of interest distributable to the Holders of the Class A Certificates on such Payment Date as described under “Description of the Certificates—Distributions—Priority of Distributions” in this offering circular.
“Class Principal Balance” means, with respect to any Class of Certificates, as of any date of determination, a principal amount equal to the class principal balance of such Class set forth in the table on page 7, as such principal amount may be permanently reduced (to not less than zero) on each Payment Date preceding such date of determination by (a) any distributions of principal made with respect to such Class of Certificates on each such Payment Date and (b) any Realized Losses allocated to such Class of Certificates on each such Payment Date, in each case, in accordance with the Trust and Servicing Agreement.
“Collection Period” means, with respect to each Payment Date, the period commencing immediately following the Determination Date in the month preceding the month in which such Payment Date occurs and ending on and including the Determination Date in the month in which such Payment Date occurs; provided that the Collection Period with respect to the First Payment Date for the Certificates will be the period commencing on the Initial Cut-off Date and ending on and including the Determination Date in March 2017; provided, further, that the Collection Period with respect to any Excluded Loan will be the period commencing on the related Cut-off Date for such Excluded Loan and ending on and including the First Determination Date for such Excluded Loan.
“Commission” means The U.S. Securities and Exchange Commission.
“Corrected Loan” means a Defaulted Loan with respect to which the Special Servicer has notified the Master Servicer that such Mortgage Loan has become current and remained current for three consecutive monthly payments (for such purposes taking into account any modification or amendment of the subject Mortgage Loan), provided that no additional Servicing Transfer Event is foreseeable in the reasonable judgment of the Special Servicer and that no other Servicing Transfer Event is continuing with respect to such Defaulted Loan.
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“CREFC Investor Reporting Package®” means,
(a) the following seven electronic files: (i) CREFC® loan setup file, (ii) CREFC® loan periodic update file, (iii) CREFC® property file, (iv) CREFC® bond level file, (v) CREFC® financial file, (vi) CREFC® collateral summary file and (vii) CREFC® special servicer loan file;
(b) the following 10 supplemental reports: (i) CREFC® delinquent loan status report, (ii) CREFC® historical loan modification/forbearance and corrected mortgage loan report, (iii) CREFC® historical liquidation loss report, (iv) CREFC® loan level reserve/LOC Report, (v) CREFC® comparative financial status report, (vi) CREFC® servicer watchlist, (vii) CREFC® operating statement analysis report, (viii) CREFC® NOI adjustment worksheet, (ix) CREFC® reconciliation of funds report and (x) the CREFC® advance recovery report; and
(c) such other reports as CREFC® may designate as part of the “CREFC Investor Reporting Package®” from time to time generally; or
in lieu of (a), (b) and (c), such new CREFC Investor Reporting Package® as published by the CREFC® and consented to by the Directing Investor, Freddie Mac and any Third Party Master Servicer.
“Current Interest Distribution Amount” means, with respect to each Payment Date and each Class of Offered Certificates, interest accruing during the related Interest Accrual Period at the applicable Interest Rate for such Class of Offered Certificates on the Class Principal Balance of such Class as of the prior Payment Date (after giving effect to any payments of principal or allocation of Realized Losses on such prior Payment Date).
“Current Loan Interest Amount” means, with respect to any Payment Date, the aggregate amount of interest due and payable on each Mortgage Loan on the applicable Due Date immediately preceding such Payment Date (without taking into account any interest due and payable on any prior Due Date with respect to such Mortgage Loan or any Default Interest due and payable with respect to such Mortgage Loan) or any portion of such interest that the Trust is entitled to receive (regardless of whether or not such interest (or a portion thereof) has been actually received by the Master Servicer on behalf of the Trust).
“Current Program Expenses and Certificate Interest Amount” means, with respect to any Payment Date, the sum of (i) the aggregate amount of the Current Program Expenses for such Payment Date and (ii) the aggregate sum of the Current Interest Distribution Amounts for the Class A Certificates and the Mezzanine Certificates for such Payment Date.
“Current Program Expenses” means, with respect to each Payment Date, (a) the Servicing Fees, the Trustee Fees and the Certificate Administrator Fees accrued during the related Loan Interest Accrual Period for each Mortgage Loan (or a portion of such fees) that are payable by the Trust, (b) any out-of-pocket expenses incurred by Freddie Mac, in its capacity as the Master Servicer in connection with maintaining the applicable Accounts during the related Loan Interest Accrual Period and (c) the Guarantee Fees and any Guarantor Reimbursement Interest Amount (other than any interest accrued on the Waterfall Trigger Event Guarantee Payment) accrued during the related Interest Accrual Period.
“Custodial Exception Report” means the report delivered by the Custodian to the Master Servicer, the Special Servicer, the Trustee and the Certificate Administrator setting forth any Defect and the nature of such Defect with respect to the delivery of Mortgage Loans to the Trust on any Transfer Date as required under the Trust and Servicing Agreement.
“Cut-off Date” means (a) with respect to any Mortgage Loans transferred to the Trust on the Closing Date, individually and collectively, the Initial Cut-off Date, and (b) with respect to any Mortgage Loans transferred to the Trust or repurchased or substituted by the Mortgage Loan Seller after the Closing Date, the applicable Cut-off Date set forth in the related Supplement to Mortgage Loan Schedule delivered in connection with such transfer.
“Cut-off Date LTV” means, with respect to any Mortgage Loan, the ratio of (i) the Cut-off Date Principal Balance of the Mortgage Loan, to (ii) the most recent Appraised Value of the related Mortgaged Property.
“Cut-off Date Principal Balance” means, with respect to any Mortgage Loan, the outstanding principal
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balance of such Mortgage Loan as of the applicable Cut-off Date, after application of all payments of principal due on or before such date, whether or not received.
“Default Interest” means, with respect to any Mortgage Loan, any amounts collected thereon, other than late payment charges or prepayment consideration, that represent interest in excess of interest accrued on the outstanding principal balance of such Mortgage Loan at the related Mortgage Rate, such excess interest arising out of a default thereunder.
“Defaulted Loan Interest Shortfall Amount” means, with respect to any Revolving Payment Date, the excess (if any) of (a) the aggregate amount of interest accrued on each Mortgage Loan (other than Default Interest) that is due and payable by the related Borrower on the Due Date immediately preceding such Revolving Payment Date (or a portion of such interest) that the Trust is entitled to receive (regardless of whether or not the Master Servicer has actually received such interest from the related Borrower) over (b) the aggregate amount of such interest on each Mortgage Loan referred to in clause (a) that was actually received by the Master Servicer from the related Borrower on or prior to the related Determination Date.
“Defaulted Loan Proceeds” means cash amounts actually received by or on behalf of the Trust with respect to any Defaulted Loan in connection with a sale of such Defaulted Loan pursuant to the Trust and Servicing Agreement or a full, partial or discounted payoff of such Defaulted Loan from the related Borrower.
“Defect” means, with respect to any Mortgage Loan, a condition existing with respect to the related mortgage file if (i) any document required to be included in such mortgage file is not included in such mortgage file or (ii) such document has not been properly executed or is otherwise defective on its face.
“Defective Loan” means any Mortgage Loan with respect to which a Material Breach or a Material Document Defect has occurred and is continuing.
“Depository” means The Depository Trust Company, or any successor. The nominee of the initial Depository for purposes of registering those Certificates that are to be book-entry Certificates, is Cede & Co. The Depository must be at all times be a “clearing corporation” as defined in Section 8-102(3) of the Uniform Commercial Code of the State of New York.
“Depository Participant” means, a broker, dealer, bank or other financial institution or other Person for whom from time to time the Depository effects book-entry transfers and pledges of securities deposited with the Depository.
“Determination Date” means, with respect to any Payment Date, the close of business on the 11th day of the month in which such Payment Date occurs, or if such 11th day is not a Business Day, the Business Day immediately following such 11th day.
“Due Date” means, with respect to any Mortgage Loan, (a) on or prior to its Maturity Date, the day of the month set forth in the related Mortgage Note on which each Monthly Payment thereon is scheduled to be first due (without giving effect to any grace period with respect to late Monthly Payments) and (b) after its Maturity Date, the day of the month set forth in the related Mortgage Note on which each Monthly Payment on such Mortgage Loan had been scheduled to be first due (without giving effect to any grace period).
“ERISA” means the Employee Retirement Income Security Act of 1974, as amended.
“ERISA Plan” means any employee benefit or retirement plan that is subject to the fiduciary responsibility provisions of Title I of ERISA.
“Euroclear Operator” means Euroclear Bank, Brussels, Belgium office, as operator of the Euroclear System.
“Euroclear Terms and Conditions” means the Terms and Conditions Governing Use of Euroclear and the related Operating Procedures of the Euroclear System and, to the extent that it applies to the operation of the Euroclear System, Belgian law.
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“Exchange Act” means The Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder.
“Excluded Loan” means, with respect to any Payment Date, any Mortgage Loan transferred to the Trust by the Mortgage Loan Seller after the Closing Date during any period commencing on the 1st day of the month in which such Payment Date occurs and ending on and including the Determination Date relating to such Payment Date.
“Final Remaining Term Payment Date” means the earlier of (a) the Payment Date in February 2020 and (b) the Payment Date immediately following the sale of all of the Mortgage Loans (other than any Defaulted Loan) to the Mortgage Loan Seller pursuant to the Trust and Servicing Agreement.
“Final Sales Proceeds” means the aggregate of any Par Purchase Prices received by the Master Servicer in connection with the sale of the Mortgage Loans to the Mortgage Loan Seller in connection with a Final Sale.
“First Determination Date” means (a) with respect to any Mortgage Loans transferred to the Trust on the Closing Date, the Determination Date in March 2017, and (b) with respect to any Mortgage Loans transferred to the Trust after the Closing Date, the Determination Date in the month immediately following the month in which such transfer occurs.
“First Payment Date” means the Payment Date in March 2017.
“Freddie Mac Act” means Title III of the Emergency Home Finance Act of 1970, as amended.
“Freddie Mac Servicing Practices” means the servicing and administering of the Mortgage Loans by the Master Servicer, any Sub-Servicer or the Special Servicer in the same manner in which, and with the same care, skill, prudence and diligence with which, Freddie Mac services and administers multifamily mortgage loans owned by it, which includes, without limitation, servicing and administering the Mortgage Loans in accordance with the Guide, and any Freddie Mac written policies, procedures or other communications, and if Freddie Mac is not the Master Servicer or the Special Servicer, such Freddie Mac policies, procedures or other communications made available in writing by Freddie Mac to any Sub-Servicer, any Third Party Master Servicer or any Third Party Special Servicer, as applicable.
“Guarantee Fee” means a fee payable to the Guarantor on each Payment Date, accrued at the Guarantee Fee Rate on a balance equal to the Class Principal Balance of the Class A Certificates for the related Interest Accrual Period, calculated in the same manner in which interest is calculated in respect of the Class A Certificates.
“Guarantee Fee Rate” means a per annum rate equal to 0.20%.
“Guarantee Payment” means, a payment by the Guarantor under the Freddie Mac Guarantee in an amount equal to the applicable Class A Certificate Deficiency Amount.
“Guarantor Reimbursement Interest Amount” means, with respect to any Payment Date and the Class A Certificates, the portion of interest accrued on any Guarantor Reimbursement Amount at a per annum rate for each day (calculated on a daily basis) equal to the Prime Rate for such day plus 2.0%.
“Guide” means the Freddie Mac Multifamily Seller/Servicer Guide, as amended or supplemented from time to time. To the extent the Freddie Mac Multifamily Seller/Servicer Guide is no longer published by Freddie Mac, either directly or indirectly, “Guide” will refer to any successor guide as prescribed by Freddie Mac, which will be provided by Freddie Mac upon request if not otherwise reasonably accessible to the parties to the Trust and Servicing Agreement, except that in the event that no successor guide is prescribed by Freddie Mac within 90 days of the date on which the Guide is no longer published by Freddie Mac, all references to the “Guide” in the Trust and Servicing Agreement will be disregarded and the Guide will no longer be applicable.
“Indemnified Sub-Servicer” means a Sub-Servicer under a Sub-Servicing Agreement that entitles such Sub-Servicer to indemnification by the Trust under the Trust and Servicing Agreement.
“Initial Cut-off Date” means, with respect to any Mortgage Loans transferred to the Trust on the Closing Date, the Due Date for such Mortgage Loans in February 2017.
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“Interest Accrual Period” means (i) with respect to any Payment Date and the Mezzanine Certificates, the month immediately preceding the month in which such Payment Date occurs, and (ii) with respect to any Payment Date and the Class A Certificates, the period beginning on and including the 25th day of the month immediately preceding the month in which such Payment Date occurs (or beginning on and including the Closing Date, in the case of the First Payment Date) and ending on and including the 24th day of the month in which such Payment Date occurs. Each Interest Accrual Period for the Mezzanine Certificates will be deemed for purposes of this definition to consist of 30 days.
“Interest Distribution Amount” means, with respect to each Payment Date and each Class of Offered Certificates, the sum of (i) the Current Interest Distribution Amount for such Class for such Payment Date and (ii) the Unpaid Interest Shortfall for such Class for such Payment Date.
“Interest Mismatch” means, with respect to any Payment Date, the occurrence of the Current Loan Interest Amount for such Payment Date being less than the Current Program Expenses and Certificate Interest Amount for such Payment Date.
“Interest Rate” means, with respect to any Payment Date, with respect to each Class of Certificates other than the Class D Certificates, the interest rate for such Class, as set forth in the table on page 7.
“Junior Loan Holder” means, with respect to any Mortgage Loan, the holder of any related Junior Loan.
“LIBOR Determination Date” means, with respect to any Interest Accrual Period, the third Business Day preceding the beginning of such Interest Accrual Period for which LIBOR has been released by the IBA.
“LIBOR Index Page” means, the Bloomberg L.P., page “BBAM”, or such other page for LIBOR as may replace page BBAM on that service, or at the option of the Calculation Agent (i) the applicable page for LIBOR on another service which electronically transmits or displays IBA LIBOR rates, or (ii) any publication of LIBOR rates available from the IBA. In the event the IBA ceases to set or publish a rate for LIBOR, the Calculation Agent will designate an alternative index, and such alternative index will constitute the LIBOR Index Page.
“LIBOR” means, for any Interest Accrual Period, the IBA’s one month London interbank offered rate for United States Dollar deposits, as displayed on the LIBOR Index Page, as determined on the related LIBOR Determination Date; provided, however, that in the event LIBOR with respect to any Interest Accrual Period is less than zero, LIBOR for such Interest Accrual Period will be deemed to be zero. With respect to each LIBOR Determination Date, LIBOR for the Certificates will be determined by the Calculation Agent.
“Liquidation Fee” means a fee payable to the Special Servicer with respect to each Defaulted Loan (i) that has been sold by the Special Servicer as specified in the Trust and Servicing Agreement or (ii) as to which the Special Servicer receives a full, partial or discounted payoff from the related Borrower, in either case, in an amount equal to the product of the Liquidation Fee Rate and the Defaulted Loan Proceeds relating to such Defaulted Loan (net of related costs and expenses), except that no Liquidation Fee will be payable in connection with any purchase by Freddie Mac or a Junior Loan Holder.
“Liquidation Fee Rate” means a rate equal to 1.00%.
“Loan Documents” means, with respect to each Mortgage Loan, to the extent applicable, the loan agreement, the mortgage, the note, any related intercreditor agreement, the assignment of leases (if separate from the mortgage), the security agreement, any cash management agreement, any letters of credit, escrow or reserve account agreement, any UCC Financing Statements, the title insurance policy, all surveys, all insurance policies, any insurance agreements, any environmental indemnity agreements, any escrow agreements for improvements or lease-up, any guaranties related to such Mortgage Loan, any prior assignments of mortgage in the event that the originator is not the originator of record, any collateral assignments of property management agreements and other services agreements required by the applicable commitment and other loan documents, any preferred equity documents and all modification, consolidation and extension agreements, if any.
“Loan Interest Accrual Period” means, with respect to any Mortgage Loan and any Due Date, the period during which interest payable on such Due Date on such Mortgage Loan accrues pursuant to the related Mortgage
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Note. With respect to any Payment Date, the related Loan Interest Accrual Period will refer to the Loan Interest Accrual Period relating to the Due Date immediately preceding such Payment Date.
“Master Servicer Account” means, any of the Servicing Accounts, the Collection Account or the Principal Reserve Account.
“Master Servicing Fee” means, with respect to each Mortgage Loan, the fee payable to the Master Servicer under the Trust and Servicing Agreement at the Master Servicing Fee Rate, computed on the same basis and in the same manner as any related interest payment due on such Loan (or any portion of such interest payment) to which the Trust is entitled is computed, as described under “The Mortgage Loan Purchase, Trust and Servicing Agreement—Servicing and Other Compensation and Payment of Expenses—The Servicing Fee”.
“Master Servicing Fee Rate” means, with respect to each Mortgage Loan, 0.03% per annum.
“Maturity Date” means, with respect to any Mortgage Loan, as of any date of determination, the date on which the last payment of principal is due and payable under the related Mortgage Note, after taking into account all Principal Prepayments received prior to such date of determination, but without giving effect to (a) any acceleration of the principal of such Mortgage Loan by reason of default thereunder or (b) any grace period permitted by the related Mortgage Note.
“Monthly Payment” means, with respect to any Mortgage Loan and any Due Date, the scheduled monthly payment of principal, if any, and interest at the mortgage rate, excluding any balloon payment, which is payable by the related Borrower on such Due Date under the related Mortgage Note (as such terms may be changed or modified in connection with a bankruptcy or similar proceeding involving the related Borrower), without regard to any acceleration of principal of such Mortgage Loan by reason of a default thereunder.
“Mortgage Loan Schedule” means the list of Mortgage Loans transferred to the Trust on the Closing Date as part of the Trust Fund, attached hereto as Exhibit A to this offering circular.
“Mortgage Pool” means, all of the Mortgage Loans, collectively, as of any particular date of determination.
“Mortgage Note” means the original executed note (or, if applicable, multiple notes collectively) evidencing the indebtedness of a Borrower under a Mortgage Loan, together with any rider, addendum or amendment thereto.
“Mortgage Rate” means, with respect to: (a) any Mortgage Loan on or prior to its maturity date, the annual rate at which interest is scheduled (in the absence of a default) to accrue on such Mortgage Loan from time to time in accordance with the related Mortgage Note and applicable law; and (b) any Mortgage Loan after its maturity date, the annualized rate described in clause (a) above determined without regard to the passage of such maturity date.
“Net Investment Earnings” means, with respect to any Account, for any period beginning on a Payment Date and ending on the following Master Servicer Remittance Date, the amount, if any, by which the aggregate of all interest and other income realized during such period on funds relating to the Trust Fund held in such account (and which is not required to be paid to the related Borrower) exceeds the aggregate of all losses, if any, incurred during such period in connection with the investment of such funds in such account in accordance with the Trust and Servicing Agreement.
“Net Investment Loss” means, with respect to any Account, for any period beginning on a Payment Date and ending on the following Master Servicer Remittance Date, the amount, if any, by which the aggregate of all losses, if any, incurred during such period in connection with the investment of funds relating to the Trust Fund held in such account (and which investment is not directed by the related Borrower) in accordance with the Trust and Servicing Agreement exceeds the aggregate of all interest and other income realized during such period on such funds in such account.
“Original Class Principal Balance” means, with respect to any Class of Certificates, the initial aggregate principal amount thereof as of the Closing Date set forth on the cover page.
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“Par Purchase Price” means,
(a) with respect to any Mortgage Loan (other than any Defaulted Loan that is a Repurchase Loan), a price equal to the sum of the following:
(i) the outstanding principal balance of such Mortgage Loan as of the date of purchase;
(ii) in connection with any sale by the Trust of such Mortgage Loan to the Mortgage Loan Seller under the Trust and Servicing Agreement, all accrued and unpaid interest on such Mortgage Loan through and including the date of the purchase; and
(iii) in connection with any sale by the Trust of such Mortgage Loan to the Mortgage Loan Seller under the Trust and Servicing Agreement, any Program Expenses referred to in clause (b) of the definition of “Program Expenses” to the extent such Program Expenses are specifically related to such Mortgage Loan.
(b) with respect to any Defaulted Loan that is a Repurchase Loan, a price equal to the sum of the following:
(i) the outstanding principal balance of such Defaulted Loan as of the date of purchase;
(ii) all accrued and unpaid interest on such Defaulted Loan through and including the date of the purchase; and
(iii) all related Special Servicing Fees and, if applicable, Liquidation Fees or Workout Fees payable to the Special Servicer and any related workout or liquidation expenses incurred by the Special Servicer.
“Payment Date” means, with respect to any month, the 25th day of such month, or, if the 25th day of such month is not a Business Day, the immediately succeeding Business Day, commencing with the First Payment Date.
“Penalty Charges” means, with respect to any Mortgage Loan, any amounts actually collected thereon from the related Borrower that represent late payment charges or Default Interest.
“Percentage Interest” means as to any Certificate, the percentage interest equal to the denomination of such Certificate, as set forth on the face thereof, divided by the Original Class Principal Balance of such Class of Certificates.
“Permitted Investments” means the U.S. government securities and other obligations specified in the Trust and Servicing Agreement.
“Permitted Kick Out Percentage” means 3.0%.
“Person” means any individual, corporation, partnership, limited liability company, joint venture, association, joint-stock company, trust, unincorporated organization or government or any agency or political subdivision thereof.
“Plan Asset Regulations” means the regulations of the U.S. Department of Labor codified at 29 C.F.R. Section 2510.3-101, as modified by Section 3(42) of ERISA, describing what constitutes the assets of a Plan.
“Plan” means any ERISA Plan or any other employee benefit or retirement plan, arrangement or account, including any individual retirement account or Keogh plan, that is subject to the fiduciary responsibility provisions of Title I of ERISA or Section 4975 of the Code, or that otherwise is a “benefit plan investor” as defined in 29 C.F.R. Section 2510.3-101, as modified by Section 3(42) of ERISA.
“Prepayment Charges” means, with respect to any Mortgage Loan, any yield maintenance charge or any prepayment premium, penalty or consideration payable by the related Borrower in connection with any prepayment of such Mortgage Loan (or a portion thereof).
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“Prime Rate” means the “Prime Rate” published in the “Money Rates” section of The Wall Street Journal (or, if such section or publication is no longer available, such other comparable publication as is determined by the Certificate Administrator, in its sole discretion, in consultation with the Master Servicer) as may be in effect from time to time (or if the “Prime Rate” is not published on any calculation day, then the “Prime Rate” for such day will be the most recently published “Prime Rate” prior to such calculation day), or if the “Prime Rate” no longer exists, such other comparable rate (as determined by the Master Servicer) as may be in effect from time to time.
“Principal Collections” means an amount equal to the total, without duplication, of the following: (a) all payments of principal, including voluntary principal prepayments received by or on behalf of the Trust with respect to the Mortgage Loans, (b) the principal portion of the Par Purchase Price for any Repurchase Loan received by or on behalf of the Trust from the Mortgage Loan Seller and all Substitution Shortfall Amounts and (c) the portion of any sales proceeds (including any Final Sales Proceeds and Defaulted Loan Proceeds) or other payments or collections received in respect of principal of a Mortgage Loan pursuant to the Mortgage Loan Seller Purchase Option or other provisions of the Trust and Servicing Agreement.
“Principal Prepayment” means any payment of principal made by the Borrower on a Mortgage Loan that is received in advance of its scheduled Due Date, other than any amount paid in connection with the release of the related Mortgaged Property through defeasance.
“Privileged Person” means each of the parties to the Trust and Servicing Agreement, each Placement Agent, and, upon receipt by the Certificate Administrator of an investor certification specified in the Trust and Servicing Agreement, each Holder of a Certificate and each Certificate Owner or prospective purchaser of a Certificate. Euroclear and Clearstream, Luxembourg will be Privileged Persons solely for the limited purpose of accessing the Statement to Certificateholders on the Certificate Administrator’s Website. The Certificate Administrator will be required to provide all Privileged Persons with access to certain restricted information on the Certificate Administrator’s Reporting Website (in the case of any Certificate Owner or prospective purchaser, upon receipt of such investor certification) through the use of a restricted mechanism on the Certificate Administrator’s Reporting Website; provided that any Privileged Person that is a Borrower or an affiliate thereof, as evidenced by the information set forth in the investor certification, will only be entitled to information in accordance with certain restrictions specified in the Trust and Servicing Agreement.
“Program Expenses” means any Guarantor Reimbursement Amount (other than any Waterfall Trigger Event Guarantee Payment), any Guarantor Reimbursement Interest Amount (other than the portion of interest accrued on any Waterfall Trigger Event Guarantee Payment), the Master Servicing Fee, the Special Servicing Fee, the Guarantee Fee, the Trustee Fee, the Certificate Administrator Fee, the Workout Fee, the Liquidation Fee, any workout-related expenses, any legal expenses and any indemnification amounts reimbursable or payable to the Mortgage Loan Seller, the Guarantor, the Master Servicer, the Special Servicer, the Trustee, the Certificate Administrator or the Custodian, any out-of-pocket expenses incurred by the Master Servicer or the Special Servicer in connection with the servicing, sale or purchase of the Mortgage Loans that are not reimbursable by the related Borrower, any reasonable out-of-pocket expenses of the Certificate Administrator, the Trustee and the Custodian that are reimbursable to such parties pursuant to the Trust and Servicing Agreement and any other expenses of the Trust that (a) arise out of a default of a Borrower under the related Mortgage Loan, (b) arise out of an otherwise unanticipated event affecting the Trust, whether or not related to a particular Mortgage Loan or (c) are expressly identified as such in the Trust and Servicing Agreement.
“Qualified Substitute Mortgage Loan” means, a mortgage loan that meets the Eligibility Criteria on the date of substitution.
“Record Date” means, with respect to any Payment Date, the last Business Day of the month immediately preceding the month in which such Payment Date occurs.
“Remaining Term Payment Date” means any Payment Date occurring after the end of the Revolving Period.
“Repurchase Communication” means, any communication relating to the repurchase of a Defective Loan by the Mortgage Loan Seller, whether oral or written, which need not be in any specific form.
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“Repurchase Loan” means any Mortgage Loan which is a Defective Loan, Ineligible Loan or Permitted Kick Out Loan.
“Required Prepayment Amount” means, with respect to any Remaining Term Payment Date on which an Interest Mismatch has occurred, an aggregate amount of the Class Principal Balances of the Class A Certificates and/or the Mezzanine Certificates that need to be reduced (after taking into account any reduction in the Class Principal Balance of the Class A Certificates resulting from any prepayment on such Remaining Term Payment Date (as described in clause second of “Description of the Certificates—Distributions—Priority of Distributions—Priority of Distributions After the Revolving Period” in this offering circular)) in order to cause the Current Loan Interest Amount for the next Remaining Term Payment Date to be at least equal to the Current Program Expenses and Certificate Interest Amount for the next Remaining Term Payment Date.
“Restricted Mezzanine Holder” means, with respect to a Mortgage Loan, a holder of a related mezzanine loan that has accelerated, or otherwise begun to exercise its remedies with respect to, such mezzanine loan (unless such mezzanine holder is stayed pursuant to a written agreement or court order or as a matter of law from exercising any remedies associated with foreclosure of the related equity collateral under such mezzanine loan).
“Revolving Period” means the period beginning on the Closing Date and ending on the earlier of (a) the Payment Date occurring in October 2019 and (b) the date on which a Termination Event has occurred.
“Rule 15Ga-1” means Rule 15Ga-1 under the Exchange Act.
“S&P” means S&P Global Ratings, and its successors-in-interest. References herein to “applicable rating category” (other than such references to “highest applicable rating category”) will, in the case of S&P, be deemed to refer to such applicable rating category of S&P, without regard to any plus or minus or other comparable rating qualification.
“Servicing Fee” means, with respect to any Mortgage Loan, any related Master Servicing Fee and related Sub-Servicing Fee, together, computed on the basis of the Stated Principal Balance of such Mortgage Loan and for the same period for which any related interest payment due on such Mortgage Loan (or any portion of such interest payment) to which the Trust is entitled is computed, as described under “The Mortgage Loan Purchase, Trust and Servicing Agreement—Servicing and Other Compensation and Payment of Expenses—The Servicing Fee”.
“Servicing Fee Rate” means, with respect to any Mortgage Loan, the sum of any related Master Servicing Fee Rate and any related Sub-Servicing Fee Rate.
“Servicing Standard” means, to the extent not inconsistent with applicable law, the terms of the Trust and Servicing Agreement or the terms of the respective Mortgage Loans or any applicable intercreditor or co-lender and/or similar agreement(s), servicing and administering such Mortgage Loans in accordance with (i) Freddie Mac Servicing Practices or (ii) to the extent Freddie Mac Servicing Practices do not provide sufficient guidance or Freddie Mac Servicing Practices have not been made available in writing or communicated in writing by Freddie Mac to any Third Party Master Servicer (if Freddie Mac is not the Master Servicer), any Third Party Special Servicer (if Freddie Mac is not the Special Servicer) or any related Sub-Servicer, Accepted Servicing Practices; provided that to the extent of any conflict under this definition between Freddie Mac Servicing Practices and Accepted Servicing Practices, Freddie Mac Servicing Practices will govern and be applicable.
“Servicing Transfer Event” means any Mortgage Loan with respect to which any of the following events have occurred:
(a) a payment default has occurred on such Mortgage Loan at its maturity date, unless (i) the Borrower is making its assumed scheduled payments, (ii) the Borrower notifies the Master Servicer of its intent to refinance such Mortgage Loan or sell the related Mortgaged Property to a party that is not an affiliate of the Borrower, and is diligently pursuing such refinancing or sale, (iii) within 45 days after such maturity date, the Borrower delivers a firm commitment to refinance, or a fully executed purchase and sale contract for the related Mortgaged Property, as applicable, which is acceptable to the Master Servicer, and (iv) such refinancing or property sale occurs within 60 days of such default, which 60-day period may be extended to 120 days at the Special Servicer’s discretion with the consent of Freddie Mac (in the case of any Third Party Special Servicer) and the
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consent of the Directing Investor; provided that in the case of clause (iv), any Third Party Special Servicer may not follow any such direction of Freddie Mac or the Directing Investor, or refrain from acting based upon the lack of any such direction, if following any such direction of Freddie Mac or the Directing Investor, or refraining from taking such action based upon the lack of any such direction of Freddie Mac or the Directing Investor, would violate the Servicing Standard; or
(b) any monthly payment (other than a balloon payment) is 60 days or more delinquent; or
(c) (i) the Master Servicer (with the approval of Freddie Mac in the case of any Third Party Master Servicer) or (ii) the Special Servicer (with the approval of the Directing Investor and of Freddie Mac in the case of any Third Party Special Servicer) determines that (A) a default under any Mortgage Loan is reasonably foreseeable, (B) such default will materially impair the value of the related Mortgaged Property as security for such Mortgage Loan or otherwise materially adversely affect the interests of Certificateholders, and (C) the default either would give rise to the immediate right to accelerate the Mortgage Loan or such default is likely to continue unremedied for the applicable cure period under the terms of such Mortgage Loan (or, if no cure period is specified and the default is capable of being cured, for 30 days); provided that in the case of clause (i) above, if Freddie Mac’s approval is sought by the Third Party Master Servicer and not provided (and/or during the period that the Third Party Master Servicer is waiting for Freddie Mac’s approval contemplated by clause (i) above), such Third Party Master Servicer’s servicing obligations with respect to such Mortgage Loan will be to service such Mortgage Loan as a Mortgage Loan that is a not a Defaulted Loan; or
(d) a decree or order of a court or agency or supervisory authority having jurisdiction in the premises in an involuntary case under any present or future federal or state bankruptcy, insolvency or similar law or the appointment of a conservator or receiver or liquidator in any insolvency, readjustment of debt, marshaling of assets and liabilities or similar proceedings, or for the winding up or liquidation of its affairs is entered against the related Borrower; provided that if such decree or order is discharged or stayed within 60 days of being entered, such Mortgage Loan will not be a Defaulted Loan (and no Special Servicing Fees, Workout Fees or Liquidation Fees will be payable with respect thereto); or
(e) the related Borrower files for or consent to the appointment of a conservator or receiver or liquidator in any insolvency, readjustment of debt, marshaling of assets and liabilities or similar proceedings of or relating to such Borrower or of or relating to all or substantially all of its property; or
(f) the related Borrower admits in writing its inability to pay its debts generally as they become due, file a petition to take advantage of any applicable insolvency or reorganization statute, make an assignment for the benefit of its creditors, or voluntarily suspend payment of its obligations; or
(g) the Master Servicer or the Special Servicer has received notice of the foreclosure or proposed foreclosure of any lien on the related Mortgaged Property; or
(h) any other default has occurred which, in the reasonable judgment of the Special Servicer (with the approval of the Directing Investor and Freddie Mac (in the case of any Third Party Special Servicer) or the Master Servicer (with the approval of Freddie Mac in the case of any Third Party Master Servicer)), has materially and adversely affected the value of such Mortgage Loan or otherwise materially and adversely affects the interests of the Certificateholders and, in either such case, has continued unremedied for 30 days (irrespective of any applicable grace period specified in the related Loan Documents), provided that the failure of the related Borrower to obtain all risk casualty insurance that does not contain any carve out for terrorist or similar acts (other than such amounts as are specifically required by the related Mortgage Loan Agreement) will not apply with respect to this clause, at the discretion of the Special Servicer; provided, further, that in the case of a Third Party Special Servicer, such Third Party Special Servicer has determined in accordance with the Servicing Standard that either (i) such insurance is not available at commercially reasonable rates and that such hazards are not at the time commonly insured against for properties similar to the Mortgaged Property and located in or around the region in which such Mortgaged Property is located or (ii) such insurance is not available at any rate.
“Similar Law” means any federal, state or local law which is to a material extent similar to Section 406 of ERISA and/or Section 4975 of the Code.
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“Special Servicing Fee” means, with respect to each Defaulted Loan, the fee payable to the Special Servicer under the Trust and Servicing Agreement at the Special Servicing Fee Rate, computed on the basis of the Stated Principal Balance of such Defaulted Loan and for the same period for which any related interest payment due on such Defaulted Loan (or any portion of such interest payment) to which the Trust is entitled is computed, as described under “The Mortgage Loan Purchase, Trust and Servicing Agreement—Servicing and Other Compensation and Payment of Expenses—The Special Servicing Fee”.
“Special Servicing Fee Rate” means, with respect to each Defaulted Loan, 0.25% per annum.
“Stated Principal Balance” means, with respect to any Mortgage Loan, as of any date of determination, an amount equal to the Cut-off Date Principal Balance of such Mortgage Loan, minus the sum of:
(i) the principal portion of each Monthly Payment due on such Mortgage Loan after the applicable Cut-off Date, to the extent received from the Borrower and distributed to Certificateholders, on or before such date of determination;
(ii) all Principal Prepayments received with respect to such Mortgage Loan after the applicable Cut-off Date, to the extent distributed to Certificateholders, on or before such date of determination; and
(iii) any reduction in the outstanding principal balance of such Mortgage Loan due to a modification by the Special Servicer under the Trust and Servicing Agreement, which reduction occurred prior to the end of the Collection Period for the most recent Payment Date.
“Subsequent Transfer Date” means any date on which additional Mortgage Loans are transferred to the Trust after the Closing Date from time to time in accordance with the Trust and Servicing Agreement or any date on which the Mortgage Loan Seller substitutes any Repurchase Loan with a Qualified Substitute Mortgage Loan in accordance with the Trust and Servicing Agreement.
“Sub-Servicer” means (i) if Freddie Mac is acting as the Master Servicer, any Person that performs any material servicing duties of the Master Servicer with respect to the Mortgage Loans pursuant to the related Sub-Servicing Agreement, and (ii) with respect to any Third Party Master Servicer, any Person engaged with respect to one or more Mortgage Loans by such Third Party Master Servicer to perform any material duties of such Third Party Master Servicer pursuant to the related Sub-Servicing Agreement. The term Sub-Servicer is not intended to apply to contractors who provide specific services relating to processes performed by the Master Servicer, the Special Servicer or the Sub-Servicer. For the avoidance of doubt, and by way of illustration and not exclusion, the retention of contractors to perform certain functions, including but not limited to, functions such as or similar in scope to conducting appraisals and/or inspections, preparing financial statements, performing data entry and other administrative functions will not constitute sub-servicing and no such contractor may be considered a Sub-Servicer.
“Sub-Servicing Agreement” means the applicable agreement between each Sub-Servicer and the Master Servicer with respect to the servicing, administration, remittance and reporting obligations of such Sub-Servicer following the transfer of the related Mortgage Loans to the Trust. If there is a Third Party Master Servicer, the Sub-Servicing Agreement will be an agreement in form and substance satisfactory to Freddie Mac.
“Sub-Servicing Fee” means the sub-servicing fee (a) payable to the applicable Sub-Servicer by the Master Servicer pursuant to the related Sub-Servicing Agreement or (b) payable to the Master Servicer.
“Sub-Servicing Fee Rate” means, with respect to each Mortgage Loan, the per annum rate specified in the column entitled “Primary Servicing Fee” in the Mortgage Loan Schedule or the applicable Supplement to Mortgage Loan Schedule.
“Substitution Shortfall Amount” means, with respect to a substitution permitted or contemplated under the Trust and Servicing Agreement, an amount equal to the excess, if any, of the Par Purchase Price of the Mortgage Loan being replaced calculated as of the date of substitution over the Stated Principal Balance of the related Qualified Substitute Mortgage Loan as of the applicable Cut-off Date. In the event that one or more Qualified Substitute Mortgage Loans are substituted (at the same time) for one or more deleted Mortgage Loans, the Substitution Shortfall Amount will be determined as provided in the preceding sentence on the basis of the aggregate
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amount of the Par Purchase Prices of the Mortgage Loan(s) being replaced and the aggregate Stated Principal Balances of the applicable Qualified Substitute Mortgage Loan(s) as of the applicable Cut-off Date(s).
“Supplement to Mortgage Loan Schedule” means (i) with respect to any Mortgage Loan transferred to the Trust after the Closing Date, a supplement to the Mortgage Loan Schedule delivered in connection with such transfer, setting forth any applicable information with respect to such Mortgage Loan in form and substance similar to the Mortgage Loan Schedule delivered on the Closing Date, and/or (ii) with respect to any Mortgage Loan sold by the Trust to the Mortgage Loan Seller, a supplement to the Mortgage Loan Schedule, identifying such Mortgage Loan sold to the Mortgage Loan Seller.
“Termination Event” means the occurrence of any of the following events:
(i) a representation or warranty made by Freddie Mac in its capacity as the Mortgage Loan Seller or the Guarantor (excluding any representations or warranties made regarding the Mortgage Loans) as specified in the Trust and Servicing Agreement proves to have been false or misleading in any material respect as of the time when made, and which continues to be false or misleading in any material respect for a period of 60 days after the day on which written notice thereof has been given to Freddie Mac by the Directing Third Party;
(ii) the failure on the part of Freddie Mac in its capacity as the Mortgage Loan Seller to observe or perform in any material respect any of the material covenants of such party contained in the Trust and Servicing Agreement that continues unremedied for a period of 30 days after the day on which written notice thereof has been given to Freddie Mac by the Directing Third Party;
(iii) the FHFA places Freddie Mac into receivership;
(iv) an Event of Default of the Master Servicer or Special Servicer as specified in the Trust and Servicing Agreement has occurred and is continuing after giving effect to any applicable grace period; or
(v) the failure of the Guarantor to make any payment due under the Freddie Mac Guarantee;
provided that in the case of any event described in clause (i), (ii) or (iv), a Termination Event will occur only upon the delivery of a written notice by the Directing Third Party to the Certificate Administrator, the Trustee and the Master Servicer declaring the occurrence of a Termination Event under such clause, and after the expiration of the cure period set forth in such clause.
“Third Party Master Servicer” means any entity other than Freddie Mac appointed as a successor Master Servicer under the Trust and Servicing Agreement or any successor to such successor entity.
“Third Party Special Servicer” means any entity other than Freddie Mac appointed as a successor Special Servicer under the Trust and Servicing Agreement or any successor to such successor entity.
“Total Trust Assets” means the sum of (i) the aggregate Stated Principal Balance of the Mortgage Loans (including Mortgage Loans that have been defeased) and (ii) the total amount of funds on deposit in the Collection Account and the Principal Reserve Account.
“Transfer Date” means (i) with respect to the Initial Mortgage Loans transferred to the Trust on the Closing Date, the Closing Date, and (ii) with respect to any additional Mortgage Loans transferred to the Trust from time to time after the Closing Date, the applicable Subsequent Transfer Date.
“Transfer Fee” means, with respect to any Mortgage Loan, the Transfer Fee as defined in the related Loan Documents.
“Transfer Processing Fee” means, with respect to any Mortgage Loan and any Transfer Processing Fee Transaction, a fee equal to the lesser of (a) the fee required to be paid by the related Borrower under the terms of the related Loan Documents for the review or processing of the Transfer Processing Fee Transaction (which may also be referred to in the related Loan Documents as a “Transfer Review Fee”) and (b) $15,000.
“Transfer Processing Fee Transaction” means, with respect to any Mortgage Loan, any transaction or
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matter involving (i) the transfer of an interest in the related Mortgaged Property, the related Borrower, any Person that controls the related Borrower or any Person that executes a guarantee pursuant to the terms of the related Loan Documents, which transfer requires the Master Servicer’s review, consent and/or approval, including, without limitation, a Borrower’s request for an assumption or waiver of a “due-on-sale” clause with respect to any Mortgage Loan and/or (ii) a Borrower’s request for a waiver of a “due-on-encumbrance” clause with respect to any Mortgage Loan; provided that any transaction or matter involving (a) defeasance of such Mortgage Loan, (b) the full or partial condemnation of such Mortgaged Property or any Borrower request for consent to subject such Mortgaged Property to an easement, right of way or similar agreement for utilities, access, parking, public improvements or another purpose, (c) a permitted transfer and/or (d) permitted subordinate debt, will not be a Transfer Processing Fee Transaction.
“Trustee Fee” means, with respect to each Mortgage Loan, the fee payable to the Trustee at the Trustee Fee Rate under the Trust and Servicing Agreement, computed on the same basis and in the same manner as any related interest payment due on such Mortgage Loan (or any portion of such interest payment) to which the Trust is entitled is computed, as described under “The Mortgage Loan Purchase, Trust and Servicing Agreement—Matters Regarding the Trustee, the Certificate Administrator and the Custodian”.
“Trustee Fee Rate” means, with respect to each Mortgage Loan, 0.00075% per annum.
“Waterfall Trigger Event Guarantee Payment” means, with respect to any Revolving Payment Date with respect to which a Waterfall Trigger Event has occurred and is continuing, any portion of the Guarantee Payment paid by the Guarantor solely as a result of the occurrence of a Waterfall Trigger Event in an amount equal to the Guarantee Payment paid by the Guarantor in respect of any Class A Interest Deficiency Amount on such Revolving Payment Date minus any Defaulted Loan Interest Shortfall Amount allocated to the Class A Certificates to notionally reduce the Interest Distribution Amount for the Class A Certificates as described under “Description of the Certificates—Distributions” in this offering circular. For the avoidance of doubt, any portion of the Guarantee Payment made by the Guarantor in respect of such Defaulted Loan Interest Shortfall Amount allocated to the Class A Certificates will be reimbursed to the Guarantor as Program Expenses in accordance with the priority of payment described under “Description of the Certificates—Distributions” in this offering circular.
“Waterfall Trigger Event” occurs with respect to any Revolving Payment Date, if there is an Interest Mismatch.
“Waterfall Trigger Class C Interest Distribution Amount” means, with respect to any Revolving Payment Date with respect to which a Waterfall Trigger Event has occurred and is continuing, the Current Interest Distribution Amount for the Class C Certificates for such Revolving Payment Date, minus any Defaulted Loan Interest Shortfall Amount allocated to the Class C Certificates to notionally reduce the Interest Distribution Amount for the Class C Certificate as specified under “Description of the Certificates—Distributions—Priority of Distributions—Allocation of Interest Shortfalls Resulting from Payment Default under Mortgage Loans During the Revolving Period” in this offering circular; provided that the Waterfall Trigger Class C Interest Distribution Amount for any Revolving Payment Date may not be less than zero.
“Waterfall Trigger Class B Interest Distribution Amount” means, with respect to any Revolving Payment Date with respect to which a Waterfall Trigger Event has occurred and is continuing, the Current Interest Distribution Amount for the Class B Certificates for such Revolving Payment Date, minus any Defaulted Loan Interest Shortfall Amount allocated to the Class B Certificates to notionally reduce the Interest Distribution Amount for the Class B Certificates as specified under “Description of the Certificates—Distributions—Priority of Distributions—Allocation of Interest Shortfalls Resulting from Payment Default under Mortgage Loans During the Revolving Period” in this offering circular; provided that the Waterfall Trigger Class B Interest Distribution Amount may not be less than zero.
“Workout Fee” means the fee payable to the Special Servicer with respect to each Corrected Loan.
“Workout Fee Rate” means, with respect to any Corrected Loan, 1.0% applied to each collection of interest (other than Penalty Charges) and principal (including scheduled payments, prepayments, Balloon Payments and payments at maturity) received on such Corrected Loan for so long as it remains a Corrected Loan.
Website ................................................................. 19 Certificate Owner .................................................. 148 Certificate Principal Balance ................................. 148 Certificateholder .................................................... 148 Certificates ................................................................. 7 Class .................................................................. 7, 149 Class A Certificate Deficiency Amount ................ 149 Class A Certificates ................................................... 1 Class A Interest Deficiency Amount ..................... 149 Class B Certificates ................................................... 1 Class C Certificates ................................................... 1 Class D Certificates ................................................... 1 Class Principal Balance ......................................... 149 Cleanup Call .................................................... 24, 105 Clearstream Participants ........................................ 108 Closing Date ........................................................ 1, 10 Code ....................................................................... 136
Collection Account .................................................. 97 Collection Period ................................................... 149 Collective Investment Scheme .................................. 4 Commission ........................................................... 149 Conservator .............................................................. 76 Corrected Loan ...................................................... 149 CPDI Regulations .................................................. 137 Credit Risk Retention Rule ...................................... 77 CREFC Investor Reporting Package® ................... 150 Current Interest Distribution Amount .................... 150 Current Loan Interest Amount ............................... 150 Current Program Expenses .................................... 150 Current Program Expenses and
Direction ............................................................. 104 Mezzanine Certificates .............................................. 7 Monthly Payment .................................................. 154 Mortgage Loan Schedule ....................................... 154 Mortgage Loan Seller ............................................ 1, 7 Mortgage Loan Seller Purchase Option ........... 13, 116 Mortgage Loans ................................................... 1, 87 Mortgage Note ....................................................... 154 Mortgage Pool ....................................................... 154 Mortgage Rate ....................................................... 154 Mortgaged Properties ................................................ 1 Mortgaged Property ................................................. 87 Net Investment Earnings ....................................... 154 Net Investment Loss .............................................. 154 NI 33-105................................................................... 4 Non-U.S. Beneficial Owner ................................... 136 NRSRO .................................................................... 26 Offered Certificates ............................................. 1, 12 OID ........................................................................ 137 Original Class Principal Balance ........................... 154 Par Purchase Price ................................................. 155 Participants ............................................................ 107 Payment Date ................................................... 11, 155 PCIS Persons ............................................................. 4 Penalty Charges ..................................................... 155 Percentage Interest ................................................. 155 Permitted Investments ........................................... 155 Permitted Kick Out Loan ................................. 20, 117 Permitted Kick Out Percentage ............................. 155 Person .................................................................... 155 PILOT ...................................................................... 39 Placement Agency Agreement .............................. 143 Placement Agent Entities ......................................... 65 Placement Agents ...................................................... 1 Plan ........................................................................ 155 Plan Asset Regulations .......................................... 155 Prepayment Assumption ........................................ 138 Prepayment Charges .............................................. 155 Prime Rate ............................................................. 156 Principal Collections .............................................. 156 Principal Prepayment ............................................. 156
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Principal Reserve Account ...................................... 99 Privileged Person ................................................... 156 Program Expenses ................................................. 156 Program Size ................................................... 12, 105 Promotion Of Collective Investment
Yes (i) Max combined LTV of 80.0% (ii) Min combined DSCR of 1.25x
Yes (i) Max combined LTV of 80.0% (ii) Min combined DSCR of 1.25x (iii) EGI greater than $8,891,055 (iv) NOI greater than $5,800,518
Yes (i) Max combined LTV of 60.0% (ii) Min combined DSCR of 1.25x
Yes (i) Max combined LTV of 80.0% (ii) Min combined DSCR of 1.25x
Yes (i) Max combined LTV of 80.0% (ii) Min combined DSCR of 1.25x
Yes (i) Max combined LTV of 55.0% (ii) Min combined DSCR of 1.25x
Yes (i) Max combined LTV of 80.0% (ii) Min combined DSCR of 1.25x
Yes (i) Max combined LTV of 75.0% (ii) Min combined DSCR of 1.25x
Yes (i) Max combined LTV of 70.0% (ii) Min combined DSCR of 1.25x
Yes (i) Max combined LTV of 80.0% (ii) Min combined DSCR of 1.25x
Yes (i) Max combined LTV of 70.0% (ii) Min combined DSCR of 1.25x
Yes (i) Max combined LTV of 80.0% (ii) Min combined DSCR of 1.25x
Yes (i) Max combined LTV of 75.0% (ii) Min combined DSCR of 1.25x
Yes (i) Max combined LTV of 70.0% (ii) Min combined DSCR of 1.25x
Yes (i) Max combined LTV of 70.0% (ii) Min combined DSCR of 1.25x
Yes (i) Max combined LTV of 75.0% (ii) Min combined DSCR of 1.25x
Yes (i) Max combined LTV of 70.0% (ii) Min combined DSCR of 1.25x
Yes (i) Max combined LTV of 66.0% (ii) Min combined DSCR of 1.25x
Yes (i) Max combined LTV of 80.0% (ii) Min combined DSCR of 1.25x
Yes (i) Max combined LTV of 70.0% (ii) Min combined DSCR of 1.25x
Yes (i) Max combined LTV of 70.0% (ii) Min combined DSCR of 1.25x
Yes (i) Max combined LTV of 65.0% (ii) Min combined DSCR of 1.25x (iii) EGI greater than $2,257,419 (iv) NOI greater than $1,432,189
Yes (i) Max combined LTV of 80.0% (ii) Min combined DSCR of 1.25x
Yes (i) Max combined LTV of 70.0% (ii) Min combined DSCR of 1.25x
Yes (i) Max combined LTV of 70.0% (ii) Min combined DSCR of 1.25x
Yes (i) Max combined LTV of 80.0% (ii) Min combined DSCR of 1.25x
Yes (i) Max combined LTV of 70.0% (ii) Min combined DSCR of 1.25x
Yes (i) Max combined LTV of 75.0% (ii) Min combined DSCR of 1.25x
Yes (i) Max combined LTV of 80.0% (ii) Min combined DSCR of 1.25x
Yes (i) Max combined LTV of 75.0% (ii) Min combined DSCR of 1.25x
Yes (i) Max combined LTV of 65.0% (ii) Min combined DSCR of 1.25x
Yes (i) Max combined LTV of 65.0% (ii) Min combined DSCR of 1.25x
Yes (i) Max combined LTV of 70.0% (ii) Min combined DSCR of 1.25x
Yes (i) Max combined LTV of 65.0% (ii) Min combined DSCR of 1.25x
Yes (i) Max combined LTV of 70.0% (ii) Min combined DSCR of 1.25x
Yes (i) Max combined LTV of 65.0% (ii) Min combined DSCR of 1.25x
Yes (i) Max combined LTV of 75.0% (ii) Min combined DSCR of 1.25x
Yes (i) Max combined LTV of 80.0% (ii) Min combined DSCR of 1.25x
Exhibit A-13
Footnotes to Exhibit A
(1) This Exhibit A-1 describes the mortgage loans in the initial mortgage pool. The mortgage loans in the
mortgage pool are expected to change after the Closing Date as Freddie Mac repurchases mortgage loans
from the trust for securitization in other Freddie Mac securitization programs and transfers additional
mortgage loans to the trust. See “Risk Factors—General—The Mortgage Pool is Subject to Change ” in this
Offering Circular.
(2) The related groups of mortgage loans were made to separate borrowers under common ownership.
For discussion of the risks associated with related borrower loans, see "Risk Factors—Risks Related to the
Mortgage Loans " in this Offering Circular.
(3) The Administration Fee Rate includes the master servicing fee rate, sub-servicing fee rate, trustee fee rate
and certificate administrator fee rate applicable to each mortgage loan.
(4) Monthly Debt Service Amount (Amortizing) shown for mortgage loans with partial interest only periods
reflects such amount payable after the expiration of the interest only period. Monthly Debt Service Amount
(Amortizing) shown for full term interest only mortgage loans is based on the monthly interest only payment
amount.
(5) Prepayment Provision is shown from the respective mortgage loan origination date.
(6) Initial Escrow Balances are as of the related mortgage loan origination date, not as of the Cut-off Date.
(7) With respect to Tax and Insurance Escrow (Monthly), springing Tax and Insurance Escrow (Monthly)
commences upon an event of default or, with respect to certain mortgage loans, (i) event of default or (ii)
origination of supplemental mortgage.
(8) With respect to Replacement Reserve (Monthly), springing Replacement Reserve (Monthly) commences
upon (i) event of default, (ii) origination of supplemental mortgage, (iii) 120 months after the First Payment
Date or (iv) certain other conditions of the mortgage loan agreement, where applicable.
(9) With respect to the springing Radon Remediation Reserve, the borrower is required to make a deposit of
150% of the total amount necessary for remediation if radon testing results indicate radon remediation is
required.
With respect to the Radon Remediation Reserve (Monthly), a springing Radon Remediation Reserve
(Monthly) commences upon the related long term radon test concluding radon concentrations greater than 4
pCi/L.
(10) With respect to Future Supplemental Financing Description, other than the required maximum combined
LTV and minimum combined DSCR, the underlying mortgage loan documents also require (i) Freddie Mac
approval, (ii) the passage of at least 12 months after the origination of the first mortgage and (iii) certain
other conditions of the security instrument or the mortgage loan agreement, where applicable.
Exhibit A-14
EXHIBIT B
CERTAIN INITIAL POOL INFORMATION
(THIS PAGE INTENTIONALLY LEFT BLANK)
Exhibit B-1
The Initial Mortgage Pool(1)(2)
(1) The Initial Mortgage Pool information is expected to change regularly as mortgage loans revolve through the Trust. Additionally, all DSCR calculations are based on
amortizing debt service payments (with the exception of Interest Only loans).
(2) All mortgage loans in the Initial Mortgage Pool have been originated; however, certain mortgage loans in the Initial Mortgage Pool have not yet been acquired by Freddie Mac but are expected to be acquired by Freddie Mac prior to the Closing Date.
Initial Mortgage Pool Cut-off Date Principal BalancesWeighted Weighted Weighted
Number of Cut-off Date % of Initial Average Average Average
Mortgage Principal Mortgage Underwritten Cut-off Date Mortgage
Range of Cut-off Date Balances Loans Balance Pool Balance DSCR LTV Ratio Rate
Mortgage Loan Seller: Federal Home Loan Mortgage Corporation
Guarantor: Federal Home Loan Mortgage Corporation
Trustee: Federal Home Loan Mortgage Corporation
Certificate Administrator: U.S. Bank National Association
Custodian: Federal Home Loan Mortgage Corporation
Master Servicer: Federal Home Loan Mortgage Corporation
Special Servicer: Federal Home Loan Mortgage Corporation
Payment Date: Mar 27, 2017
Prior Payment:
Next Payment: Apr 25, 2017
Record Date: Feb 28, 2017
Determination Date: Mar 13, 2017
First Payment Date: Mar 27, 2017
Closing Date: Feb 16, 2017
Initial Cut-off Date: Feb 1, 2017
Final Distribution Date:
* This report contains, or is based on, information furnished to U.S. Bank Global Corporate Trust Services ("U.S. Bank") by one or more third parties (e.g. Servicers, Master Servicer, etc.), and U.S.
Bank has not independently verified information received from any such third party.
Payment Detail Page 1
Factor Detail Page 2
Principal Detail Page 3
Interest Detail Page 4
Reconciliation of Funds Page 5
Additional Reconciliation Detail Page 6
Historical Bond Collateral Realized Loss Reconciliation Page 8
Historical Delinquency & Liquidation Page 9
Historical Liquidation Loss Loan Detail Page 10
Interest Shortfall Reconciliation Page 11
NOI Loan Detail Page 12
Loan Level Detail Page 13
Historical Loan Modification Report Page 14
Ineligible Loan, Permitted Kick Out Loan and Defective Loan Page 15
Mortgage Loan Characteristics Page 16
Interest Next Interest Orig. Certificate Beg. Certificate Principal Interest Total Defaulted Loan Realized Ending
Class Rate Rate Balance Balance Distribution Distribution Distribution Int. SF Amt. Loss Balance
FMPRE 2017-KT01 Multifamily Aggregation Risk Transfer Certificates, Series 2017-KT01
Page 6 of 19
Mortgage Loan Activity
Number of Beginning Current Available Ending Realized Ending
Loans Scheduled Principal Realized Interest Distribution Scheduled Losses Actual
Group Remaining Balance Remittance Losses Remittance Amount Balance Since Cutoff Balance
1 0 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
ADDITIONAL RECONCILIATION DETAIL
March 2017
ADDITIONAL RECONCILIATION DETAIL
FMPRE 2017-KT01 Multifamily Aggregation Risk Transfer Certificates, Series 2017-KT01
Page 7 of 19
March 2017
HISTORICAL BOND/COLLATERAL REALIZED LOSS RECONCILIATION
FMPRE 2017-KT01 Multifamily Aggregation Risk Transfer Certificates, Series 2017-KT01
Loan ID
Curr Beg Sch
Bal of Loan at
Liquidation
Aggregate
Realized Loss
on Loans
Prior Real'd
Loss Appl'd to
Cert
Amt Covered
by OC/other
Credit Support
Int (Shortages) /
Excesses appl'd
to Real'd Loss
Mod Adj/
Appraisal
Reduction Adj
Distribution
Date
Addt'l (Recov)
Exp appl'd to
Real'd Loss
Real'd Loss
Appl'd to Cert
to Date
Recov of
Real'd Loss
paid as Cash
(Recov)/Real'd
Loss Appl'd to
Cert Int
A B C D E
Loan Count: Totals:
Prior Realized Loss Applied to Certificates
Reduction to Realized Loss applied to bonds (could represent OC, insurance policies, reserve accounts, etc)
Amounts classified by the Master as interest adjustments from general collections on a loan with a Realized Loss
Adjustments that are based on principal haircut or future interest foregone due to modification
Realized Loss Adjustments, Supplemental Recoveries or Expenses on a previously liquidated loan
Description of Fields
A
B
C
D
E
*In the Initial Period the Current Realized Loss Applied to Certificates will equal Aggregate Realized Loss on Loans - B - C - D + E instead of A - C - D + E
Page 8 of 19
March 2017
HISTORICAL DELINQUENCY & LIQUIDATION SUMMARY
FMPRE 2017-KT01 Multifamily Aggregation Risk Transfer Certificates, Series 2017-KT01
30 Days Delinq 60 Days Delinq PrepaymentsBankruptcy
(1) Exclusive of loans in Bankruptcy, Foreclosure and REO
Page 9 of 19
March 2017
HISTORICAL LIQUIDATION LOSS LOAN DETAIL
FMPRE 2017-KT01 Multifamily Aggregation Risk Transfer Certificates, Series 2017-KT01
Current
Beginning
Scheduled
BalanceMost Recent
Value
Net Proceeds
Received on
Liquidation
Liquidation
Expense
Net Proceeds
Available for
Distribution
Realized Loss
to TrustLoan IDLiquidation
Sales Price
Current Period
Adjustment to
Trust
Date of Current
Period
Adjustment to
Trust
Loss to Loan
with Cumulative
Adjustment to
Trust
Count: Totals:
Page 10 of 19
March 2017
INTEREST SHORTFALL RECONCILIATION
FMPRE 2017-KT01 Multifamily Aggregation Risk Transfer Certificates, Series 2017-KT01
Special
Servicing Fee
Amount plus
Adjustments
Liquidation
Fee Amount
Workout Fee
Amount
Most Rec
I Reduction/
(Excess) Current Month Outstanding
Other
Shortfalls/
(Refunds)
Current Ending
Scheduled
BalanceLoan ID
Modified Reimbursement of Interest Rate Advances to Servicr
Count:
Totals:
Total Interest Shortfall hitting the Trust: 0.00
*Total shortfall may not match impact to bonds due to, but not limited to, the net effect of PPIE and Master Servicing fees received as per the governing documents.
**In some cases, the Servicer does not withhold their Servicing Fees on Non-Recoverable loans.
Page 11 of 19
March 2017
NOI LOAN DETAIL
FMPRE 2017-KT01 Multifamily Aggregation Risk Transfer Certificates, Series 2017-KT01
Loan ID ODCR
Property
Type City State
End Schedule
Balance
Most Recent
Fiscal NOI
Most Recent
NOI
Most Recent NOI
Start Dt
Most Recent NOI
End Dt Occupancy %
Occupancy as
of Date
Totals:Count:
Page 12 of 19
March 2017
LOAN LEVEL DETAIL
FMPRE 2017-KT01 Multifamily Aggregation Risk Transfer Certificates, Series 2017-KT01
Loan ID
Property
Type
Transfer
Date State*
Maturity
Date
Neg
Am
End Schedule
Balance
Sched
P&I
Prepay
Adj
Prepay
Date
Paid
Thru
Prepay
Premium
Loan
Status **
Interest
Payment
Prepayment
Charges
Note
Rate
Totals:Count:
** Loan Status: A = Payment not received but still in grace period; B = Late Payment but less than 30 days delinquent; 0 = Current; 1 = 30-59 Days Delinquent; 2 = 60-89 Days Delinquent;
3 = 90-120 Days Delinquent; 4 = Performing Matured Balloon; 5 = Non-Performing Matured Balloon; 6 = 121+ Days Delinquent; R = Repurchased.
* If State field is blank or 'XX', loan has properties in multiple states.
Page 13 of 19
March 2017
HISTORICAL LOAN MODIFICATION REPORT
FMPRE 2017-KT01 Multifamily Aggregation Risk Transfer Certificates, Series 2017-KT01
6 = Capitalization on Interest; 7 = Capitalization on Taxes; 8 = Other; 9 = RCombination; 10 = Forbearance.
Page 14 of 19
January 1900
FREMF 2015-K47 Mortgage Trust, Multifamily Mortgage Pass‑Through Certificates, Series 2015-K47
Date Received
Loan ID Notice Type
INELIGIBLE LOAN, PERMITTED KICK OUT LOAN AND DEFECTIVE LOAN
Description
March 2017
INELIGIBLE LOAN, PERMITTED KICK OUT LOAN AND DEFECTIVE LOAN
FMPRE 2017-KT01 Multifamily Aggregation Risk Transfer Certificates, Series 2017-KT01
Page 15 of 19
March 2017
MORTGAGE LOAN CHARACTERISTICS
FMPRE 2017-KT01 Multifamily Aggregation Risk Transfer Certificates, Series 2017-KT01
Remaining Principal Balance
Count Balance ($) %
0% - 0% 0 $0.00 0.00%
Total 0 $0.00 0.00%
Gross Rate
Total Weighted Average Rate: 0.00%
-6
-4
-2
0
2
4
6
0% -
0%
Page 16 of 19
March 2017
MORTGAGE LOAN CHARACTERISTICS
FMPRE 2017-KT01 Multifamily Aggregation Risk Transfer Certificates, Series 2017-KT01
Count Balance ($) %
UNDEFINED 0 $0.00 0.00%
Total 0 $0.00 0.00%
Geographic Distribution by State
-6
-4
-2
0
2
4
6
UNDEFIN
ED
Count Balance ($) %
UNDEFINED 0 $0.00 0.00%
Total 0 $0.00 0.00%
Property Type
UNDEFINED 0.0%
Total: 100.0%
Page 17 of 19
March 2017
MORTGAGE LOAN CHARACTERISTICS
FMPRE 2017-KT01 Multifamily Aggregation Risk Transfer Certificates, Series 2017-KT01
Count Balance ($) %
0 - 0 0 $0.00 0.00%
Total 0 $0.00 0.00%
Seasoning
Months
Total Weighted Average Seasoning: 0
-6
-4
-2
0
2
4
6
0 - 0
Count Balance ($) %
0 - 0 0 $0.00 0.00%
Total 0 $0.00 0.00%
Remaining Term to Maturity
Months
Total Weighted Average Remaining Months: 0
-6
-4
-2
0
2
4
6
0 - 0
Page 18 of 19
March 2017
MORTGAGE LOAN CHARACTERISTICS
FMPRE 2017-KT01 Multifamily Aggregation Risk Transfer Certificates, Series 2017-KT01
Count Balance ($) %
0.000 (N/A) 0 $0.00 0.00%
Total 0 $0.00 0.00%
DSCR
Total Weighted Average DSCR: 0.00
-6
-4
-2
0
2
4
6
0.00
0 (N
/A)
UNDEFINED 0.00%
Total: 100.00%
Count Balance ($) %
UNDEFINED 0 $0.00 0.00%
Total 0 $0.00 0.00%
Amortization Type
Page 19 of 19
Exhibit D-1
EXHIBIT D
REPRESENTATIONS AND WARRANTIES OF THE MORTGAGE LOAN SELLER REGARDING THE MORTGAGE LOANS
For purposes of the representations and warranties set forth in this Exhibit D, the phrase “to the knowledge of the Mortgage Loan Seller” or “to the Mortgage Loan Seller’s knowledge” will mean, except where otherwise expressly set forth below, the actual state of knowledge of the Mortgage Loan Seller or any servicer acting on its behalf regarding the matters referred to, (a) after the Mortgage Loan Seller’s having conducted such inquiry and due diligence into such matters as would be customarily required by the Mortgage Loan Seller’s underwriting standards represented in the Multifamily Seller/Servicer Guide (the “Guide”) and the Mortgage Loan Seller’s credit policies and procedures, at the time of the Mortgage Loan Seller’s acquisition of the particular Loan; and (b) subsequent to such acquisition, utilizing the monitoring practices customarily utilized by the Mortgage Loan Seller and its servicer pursuant to the Guide. All information contained in documents which are part of or required to be part of a Mortgage File will be deemed to be within the knowledge of the Mortgage Loan Seller. Wherever there is a reference to receipt by, or possession of, the Mortgage Loan Seller of any information or documents, or to any action taken by the Mortgage Loan Seller or not taken by the Mortgage Loan Seller, such reference will include the receipt or possession of such information or documents by, or the taking of such action or the not taking of such action by, either the Mortgage Loan Seller or any servicer acting on its behalf. Capitalized terms used in this Exhibit D but not defined in this Exhibit D will have the respective meanings assigned to those terms in the Trust and Servicing Agreement.
The Mortgage Loan Seller represents and warrants, subject to the Approved Exceptions, with respect to each Loan, that as of the date specified below or, if no date is specified, as of the applicable Cut-off Date for such Loan, the following representations and warranties are true and correct in all material respects:
(1) Fixed Rate.
Each Loan bears interest at a fixed rate.
(2) Crossed Loans.
Except with respect to any subordinate mortgage identified in Paragraph (3), no Loan is cross-collateralized or cross-defaulted with any other loan not being transferred to the Trust.
(3) Subordinate Loans.
Except as set forth in the Mortgage Loan Schedule and except as set forth in the Loan Documents regarding future permitted subordinate debt, there are no subordinate mortgages encumbering the related Mortgaged Property. The Mortgage Loan Seller has no knowledge of any mezzanine debt related to such Mortgaged Property.
(4) Single Purpose Entity.
(a) The Loan Documents executed in connection with each Loan with an original principal balance of $5,000,000 or more require the Borrower to be a Single Purpose Entity (defined below) for at least as long as the Loan is outstanding, except in cases where the related Mortgaged Property is a residential cooperative property.
(b) To the Mortgage Loan Seller’s knowledge, each such Borrower is a Single Purpose Entity.
For this purpose, a “Single Purpose Entity” will mean an entity (not an individual) which meets all of the following requirements:
Exhibit D-2
(i) An entity whose organizational documents provide and which entity represented in the related Loan Documents, substantially to the effect that each of the following is true with respect to each Borrower:
(A) it was formed or organized solely for the purpose of owning and operating one or more of the Mortgaged Properties securing the Loans, and
(B) it is prohibited from engaging in any business unrelated to such Mortgaged Property or Properties,
(ii) An entity whose organizational documents provide or which entity represented in the related Loan Documents, substantially to the effect that all the following are true with respect to each Borrower:
(A) it does not have any assets other than those related to its interest in and operation of such Mortgaged Property or Properties,
(B) it does not have any indebtedness other than as permitted by the related Mortgage(s) or the other related Loan Documents,
(C) it has its own books and records and accounts separate and apart from any other Person (other than a Borrower for a Loan that is cross-collateralized and cross-defaulted with the related Loan), and
(D) it holds itself out as a legal entity, separate and apart from any other Person.
(c) Each Loan with an original principal balance of $25,000,000 or more has a counsel’s opinion regarding non-consolidation of the Borrower in any insolvency proceeding involving any other party.
(d) To the Mortgage Loan Seller’s actual knowledge, each Borrower has fully complied with the requirements of the related Loan Documents and the Borrower’s organizational documents regarding Single Purpose Entity status.
(e) The Loan Documents executed in connection with each Loan with an original principal balance of less than $5,000,000 prohibit the related Borrower from doing either of the following:
(i) having any assets other than those related to its interest in the related Mortgaged Property or its financing, or
(ii) engaging in any business unrelated to such property and the related Loan.
(5) Licenses, Permits and Authorization.
(a) As of the Origination Date, to Mortgage Loan Seller’s knowledge, based on the related Borrower’s representations and warranties in the related Loan Documents, the Borrower, commercial lessee and/or operator of the Mortgaged Property was in possession of all material licenses, permits, and authorizations required for use of the related Mortgaged Property as it was then operated.
(b) Each Borrower covenants in the related Loan Documents that it will remain in material compliance with all material licenses, permits and other legal requirements necessary and required to conduct its business.
Exhibit D-3
(6) Condition of Mortgaged Property.
To the Mortgage Loan Seller’s knowledge, based solely upon due diligence customarily performed in connection with the origination of comparable loans, one of the following is applicable:
(a) each related Mortgaged Property is free of any material damage that would materially and adversely affect the use or value of such Mortgaged Property as security for the Loan (other than normal wear and tear), or
(b) to the extent a prudent lender would so require, the Mortgage Loan Seller has required a reserve, letter of credit, guaranty, insurance coverage or other mitigant with respect to the condition of the Mortgaged Property.
(7) Access, Public Utilities and Separate Tax Parcels.
All of the following are true and correct with regard to each Mortgaged Property:
(a) each Mortgaged Property is located on or adjacent to a dedicated road, or has access to an irrevocable easement permitting ingress and egress,
(b) each Mortgaged Property is served by public utilities and services generally available in the surrounding community or otherwise appropriate for the use in which the Mortgaged Property is currently being utilized, and
(c) each Mortgaged Property constitutes one or more separate tax parcels. In certain cases, if such Mortgaged Property is not currently one tax parcel, an application has been made to the applicable governing authority for creation of separate tax parcels, in which case the Loan Documents require the Borrower to escrow an amount sufficient to pay taxes for the existing tax parcel of which the Mortgaged Property is a part until the separate tax parcels are created.
(d) Any requirement described in clauses (a), (b) or (c) will be satisfied if such matter is covered by an endorsement or affirmative insurance under the related Title Policy (defined in Paragraph 11).
(8) Taxes and Assessments.
One of the following is applicable:
(a) there are no delinquent or unpaid taxes, assessments (including assessments payable in future installments) or other outstanding governmental charges affecting any Mortgaged Property that are or may become a lien of priority equal to or higher than the lien of the related Mortgage, or
(b) an escrow of funds has been established in an amount (including all ongoing escrow payments to be made prior to the date on which taxes and assessments become delinquent) sufficient to cover the payment of such unpaid taxes and assessments.
For purposes of this representation and warranty, real property taxes and assessments will not be considered unpaid until the date on which interest or penalties would be first payable.
(9) Ground Leases.
No Loan is secured in whole or in part by the related Borrower’s interest as lessee under a ground lease of the related Mortgaged Property without also being secured by the related fee interest in such Mortgaged Property.
Exhibit D-4
(10) Valid First Lien.
(a) Each related Mortgage creates a valid and enforceable first priority lien on the related Mortgaged Property, subject to Permitted Encumbrances (defined below) and except as enforcement may be limited by bankruptcy, insolvency, reorganization, moratorium or other laws affecting the enforcement of creditors’ rights or by general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law).
(b) If the related Loan is cross-collateralized with any other Loan(s), the related Mortgage encumbering the related Mortgaged Property also secures such other Loan(s).
(c) The related Mortgaged Property is free and clear of any mechanics’ and materialmen’s liens which are prior to or equal with the lien of the related Mortgage, except those which are bonded over, escrowed for or insured against by a Title Policy.
(d) A UCC financing statement has been filed and/or recorded (or sent for filing or recording) (or, in the case of fixtures, the Mortgage constitutes a fixture filing) in all places (if any) necessary at the time of origination of the Loan to perfect a valid security interest in the personal property owned by Borrower and reasonably necessary to operate the related Mortgaged Property in its current use other than for any of the following:
(i) non-material personal property,
(ii) personal property subject to purchase money security interests, and
(iii) personal property that is leased equipment, to the extent a security interest may be created by filing or recording.
Notwithstanding the foregoing, no representation is made as to the perfection of any security interest in rents or other personal property to the extent that possession or control of such items or actions other than the filing of UCC financing statements are required in order to effect such perfection.
(e) Any security agreement or equivalent document related to and delivered in connection with the Loan establishes and creates a valid and enforceable lien on the property described therein (other than on healthcare licenses or on payments to be made under Medicare, Medicaid or similar federal, state or local third party payor programs that are not assignable without governmental approval), subject to Permitted Encumbrances and except as enforcement may be limited by bankruptcy, insolvency, reorganization, moratorium or other laws affecting the enforcement of creditors’ rights or by general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law).
(11) Title Insurance.
(a) Each Mortgaged Property is covered by an ALTA lender’s title insurance policy (or its equivalent as set forth in the applicable jurisdiction), a pro forma policy or a marked-up title insurance commitment (on which the required premium has been paid) that evidences such title insurance policy (collectively, a “Title Policy”), in the original principal amount of the related Loan (or the allocated loan amount of the portions of the Mortgaged Property that are covered by such Title Policy).
(b) Each Title Policy insures that the related Mortgage is a valid first priority lien on the related Mortgaged Property, subject only to Permitted Encumbrances.
Exhibit D-5
(c) Each Title Policy (or, if it has yet to be issued, the coverage to be provided by such Title Policy) is in full force and effect and all premiums have been paid.
(d) Each Title Policy contains no exclusion for or affirmatively insures (except for any Mortgaged Property located in a jurisdiction where such affirmative insurance is not available) each of the following:
(i) there is access to a public road,
(ii) the area shown on the survey is the same as the property legally described in the Mortgage,
(iii) unless the Mortgaged Property is located in Alaska, Arizona, Arkansas, Connecticut, Washington, D.C., Delaware, Hawaii, Illinois, Louisiana, Maine, Massachusetts, Michigan, Minnesota, Missouri, Montana, New Hampshire, New Jersey, New Mexico, New York, North Dakota, Ohio, Oklahoma, Pennsylvania, Texas, Washington or Wisconsin, the lien of the Mortgage is superior to a lien created by any applicable statute relating to environmental remediation, and
(iv) to the extent that the Mortgaged Property consists of two or more adjoining parcels, such parcels are contiguous.
(e) No material claims have been made or paid under the Title Policy.
(f) The Mortgage Loan Seller has not done, by act or omission, anything that would materially impair or diminish the coverage under the Title Policy, and has no knowledge of any such action or omission.
(g) Immediately following the transfer and assignment of the related Loan to the Trustee, the Title Policy (or, if it has yet to be issued, the coverage to be provided by such Title Policy) will inure to the benefit of the Trustee without the consent of or notice to the insurer of the Title Policy.
(h) The Mortgage Loan Originator, the Mortgage Loan Seller and its successors and assigns are the sole named insureds under the Title Policy.
(i) To the Mortgage Loan Seller’s knowledge, the insurer of the Title Policy is qualified to do business in the jurisdiction in which the related Mortgaged Property is located.
“Permitted Encumbrances” will mean:
(i) the lien of current real property taxes, ground rents, water charges, sewer rents and assessments not yet delinquent,
(ii) covenants, conditions and restrictions, rights of way, easements and other matters of public record specifically identified in the Title Policy, none of which, individually or in the aggregate, materially interferes with any of the following:
(A) the current use of the Mortgaged Property,
(B) the security in the collateral intended to be provided by the lien of such Mortgage,
(C) the related Borrower’s ability to pay its obligations when they become due, or
(D) the value of the Mortgaged Property,
Exhibit D-6
(iii) exceptions (general and specific) and exclusions set forth in such Title Policy, none of which, individually or in the aggregate, materially interferes with any of the following:
(A) the current use of the Mortgaged Property,
(B) the security in the collateral intended to be provided by the lien of such Mortgage,
(C) the related Borrower’s ability to pay its obligations when they become due, or
(D) the value of the Mortgaged Property,
(iv) the rights of tenants, as tenants only, under leases, including subleases, pertaining to the related Mortgaged Property,
(v) other matters to which similar properties are commonly subject, none of which, individually or in the aggregate, materially interferes with any of the following:
(A) the current use of the Mortgaged Property,
(B) the security in the collateral intended to be provided by the lien of such Mortgage,
(C) the related Borrower’s ability to pay its obligations when they become due, or
(D) the value of the Mortgaged Property, and
(vi) if the related Loan is cross-collateralized with any other Loan(s), the lien of any such cross-collateralized Loan(s).
(12) Encroachments.
(a) To the Mortgage Loan Seller’s knowledge (based upon surveys and/or the Title Policy obtained in connection with the origination of the Loans), as of the related Origination Date of each Loan, all of the material improvements on the related Mortgaged Property that were considered in determining the appraised value of the Mortgaged Property lay wholly within the boundaries and building restriction lines of such property and there are no encroachments of any part of any building over any easement, except for one or more of the following:
(i) encroachments onto adjoining parcels that are insured against by the related Title Policy,
(ii) encroachments that do not materially and adversely affect the operation, use or value of such Mortgaged Property or the security intended to be provided by the Mortgage,
(iii) violations of the building restriction lines that are covered by ordinance and law coverage in amounts customarily required by prudent multifamily mortgage lenders for similar properties,
(iv) violations of the building restriction lines that are insured against by the related Title Policy, or
(v) violations of the building restriction lines that do not materially and adversely affect the operation, use or value of such Mortgaged Property or the security intended to be provided by the Mortgage.
Exhibit D-7
(b) To the Mortgage Loan Seller’s knowledge (based on surveys and/or the Title Policy obtained in connection with the origination of the Loans), as of the related Origination Date of each Loan, no improvements on adjoining properties materially encroached upon such Mortgaged Property so as to materially and adversely affect the operation, use or value of such Mortgaged Property or the security intended to be provided by the Mortgage, except those encroachments that are insured against by the related Title Policy.
(13) Zoning.
Based upon the “Zoning Due Diligence” (defined below) one of the following is applicable to each Mortgaged Property:
(a) the improvements located on or forming part of each Mortgaged Property materially comply with applicable zoning laws and ordinances, or
(b) the improvements located on or forming part of each Mortgaged Property constitute a legal non-conforming use or structure and one of the following is true:
(i) the non-compliance does not materially and adversely affect the value of the related Mortgaged Property, or
(ii) ordinance and law coverage was provided in amounts customarily required by prudent multifamily mortgage lenders for similar properties.
The foregoing may be based upon one or more of the following (“Zoning Due Diligence”):
(a) a statement of full restoration by a zoning authority,
(b) copies of legislation or variance permitting full restoration of the Mortgaged Property,
(c) a damage restoration statement along with an evaluation of the Mortgaged Property,
(d) a zoning report prepared by a company acceptable to the Mortgage Loan Seller,
(e) an opinion of counsel, and/or
(f) other due diligence considered reasonable by prudent multifamily mortgage lenders in the lending area where the subject Mortgaged Property is located (such reasonable due diligence includes, but is not limited to, ordinance and law coverage as specified in clause (b)(ii) above).
(14) Environmental Conditions.
(a) As of the Origination Date, each Borrower represented and warranted in all material respects that to its knowledge, such Borrower has not used, caused or permitted to exist (and will not use, cause or permit to exist) on the related Mortgaged Property any Hazardous Materials in any manner which violates federal, state or local laws, ordinances, regulations, orders, directives or policies governing the use, storage, treatment, transportation, manufacture, refinement, handling, production or disposal of Hazardous Materials or other environmental laws, subject to each of the following:
(i) exceptions set forth in certain Environmental Reports,
(ii) Hazardous Materials that are commonly used in the operation and maintenance of properties of similar kind and nature to the Mortgaged Property,
Exhibit D-8
(iii) Hazardous Materials that are commonly used in accordance with prudent management practices and applicable law, and
(iv) Hazardous Materials that are commonly used in a manner that does not result in any contamination of the Mortgaged Property that is not permitted by law).
(b) Each Mortgage requires the related Borrower to comply, and to cause the related Mortgaged Property to be in compliance, with all Hazardous Materials Laws applicable to the Mortgaged Property.
(c) Each Borrower (or an Affiliate thereof) has agreed to indemnify, defend and hold the lender and its successors and assigns harmless from and against losses, liabilities, damages, injuries, penalties, fines, expenses, and claims of any kind whatsoever (including attorneys’ fees and costs) paid, incurred or suffered by, or asserted against, any such party resulting from a breach of the foregoing representations or warranties given by the Borrower in connection with such Loan.
(d) A Phase I Environmental Report and, in the case of certain Loans, a Phase II Environmental Report (in either case meeting ASTM International standards), was conducted by a reputable environmental consulting firm with respect to the related Mortgaged Property within 12 months of the Transfer Date.
(e) If any material non-compliance or material existence of Hazardous Materials was indicated in any Phase I Environmental Report or Phase II Environmental Report, then at least one of the following statements is true:
(i) funds reasonably estimated to be sufficient to cover the cost to cure any material non-compliance with applicable environmental laws or material existence of Hazardous Materials have been escrowed, or a letter of credit in such amount has been provided, by the related Borrower and held by the Mortgage Loan Seller or its servicer,
(ii) if the Environmental Report recommended an operations and maintenance plan, but not any material expenditure of funds, the related Borrower has been required to maintain an operations and maintenance plan,
(iii) the environmental condition identified in the related Environmental Report was remediated or abated in all material respects,
(iv) a no further action or closure letter was obtained from the applicable governmental regulatory authority (or the environmental issue affecting the related Mortgaged Property was otherwise listed by such governmental authority as “closed”),
(v) such conditions or circumstances identified in the Phase I Environmental Report were investigated further and, based upon such additional investigation, an environmental consultant recommended no further investigation or remediation,
(vi) a party with financial resources reasonably estimated to be adequate to cure the condition or circumstance provided a guaranty or indemnity to the related Borrower or lender to cover the costs of any required investigation, testing, monitoring or remediation, or
(vii) the reasonably estimated costs of such remediation do not exceed 2% of the outstanding principal balance of the related Loan.
(f) To the best of the Mortgage Loan Seller’s knowledge, in reliance on such Environmental Reports and except as set forth in such Environmental Reports, each Mortgaged Property is in material compliance with all Hazardous Materials Laws, and to the best of the Mortgage Loan Seller’s
Exhibit D-9
knowledge, no notice of violation of such laws has been issued by any governmental agency or authority, except, in all cases, as indicated in such Environmental Reports or other documents previously provided to the Trust.
(g) The Mortgage Loan Seller has not taken any action which would cause the Mortgaged Property not to be in compliance with all Hazardous Materials Laws.
(h) All such Environmental Reports or any other environmental assessments of which the Mortgage Loan Seller has possession have been disclosed to the Trust.
(i) With respect to the Mortgaged Properties securing the Loans that were not the subject of an environmental site assessment within 12 months prior to the Cut-off Date:
(i) no Hazardous Material is present on such Mortgaged Property such that (A) the value of such Mortgaged Property is materially and adversely affected or (B) under applicable federal, state or local law,
(1) such Hazardous Material could be required to be eliminated at a cost materially and adversely affecting the value of the Mortgaged Property before such Mortgaged Property could be altered, renovated, demolished or transferred, or
(2) the presence of such Hazardous Material could (upon action by the appropriate governmental authorities) subject the owner of such Mortgaged Property, or the holders of a security interest therein, to liability for the cost of eliminating such Hazardous Material or the hazard created thereby at a cost materially and adversely affecting the value of the Mortgaged Property, and
(ii) such Mortgaged Property is in material compliance with all applicable federal, state and local laws pertaining to Hazardous Materials or environmental hazards, any noncompliance with such laws does not have a material adverse effect on the value of such Mortgaged Property, and neither Mortgage Loan Seller nor, to Mortgage Loan Seller’s knowledge, the related Borrower or any current tenant thereon, has received any notice of violation or potential violation of any such law.
“Hazardous Materials” means
(i) petroleum and petroleum products and compounds containing them, including gasoline, diesel fuel and oil; explosives; flammable materials; radioactive materials; polychlorinated biphenyls (“PCBs”) and compounds containing them,
(ii) lead and lead-based paint,
(iii) asbestos or asbestos-containing materials in any form that is or could become friable,
(iv) underground or above-ground storage tanks that are not subject to a “no further action” letter from the regulatory authority in the related property jurisdiction, whether empty or containing any substance,
(v) any substance the presence of which on the Mortgaged Property is prohibited by any federal, state or local authority,
(vi) any substance that requires special handling and any other “hazardous material,” “hazardous waste,” “toxic substance,” “toxic pollutant,” “contaminant,” or “pollutant” by or within the meaning of any Hazardous Materials Law, or
Exhibit D-10
(vii) any substance that is regulated in any way by or within the meaning of any Hazardous Materials Law.
“Hazardous Materials Law” means
(i) any federal, state, and local law, ordinance and regulation and standard, rule, policy and other governmental requirement, administrative ruling and court judgment and decree in effect now or in the future and including all amendments, that relate to Hazardous Materials or the protection of human health or the environment and apply to the Borrower or to the Mortgaged Property, and
(ii) Hazardous Materials Laws include, but are not limited to, the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. Section 9601, et seq., the Resource Conservation and Recovery Act of 1976, 42 U.S.C. Section 6901, et seq., the Toxic Substance Control Act, 15 U.S.C. Section 2601, et seq., the Clean Water Act, 33 U.S.C. Section 1251, et seq., and the Hazardous Materials Transportation Act, 49 U.S.C. Section 5101, et. seq., and their state analogs.
(15) Insurance.
(a) Each related Mortgaged Property is insured by each of the following:
(i) a property damage insurance policy, issued by an insurer meeting the requirements of the Loan Documents and the Guide, in an amount not less than
(A) the lesser of (1) the outstanding principal amount of the related Loan and (2) the replacement cost (with no deduction for physical depreciation) of the Mortgaged Property, and
(B) the amount necessary to avoid the operation of any co-insurance provisions with respect to the related Mortgaged Property,
(ii) business income or rental value insurance covering no less than the effective gross income, as determined by the Mortgage Loan Seller, attributable to the Mortgaged Property for 12 months,
(iii) comprehensive general liability insurance in amounts generally required by prudent multifamily mortgage lenders for similar properties, and
(iv) if windstorm and related perils and/or “Named Storm” is excluded from the property damage insurance policy, the Mortgaged Property is insured by a separate windstorm insurance policy or endorsement covering damage from windstorm and related perils and/or “Named Storm” in an amount not less than:
(A) the lesser of (1) the outstanding principal amount of the related Loan and (2) the replacement cost (with no deduction for physical depreciation) of the Mortgaged Property, and
(B) the amount necessary to avoid the operation of any co-insurance provisions with respect to the related Mortgaged Property.
(b) All Mortgaged Properties with borrower-owned structures located in (i) seismic zones 3 or 4 or (ii) a geographic location with a horizontal Peak Ground Acceleration (PGA) equal to or greater than 0.15g have had a seismic assessment done for the sole purpose of assessing (A) a scenario expected loss (“SEL”) or (B) a probable maximum loss (“PML”) for the Mortgaged Property in
Exhibit D-11
the event of an earthquake. In such instance, the SEL/PML was based upon a 475-year lookback with a 10% probability of exceedance in a 50-year period. If a seismic assessment concluded that the SEL/PML on a Mortgaged Property would exceed 20% of the amount of the replacement costs of the improvements, earthquake insurance was required in an amount not less than 150% of an amount equal to the difference between the projected loss for the Mortgaged Property using the actual SEL/PML and the projected loss for the Mortgaged Property using a 20% SEL/PML.
(c) Each insurance policy requires at least ten days prior notice to the lender of termination or cancellation by the insurer arising because of non-payment of a premium and at least 30 days prior notice to the lender of termination or cancellation by the insurer arising for any reason other than non-payment of a premium, and no such notice has been received by the Mortgage Loan Seller.
(d) All premiums on such insurance policies required to be paid have been paid.
(e) Each insurance policy contains a standard mortgagee clause and loss payee clause in favor of lender and names the mortgagee as an additional insured in the case of liability insurance policies (other than with respect to professional liability policies).
(f) Based solely on a flood zone determination, if any material portion of the improvements on the Mortgaged Property, exclusive of any parking lots, is located in an area identified by the Federal Emergency Management Agency as a special flood hazard area, then the Borrower is required to maintain flood insurance for such portion of the improvements located in a special flood hazard area in an amount equal to the maximum amount available under the National Flood Insurance Program, plus such additional excess flood coverage in an amount generally required by prudent multifamily mortgage lenders for similar properties.
(g) The related Loan Documents for each Loan obligate the related Borrower to maintain all such insurance and, if the Borrower fails to do so, authorize the lender to maintain such insurance at the Borrower’s cost and expense and to seek reimbursement for such insurance from the Borrower.
(h) None of the Loan Documents contains any provision that expressly excuses the related Borrower from obtaining and maintaining insurance coverage for acts of terrorism.
(i) The related Loan Documents for each Loan contain customary provisions consistent with the practices of prudent multifamily mortgage lenders for similar properties requiring the related Borrower to obtain such other insurance as the lender may require from time-to-time.
(16) Grace Periods.
For any Loan that provides for a grace period with respect to delinquent Monthly Payments, such grace period is no longer than ten days from the applicable payment date.
(17) Due on Encumbrance.
Each Loan prohibits the related Borrower from doing either of the following:
(a) from mortgaging or otherwise encumbering the Mortgaged Property without the prior written consent of the lender or the satisfaction of debt service coverage and other criteria specified in the related Loan Documents, and
(b) from carrying any additional indebtedness, except as set forth in the Loan Documents or in connection with trade debt and equipment financings incurred in the ordinary course of Borrower’s business.
Exhibit D-12
(18) Carveouts to Non-Recourse.
(a) The Loan Documents for each Loan provide that:
(i) the related Borrower will be liable to the lender for any losses incurred by the lender due to any of the following:
(A) the misapplication or misappropriation of rents (after a demand is made after an event of default), insurance proceeds or condemnation awards,
(B) any breach of the environmental covenants contained in the related Loan Documents,
(C) fraud by such Borrower in connection with the application for or creation of the Loan or in connection with any request for any action or consent by the lender, and
(ii) the Loan will become full recourse in the event of a voluntary bankruptcy filing by the Borrower.
(b) A natural person is jointly and severally liable with the Borrower with respect to (a)(i) and (a)(ii).
(19) Financial Statements.
Each Loan requires the Borrower to provide the owner or holder of the Mortgage with quarterly and annual operating statements, rent rolls and related information and annual financial statements.
(20) Due on Sale.
(a) Each Loan contains provisions for the acceleration of the payment of the unpaid principal balance of such Loan if, without the consent of the holder of the Mortgage and/or if not in compliance with the requirements of the related Loan Documents, the related Mortgaged Property or a controlling interest in the related Borrower is directly or indirectly transferred or sold, except with respect to any of the following transfers:
(i) transfers of certain interests in the related Borrower to Persons already holding direct or indirect interests in such Borrower, their family members, affiliated companies and other estate planning related transfers that satisfy certain criteria specified in the related Loan Documents (which criteria are consistent with the practices of prudent multifamily mortgage lenders),
(ii) transfers of less than a controlling interest in a Borrower,
(iii) transfers of common stock in publicly traded companies, or
(iv) if the related Mortgaged Property is a residential cooperative property, transfers of stock of the related Borrower in connection with the assignment of a proprietary lease for a unit in the related Mortgaged Property by a tenant-shareholder of the related Borrower to other Persons who by virtue of such transfers become tenant-shareholders in the related Borrower.
(b) The Mortgage requires the Borrower to pay all fees and expenses associated with securing the consent or approval of the holder of the Mortgage for all actions requiring such consent or approval under the Mortgage including the cost of counsel opinions relating to REMIC or other securitization and tax issues.
Exhibit D-13
(21) Assignment of Leases.
(a) Each Mortgage File contains an Assignment of Leases that is part of the related Mortgage.
(b) Each such Assignment of Leases creates a valid present assignment of, or a valid first priority lien or security interest in, certain rights under the related lease or leases, subject only to a license granted to the related Borrower to exercise certain rights and to perform certain obligations of the lessor under such lease or leases, including the right to operate the related leased property, except as enforcement may be limited by bankruptcy, insolvency, reorganization, moratorium or other laws affecting the enforcement of creditors’ rights or by general principles of equity (regardless of whether enforceability is considered in a proceeding in equity or at law).
(c) No Person other than the related Borrower owns any interest in any payments due under the related lease or leases that is superior to or of equal priority with the lender’s interest.
(d) The related Mortgage provides for the appointment of a receiver for rents or allows the holder thereof to enter into possession to collect rents or provides for rents to be paid directly to the mortgagee in the event of a default under the Loan or Mortgage.
(22) Insurance Proceeds and Condemnation Awards.
(a) Each Loan provides that insurance proceeds and condemnation awards will be applied to one of the following:
(i) restoration or repair of the related Mortgaged Property,
(ii) restoration or repair of the related Mortgaged Property, with any excess insurance proceeds or condemnation awards after restoration or repair being paid to the Borrower, or
(iii) reduction of the principal amount of the Loan.
(b) In the case of all casualty losses or condemnations resulting in proceeds or awards in excess of a specified dollar amount or percentage of the Loan amount that a prudent multifamily lender would deem satisfactory and acceptable, the lender or a trustee appointed by it (if the lender does not exercise its right to apply the insurance proceeds or condemnation awards (including proceeds from settlement of condemnation actions) to the principal balance of the related Loan in accordance with the Loan Documents) has the right to hold and disburse such proceeds or awards as the repairs or restoration progresses.
(c) To the Mortgage Loan Seller’s knowledge, there is no proceeding pending for the total or partial condemnation of such Mortgaged Property that would have a material adverse effect on the use or value of the Mortgaged Property.
(23) Customary Provisions.
(a) The Note or Mortgage for each Loan, together with applicable state law, contains customary and enforceable provisions so as to render the rights and remedies of the holder of such Note or Mortgage adequate for the practical realization against the related Mortgaged Property of the principal benefits of the security in the collateral intended to be provided by such Note or the lien of such Mortgage, including realization by judicial or if applicable, non-judicial foreclosure, except as the enforcement of the Mortgage may be limited by bankruptcy, insolvency, reorganization, moratorium, redemption or other laws affecting the enforcement of creditors’ rights or by general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law).
Exhibit D-14
(b) No Borrower is a debtor in, and no Mortgaged Property is the subject of, any state or federal bankruptcy or insolvency proceeding, and, as of the Origination Date, no guarantor was a debtor in any state or federal bankruptcy or insolvency proceeding.
(24) Litigation.
To the knowledge of the Mortgage Loan Seller, there are no actions, suits or proceedings before any court, administrative agency or arbitrator concerning any Loan, Borrower or related Mortgaged Property, an adverse outcome of which would reasonably be expected to materially and adversely affect any of the following:
(a) title to the Mortgaged Property or the validity or enforceability of the related Mortgage,
(b) the value of the Mortgaged Property as security for the Loan,
(c) the use for which the Mortgaged Property was intended, or
(d) the Borrower’s ability to perform under the related Loan.
(25) Escrow Deposits.
(a) Except as previously disbursed pursuant to the Loan Documents, all escrow deposits and payments relating to each Loan that are required to be deposited or paid, have been deposited or paid.
(b) All escrow deposits and payments required pursuant to each Loan are in the possession, or under the control, of the Mortgage Loan Seller or its servicer.
(c) All such escrow deposits that have not been disbursed pursuant to the Loan Documents are being conveyed by the Mortgage Loan Seller to the Trust and identified with appropriate detail.
(26) Valid Assignment.
(a) Each related assignment of Mortgage and related assignment of Assignment of Leases, if any, from the Mortgage Loan Seller to the Trust is in recordable form and constitutes the legal, valid and binding assignment from the Mortgage Loan Seller to the Trust, except as enforcement may be limited by bankruptcy, insolvency, reorganization, liquidation, receivership, moratorium or other laws relating to or affecting the enforcement of creditors’ rights or by general principles of equity (regardless of whether enforceability is considered in a proceeding in equity or at law).
(b) Each related Mortgage and Assignment of Leases, if any, is freely assignable without the consent of the related Borrower.
(27) Appraisals.
Each Servicing File contains an appraisal for the related Mortgaged Property that is dated within 12 months of the Transfer Date and that satisfies the guidelines set forth in Title XI of the Financial Institutions Reform, Recovery and Enforcement Act of 1989.
(28) Inspection of Mortgaged Property.
The Mortgage Loan Seller (or if the Mortgage Loan Seller is not the Mortgage Loan Originator, the Mortgage Loan Originator) inspected or caused to be inspected each Mortgaged Property in connection with the origination of the related Loan and within 12 months of the Transfer Date.
Exhibit D-15
(29) Qualification To Do Business.
To the extent required under applicable law, as of the Cut-off Date or as of the date that such entity held the Note, each holder of the Note was authorized to transact and do business in the jurisdiction in which the related Mortgaged Property is located, or the failure to be so authorized did not materially and adversely affect the enforceability of such Loan.
(30) Ownership.
(a) Immediately prior to the transfer to the Trust of the Loans, the Mortgage Loan Seller had good title to, and was the sole owner of, each Loan.
(b) The Mortgage Loan Seller has full right, power and authority to transfer and assign each of the Loans to the Trust and has validly and effectively conveyed (or caused to be conveyed) to the Trust or its designee all of the Mortgage Loan Seller’s legal and beneficial interest in and to the Loans free and clear of any and all liens, pledges, charges, security interests and/or other encumbrances of any kind.
(31) Deed of Trust.
If the Mortgage is a deed of trust, each of the following is true:
(a) a trustee, duly qualified under applicable law to serve as trustee, currently serves as trustee and is named in the deed of trust (or has been or may be substituted in accordance with applicable law by the related lender), and
(b) such deed of trust does not provide for the payment of fees or expenses to such trustee by the Mortgage Loan Seller, the Trust or any transferee of the Mortgage Loan Seller or the Trust.
(32) Validity of Loan Documents.
(a) Each Note, Mortgage or other agreement that evidences or secures the related Loan and was executed by or for the benefit of the related Borrower or any guarantor is the legal, valid and binding obligation of the signatory, enforceable in accordance with its terms, except as enforcement may be limited by bankruptcy, insolvency, reorganization, moratorium or other laws affecting the enforcement of creditors’ rights or by general principles of equity (regardless of whether enforceability is considered in a proceeding in equity or at law).
(b) There is no valid offset, defense, counterclaim, or right of rescission, abatement or diminution available to the related Borrower or any guarantor with respect to such Note, Mortgage or other agreement, except as enforcement may be limited by bankruptcy, insolvency, reorganization, moratorium or other laws affecting the enforcement of creditors’ rights or by general principles of equity (regardless of whether enforceability is considered in a proceeding in equity or at law).
(c) To Mortgage Loan Seller’s knowledge, no offset, defense, counterclaim or right of rescission, abatement or diminution has been asserted by Borrower or any guarantor.
(33) Compliance with Usury Laws.
As of the Origination Date, the Mortgage Rate (exclusive of any default interest, late charges, yield maintenance charge, or prepayment premiums) of each Loan was in compliance with, or was exempt from, applicable state or federal laws, regulations and other requirements pertaining to usury.
Exhibit D-16
(34) No Shared Appreciation.
No Loan has shared appreciation rights with respect to such Loan (it being understood that equity holdings, including without limitation, preferred equity holdings, will not be considered shared appreciation rights with respect to a Loan), any other contingent interest feature or a negative amortization feature.
(35) Whole Loan.
Each Loan is a whole loan and is not a participation interest in such Loan.
(36) Loan Information.
The information set forth in the Mortgage Loan Schedule is true, complete and accurate in all material respects.
(37) Full Disbursement.
The proceeds of the Loan have been fully disbursed and there is no requirement for future advances.
(38) No Advances.
No advance of funds has been made by the Mortgage Loan Seller to the related Borrower (other than mezzanine debt and the acquisition of preferred equity interests by the preferred equity interest holder), and no advance of funds have, to the Mortgage Loan Seller’s knowledge, been received (directly or indirectly) from any Person other than the related Borrower for or on account of payments due on the Loan.
(39) All Collateral Transferred.
All collateral that secures the Loans is being transferred to the Trust as part of the Loans (other than healthcare licenses, Medicare, Medicaid or similar federal, state or local third party payor programs, including housing assistance payments contracts, that are not transferable without governmental approval).
(40) Loan Status; Waivers and Modifications.
Since the Origination Date and except pursuant to written instruments set forth in the related Mortgage File or as disclosed in writing to the Directing Third Party, all of the following are true and correct:
(a) the material terms of such Mortgage, Note and related Loan Documents have not been waived, impaired, modified, altered, satisfied, canceled, subordinated or rescinded in any respect,
(b) no related Mortgaged Property or any portion thereof has been released from the lien of the related Mortgage in any manner which materially interferes with the security intended to be provided by such Mortgage or the use, value or operation of such Mortgaged Property, and
(c) neither Borrower nor guarantor has been released from its obligations under the Loan.
(41) Defaults.
(a) There exists no monetary default (other than payments due but not yet more than 30 days past due) or, to Mortgage Loan Seller’s knowledge, material non-monetary default, breach, violation or event of acceleration under the related Loan.
(b) To Mortgage Loan Seller’s knowledge, there exists no event that, with the passage of time or with notice and the expiration of any grace or cure period, would constitute a material default, breach, violation or event of acceleration under such Loan; provided, however, that the representations and
Exhibit D-17
warranties set forth in this paragraph 41 do not address or otherwise cover any default, breach, violation or event of acceleration that specifically pertains to any matter otherwise covered by any other representation or warranty made by the Mortgage Loan Seller in this Exhibit D; and, provided, further, that a breach by the Borrower of any representation or warranty contained in any Loan Document (each, a “Borrower Representation”) will not constitute a material non-monetary default, breach, violation or event of acceleration for purposes of this paragraph 41 if the subject matter of such Borrower Representation is covered by any exception to any representation or warranty made by the Mortgage Loan Seller in this Exhibit D.
(c) Since the Origination Date, except as set forth in the related Mortgage File, neither the Mortgage Loan Seller nor any servicer of the Loan has waived any material default, breach, violation or event of acceleration under any of the Loan Documents.
(d) Pursuant to the terms of the Loan Documents, no Person or party other than the holder of the Note and Mortgage may declare an event of default or accelerate the related indebtedness under such Loan Documents.
(42) Payments Current.
No scheduled payment of principal and interest under any Loan was more than 30 days past due as of the Cut-off Date, and no Loan was more than 30 days delinquent in the 12-month period immediately preceding the Cut-off Date.
(43) Qualified Loan.
Each Loan constitutes a “qualified mortgage” within the meaning of Section 860G(a)(3) of the Code (but without regard to the rule in Treasury Regulation Section 1.860G-2(f)(2) that treats a defective obligation as a “qualified mortgage” or any substantially similar successor provision). Any prepayment premiums and yield maintenance charges payable upon a voluntary prepayment under the terms of such Loan constitute “customary prepayment penalties” within the meaning of Treasury Regulation Section 1.860G-1(b)(2).
(44) Prepayment Upon Condemnation.
For all Loans originated after December 6, 2010, in the event of a taking of any portion of a Mortgaged Property by a State or any political subdivision or authority thereof, whether by legal proceeding or by agreement, if the fair market value of the real property constituting the remaining Mortgaged Property immediately after the release of such portion of the Mortgaged Property from the lien of the related Mortgage (but taking into account any planned restoration and reduced by (a) the outstanding principal balance of all senior indebtedness secured by the Mortgaged Property and (b) a proportionate amount of all indebtedness secured by the Mortgaged Property that is at the same level of priority as the Loan, as applicable), is not equal to at least 80% of the remaining principal amount of the Loan, the related Borrower can be required to apply the award with respect to such taking to prepay the Loan or to prepay the Loan in the amount required by the REMIC Provisions and such amount may not, to such extent, be used to restore the related Mortgaged Property or be released to the related Borrower.
(45) Defeasance. Only with respect to the Loans for which the related Loan Documents permit defeasance:
(a) no Loan provides that it can be defeased prior to the date that is two years following the Transfer Date,
(b) no Loan provides that it can be defeased with any property other than government securities (as defined in Section 2(a)(16) of the Investment Company Act of 1940, as amended),
(c) the related Loan Documents provide that the related Borrower is responsible for the payment of all reasonable costs and expenses of the lender, including any rating agency fees, incurred in
Exhibit D-18
connection with (i) the defeasance of such Loan and the release of the related Mortgaged Property and (ii) the approval of an assumption of such Loan, and
(d) the related Loan Documents require delivery of all of the following:
(i) an opinion to the effect that the lender has a valid and perfected lien and security interest of first priority in the defeasance collateral,
(ii) an accountant’s certificate as to the adequacy of the defeasance collateral to make all scheduled payments, and
(iii) an opinion to the effect that the defeasance complies with applicable REMIC Provisions.
(46) Releases of Mortgaged Property.
(a) No Loan requires the lender to release all or any portion of the related Mortgaged Property from the lien of the related Mortgage, except as in compliance with the REMIC Provisions and one of the following:
(i) upon payment in full of all amounts due under the related Loan,
(ii) in connection with a full or partial defeasance pursuant to provisions in the related Loan Documents,
(iii) unless such portion of the Mortgaged Property was not considered material for purposes of underwriting the Loan, was not included in the appraisal for such Mortgaged Property or does not generate income,
(iv) upon the payment of a release price at least equal to the allocated loan amount or, if none, the appraised value of the released parcel and any related prepayment, or
(v) with respect to any Loan that is cross-collateralized with any other Loan(s), or any Loan that is secured by multiple Mortgaged Properties, in connection with the release of any cross-collateralization pursuant to provisions in the related Loan Documents.
(b) With respect to clauses (iii), (iv) and (v) above, for all Loans originated after December 6, 2010, if the fair market value of the real property constituting the remaining Mortgaged Property immediately after the release of such portion of the Mortgaged Property from the lien of the related Mortgage is not equal to at least 80% of the remaining principal amount of the Loan, the related Borrower is required to prepay the Loan in an amount equal to or greater than the amount required by the REMIC Provisions.
(47) Origination and Servicing.
The origination, servicing and collection practices used by the Mortgage Loan Seller or, to the Mortgage Loan Seller’s knowledge, any prior holder or servicer of each Loan have been in compliance with all applicable laws and regulations, and substantially in accordance with the practices of prudent multifamily mortgage lenders with respect to similar mortgage loans and in compliance with the Guide in all material respects.
Exhibit E-1
EXHIBIT E
EXCEPTIONS TO REPRESENTATIONS AND WARRANTIES
Representation and Warranty
Loan Number1 Mortgaged Property Name Issue
4 (Single Purpose
Entity)
6 17
The Grove Springfield Meadows Apartments
The Loan amount is $25,000,000 or more, but a non-consolidation opinion was not obtained.
10 (Valid First
Lien)
17 34 35 36 38
Springfield Meadows Apartments Laurel Village
Creekview Apartments Oswego Village Ashton Ridge
The Mortgaged Property is subject to a regulatory agreement, declaration of restrictive covenants, land use restriction agreement, extended use agreement or other similar agreement (each, a “Regulatory Agreement”) that imposes certain tenant income and/or rent affordability restrictions and, in some cases, certain other operating restrictions, on all or a portion of the units in the Mortgaged Property and may include remedies beyond those of specific performance and/or injunctive relief. The covenants and restrictions contained in the Regulatory Agreement run with the land and are binding on Borrower and its successors and assigns and all others later acquiring right or title to the Mortgaged Property.
11 (Title
Insurance)
22 31 32 33 34 37
Verse Seattle Bridgeview Apartments
Oakwood Club Lake Charlotte Laurel Village
Chateau Monterey II
The survey was waived for the Mortgaged Property.
1 As specified on Exhibit A.
Exhibit E-2
Representation and Warranty
Loan Number1 Mortgaged Property Name Issue
11 (Title
Insurance)
17 34 35 36 38
Springfield Meadows Apartments Laurel Village
Creekview Apartments Oswego Village Ashton Ridge
The Mortgaged Property is subject to a regulatory agreement, declaration of restrictive covenants, land use restriction agreement, extended use agreement or other similar agreement (each, a “Regulatory Agreement”) that imposes certain tenant income and/or rent affordability restrictions and, in some cases, certain other operating restrictions, on all or a portion of the units in the Mortgaged Property and may include remedies beyond those of specific performance and/or injunctive relief. The covenants and restrictions contained in the Regulatory Agreement run with the land and are binding on Borrower and its successors and assigns and all others later acquiring right or title to the Mortgaged Property.
11 (Title
Insurance)
20 24 25
Aspen Village Apartments Village East Apartment Homes
Montana Valley
The Mortgaged Property is located in Ohio, which has a statute that established priority in foreclosure for certain oil and gas leases, pipeline agreements and other instruments related to the production or sale of natural gas, including such leases, agreements and instruments that arise subsequent to the date of the Title Policy.
18 (Carveouts to
Non-Recourse)
7 10
11 15 22 38
Vizcaya Apartment Homes Pine Hills Lodge And Sonoma
Shadows Orion Frisco
Thornberry Apartments Verse Seattle Ashton Ridge
There is not a natural person jointly and severally liable with Borrower.
18 (Carveouts to
Non-Recourse)
6
The Grove
There is no guarantor for this Loan.
18 (Carveouts to
Non-Recourse)
13 Woodlake Apartments The guarantor is not jointly and severally liable with Borrower with respect to one or more non-recourse carveouts applicable to the Borrower, or the guarantor may be released from, or may have limited its liability with respect to, one or more of the non-recourse carve-outs upon the occurrence of certain events.
Exhibit E-3
Representation and Warranty
Loan Number1 Mortgaged Property Name Issue
22 (Insurance
Proceeds and Condemnation
Awards)
3 North Constitution A portion of the Mortgaged Property (the 2nd and 3rd floor of the commercial garage) is part of a condominium regime (“South Condominium”). The bylaws of the South Condominium provide that the board of managers (or a trustee appointed by the board of managers) will hold the proceeds of insurance and condemnation awards.
22 (Insurance
Proceeds and Condemnation
Awards)
19 Springford Apartments Fifteen (15) garage units that are a portion of the Mortgaged Property are part of a condominium regime (“Condominium”). The bylaws of the Condominium provide that the board of managers (or a trustee appointed by the board of managers) will hold the proceeds of insurance and condemnation awards.
30 (Ownership)
35 36
Creekview Apartments Oswego Village
The Mortgaged Property has a Housing Assistance Payment Contract (the “HAP Contract”) in place between Borrower and the United States Department of Housing and Urban Development or a state or local housing agency (collectively, “HUD”). HUD has provided a consent (the “HUD Consent”) to Borrower and Mortgage Loan Seller that permits Borrower to assign a security interest in the HAP Contract to Mortgage Loan Seller. The HUD Consent by its terms states that neither the HAP Contract nor the HUD Consent can be assigned to any other parties, including any depositor, without HUD’s consent. Neither the HAP Contract nor the HUD Consent is being assigned or delivered to any depositor or any other party as a result.
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Exhibit F-1
EXHIBIT F
AUCTION PROCEDURES
The procedures set forth below may be modified from time to time by the Special Servicer (with the prior consent of Freddie Mac in the case of any Third Party Special Servicer) in accordance with the Servicing Standard. Capitalized terms used in this Exhibit F but not defined in this Exhibit F will have the respective meanings assigned to those terms in the Trust and Servicing Agreement. As used in this Exhibit F, the term “Original Appraisal” means with respect to any Loan, an appraisal obtained in connection with the origination of each Loan.
SUMMARY The Special Servicer (with the prior consent of Freddie Mac in the case of any Third Party Special Servicer) may engage any broker in connection with the auction in its sole discretion. The auction sale will be subject to the Special Servicer’s determination of the winning bidder(s) and acceptable price and terms for each Loan.
The Loans will be sold on a servicing released basis.
The Special Servicer may request bids on an all or individual basis for the Loans.
Prospective bidders must meet pre-access qualification requirements, including a complete submission of a completed bidder qualification statement (a “Bidder Qualification Statement”), prior to accessing the secure data room to review the collateral, and must meet bidder and servicer requirements to be approved to bid.
Each Loan will be awarded based on the economics of the bid, which is subject to meeting Freddie Mac’s reserve levels, in Freddie Mac’s sole discretion.
Each Loan will be sold pursuant to the terms of a binding trade confirmation setting forth certain terms and conditions of the transaction (each, a “Binding Trade Confirmation”), a Purchase Agreement, a bailee letter (“Bailee Letter”) and an interim servicing agreement (the “Interim Servicing Agreement”), forms of which will be made available to bidders prior to their submission of bids.
The Special Servicer will not be obligated to negotiate, review or accept any proposed changes to any of the forms of documents as provided in the data room either before or after a bid is submitted.
A Purchaser will not be able to remove or re-price a Loan based on (i) the Purchaser’s due diligence because it disagrees with the Original Appraisals, (ii) information provided in the data room prior to bid, including Original Appraisals or material servicing information or (iii) document defects, other than document defects that result in a material breach of a loan level representation and warranty.
A non-refundable deposit in the amount of 10% of the Aggregate Trade Price (as defined below) of the Loans will be required from each auction winner for each Loan as a condition to signing the related Binding Trade Confirmation.
In the event that an auction winner fails to either (i) pay the deposit or (ii) close the transaction, the Special Servicer reserves the right to deny that auction winner the right to bid on future offerings of mortgage loans.
The Special Servicer, in its sole discretion, may remove Loans before the trade is confirmed, and, in certain cases, up to the applicable settlement date, in accordance with the Purchase Agreement.
Exhibit F-2
The Special Servicer reserves the right to reject any bid and the participation of any potential counterparty, at any time, in the Special Servicer’s sole discretion.
BID PROCESS
BIDDER ELIGIBILITY Pre-Access Qualification. Each prospective bidder will be required to execute and submit to the Special Servicer the following (the “Qualification Documents”):
a non-disclosure agreement (a “Bidder NDA”); and
a Bidder Qualification Statement. Only those bidders who have successfully submitted the Qualification Documents by the pre-access qualification due date will be given access to the related Offering Package, as outlined below, and be eligible to bid on the relevant Loans. Any owner of the bidding entity that owns more than 20% of the direct or indirect equity interests in the bidding entity (a “Significant Equity Owner”) must be disclosed in the Bidder Qualification Statement. Any change to the Significant Equity Owners of that bidding entity after submission of the Bidder Qualification Statement must be disclosed to the Special Servicer at least 10 Business Days prior to the trade date and is subject to the Special Servicer’s approval, in its sole discretion. The entity that will purchase the Loans and execute the Binding Trade Confirmation, a mortgage loan purchase and sale agreement (a “Purchase Agreement”) and any other documents related to the purchase of such Loans must be the subject of the Qualification Documents. The Special Servicer may, in its sole discretion, require a performance guaranty from a creditworthy affiliate for any of a Purchaser’s obligations under the Purchase Agreement and the Binding Trade Confirmation. The Special Servicer reserves the right to reject the participation of any potential counterparty, at any time, including after successful submission of the Qualification Documents, for any reason or no reason. Short Form Bidder Qualification Statement. Any bidder who (i) has been previously approved by the Special Servicer in the preceding 12-month period to bid on a prior offering of multifamily non-performing mortgage loans by the Special Servicer; and (ii) can certify to the Special Servicer that the information provided in the Qualification Documents for such prior offering is true and correct (a “Prior Bidder”) shall be required to submit a short form of the Bidder Qualification Statement, which requires the following information:
general company information, representations and warranties;
proof of funds;
information regarding servicing qualification; and
certain certifications, including bring-down certification from its prior Qualification Documents.
Long Form Bidder Qualification Statement. Any bidder who is not a Prior Bidder shall be required to submit a long form of the Bidder Qualification Statement, which includes the following information:
general company information, representations and warranties (subject to the availability of such information in the case of any bidder that is a newly formed entity);
proof of funds;
Exhibit F-3
certain certifications;
information on the Significant Equity Owners of the Bidder;
entity’s formation documents, as certified by the jurisdiction of formation;
W-8 or W-9 tax forms; and
information regarding servicing qualification. The Special Servicer shall require that Bidders submit information regarding servicing qualification by the date that is 15 days prior to the closing date. If a Prior Bidder plans to use a servicer for which it has not provided information regarding servicing qualification, it must include information regarding servicing qualification with its submission of the Bidder Qualification Statement. The winning bidder may have one-time right to transfer the Loans to a newly formed entity with the prior consent of the Special Servicer. OFFERING PACKAGE Upon submission of the Qualification Documents, to the satisfaction of the Special Servicer in its sole discretion, each bidder will be provided with access to an electronic data room (which data room may be provided by a third party) that will contain certain information related to the Loans (the “Offering Package”), including, but not limited to, the following:
a collateral data tape provided as of the data determination date;
transaction cash flow history file and payment string;
an Original Appraisal with respect to each Loan;
a form of the Purchase Agreement;
a form of the Binding Trade Confirmation;
a form of the Interim Servicing Agreement;
servicing transfer instructions;
a form of the Bailee Letter;
the Custodial Exception Report; and
material servicing information. Some of the information in the data room, such as the collateral exception report and material servicing information, may not be available immediately when the data room opens. The Special Servicer may also add information from time to time after the data room opens. The Special Servicer will provide the Bidders with the bid due date when the date room opens. Each bidder will submit its bid based on the form of the documents, including the Purchase Agreement and the Binding Trade Confirmation, in the data room as of the bid due date. All information in the Offering Package will be available for review during the bidding process and bidders should incorporate the results of such review into their bid price. The winning bidder will have an opportunity to conduct its own analysis of the Loans upon executing the Binding Trade Confirmation and prior to purchasing the Loans. The Special Servicer will not be required to provide any information regarding the Loans to any bidder to the extent such information is not in the possession of the Special Servicer or is not otherwise available to the Special Servicer.
Exhibit F-4
BID PACKAGE On or prior to the applicable bid due date, each prospective bidder will be required to (i) have been qualified by the Special Servicer as a potential purchaser based on a review of the Bidder Qualification Statement, and (ii) submit the following materials (a “Bid Package”) for the Loans that it is bidding on:
a price in the form of a percentage (to 4 decimal places) of the aggregate unpaid principal balance (including both interest and non-interest bearing principal) of the Loans as of the applicable cut-off date that the bidder is prepared to pay to purchase the Loans (the “Aggregate Trade Price”);
loan-level pricing related to such Loans in the form of a percentage (to 4 decimal places) of the unpaid principal balance (including both interest and noninterest bearing principal) of each Loan (the “Loan-Level Trade Prices”) (the Loan-Level Trade Prices must be, in the aggregate, on a weighted average basis, no less than the Aggregate Trade Price given by such bidder); and
confirmation of the identity of which of its pre-selected servicers (if more than one) it will use.
THE SPECIAL SERVICER’S RIGHTS REGARDING BID PACKAGES With respect to stipulations or conditions placed on a bid by a bidder:
The Special Servicer is not obligated to accept any such stipulations or conditions.
The Special Servicer is not obligated to honor (and, if such bid wins, may ignore) any bid stipulations requiring consultation with a bidder prior to awarding the bid to such bidder.
o Stipulations or conditions to a bid that are not ignored pursuant to the immediately preceding bullet point and are not accepted by the Special Servicer will nullify such bid.
The Special Servicer is not obligated to negotiate, review or accept any proposed changes to the form of Bidder NDA, Purchase Agreement, Binding Trade Confirmation, Bailee Letter or Interim Servicing Agreement at any time, including either before or after a winning bidder is chosen. The Special Servicer is not obligated to allow any bidder to come to the Special Servicer’s office for due diligence and meetings. The Special Servicer reserves the right to (i) accept or reject any and all bids for any reason or for no reason, and (ii) in its discretion, remove Loans from a pool prior to bid award. BID AWARD
A single winning bidder will be selected for each Loan.
The winning bidder will be required to: (i) execute a Binding Trade Confirmation with the Special Servicer, setting forth the Aggregate Trade Price and Loan-Level Trade Prices and other terms and conditions of the transaction, (ii) provide an officer’s certificate including incumbency and delegations of authority, (iii) provide a certificate of good standing; and (iv) pay a good faith deposit to the Special Servicer, as described below.
The winning bidder will be either given on-line or other access to available Loan credit and servicing files and other Loan information or provided such files and loan information on an external hard drive to assist such winning bidder in performing due diligence at its own expense.
Exhibit F-5
The winning bidder will be obligated to engage with the Special Servicer it will engage promptly after the trade date to discuss and prepare for servicing transfer logistics.
The winning bidder will not be permitted to contact any Sub-Servicer of the Loans until the Special Servicer has notified such Sub-Servicer of the pending sale of the Loans.
DEPOSIT Each winning bidder (thereafter, a “Purchaser”), will be required to make an earnest money deposit in the amount of 10% of the Aggregate Trade Price of the Loans it has won by 2:00 PM (EDT) on the applicable deposit due date. The Special Servicer will be required to hold the Purchaser’s deposit and apply it toward the “Purchase Proceeds,” calculated as set forth in the Purchase Agreement. In the event a Purchaser materially breaches its obligation under the Binding Trade Confirmation, that Purchaser will be required to forfeit its deposit and the Special Servicer will be entitled to retain such deposit as liquidated damages and will be under no obligation to sell the related Loans to the Purchaser or to return such deposit. The Special Servicer may use a title company in connection with the closing of the transaction. In the event that a Purchaser fails to either (i) pay the deposit or (ii) close on the transaction, The Special Servicer reserves the right to deny that Purchaser the right to bid on future offerings of mortgage loans by Freddie Mac. POST-AWARD DUE DILIGENCE Upon execution of a Binding Trade Confirmation, the Purchaser will be allowed to perform due diligence on the Loan(s) it is purchasing. A Loan may be removed from the final population of Loans in a particular pool (“Final Population”) if, during the due diligence process, either (i) the Purchaser provides notice that there is a material breach of a loan-level representation or warranty as set forth in the Purchase Agreement, the Special Servicer agrees, and the parties mutually agree that such breach would not reasonably be able to be cured prior to, or within a mutually agreed upon time after, the applicable settlement date or (ii) the Purchaser provides notice that the related mortgaged property is subject to a pending or completed, full condemnation proceeding. However, the Special Servicer will not consider any property-related comments after the applicable settlement date. During the due diligence process and up to Purchaser’s exclusion list deadline, the Purchaser will submit to the Special Servicer weekly a detailed list of Loans the Purchaser proposes to exclude from purchase. A Purchaser will not be able to reprice a Loan for any reason. A Purchaser will not be able to remove a Loan from a pool for any of the following reasons (this is not an exclusive list):
the Purchaser disagrees with the Original Appraisals;
based on information provided in the data room prior to the bid due date including Original Appraisals and material servicing information;
due to document defects, whether or not such defects are reported in the collateral exception report (if such report was delivered by the Special Servicer), other than document defects that result in a material breach of a loan-level representation and warranty;
based on property condition, except pending or completed total condemnation;
such Loan has previously been modified or may be modified pursuant to loan modification/loss mitigation/foreclosure alternative efforts in progress;
the Borrower of such Loan is in active bankruptcy or discharged bankruptcy status; or
the length of time that such Loan has been in foreclosure proceedings regardless of (i) the jurisdiction of the proceeding, (ii) the expiration of any applicable statute of limitation in
Exhibit F-6
such jurisdiction or (iii) the implications of any potential future dismissal of such proceeding.
The results of Original Appraisals are provided in the Offering Package. Within three (3) business days after execution of the Binding Trade Confirmation, the Purchaser will be required to provide the Special Servicer with the addresses of where the Purchaser desires the Special Servicer to deliver (i) the physical custodial files and (ii) copies (electronic or via a disk) of the mortgage and credit files. The Special Servicer will not cause any physical custodial files to be delivered until the Bailee Letter is executed by the Purchaser and the Purchaser’s custodian. In the event that the Purchaser does not wish to execute the Bailee Letter in order to receive the collateral files prior to the applicable settlement date, the Purchase Agreement will be amended to reflect this change. The Purchase Agreement changes will include, but not be limited to, the following: when the collateral files are sent after the applicable settlement date, a manifest describing the contents of each file will be included; the Purchaser will be required to accept the manifest, absent Purchaser providing contradictory evidence. NO CONTACT WITH BORROWER Each prospective bidder agrees that in connection with its review of the Loans and related data, it will not take any action that could have a detrimental effect on any related Borrower, which includes the ordering of any consumer report that could appear on such borrower's future credit reports and/or negatively impact their credit score. Additionally, no prospective bidder, nor its servicer or any of its agents, will initiate any contact or otherwise communicate with any mortgagor, borrower, debtor, guarantor, appraiser, borrower’s, debtor’s or guarantor’s accountant or attorney or any other person or party, including any tenant, or managing or leasing agent, connected with, or related to, any Loan. CLOSING After execution of the Binding Trade Confirmation and up to the applicable settlement date, the Special Servicer may, but is not obligated to, remove from a pool (a) a Loan where the borrower has begun or is participating under a trial period plan of a loan modification; (b) a Loan that has been modified, cured or becomes current after the data determination date; (c) a Loan that is governed by 50 U.S.C. § 501 et seq., the Servicemembers Civil Relief Act; or (d) a Loan that the Special Servicer has identified as having a material breach of a representation and warranty. The Special Servicer makes no guarantee with respect to the number or percentage of Loans that will be included in the final pool delivered on the applicable settlement date relative to the number of Loans in the pool at the time of a Purchaser’s bid. The Special Servicer will provide the Purchaser the closing statement setting forth any fees, legal expenses, brokerage and due diligence expenses payable by the Purchaser. On the applicable settlement date, the Purchaser will deposit into the Collection Account the Purchase Proceeds, net of the deposit, calculated as set forth in the Purchase Agreement. TAXES AND OTHER FEES, ASSESSMENTS AND CHARGES The Trust will be responsible for any delinquent real estate taxes and personal property taxes on or prior to the applicable cut-off date and attributable to the related mortgaged property of a Loan. The Trust will have no further obligations with respect to any real estate taxes and personal property taxes applicable to any Loan after the applicable cut-off date, except that the Trust will be required to continue to monitor and pay real estate taxes and personal property taxes that become due prior to the applicable settlement date which will be reimbursed by the Purchaser. Notwithstanding the foregoing, the Trust makes no representations or warranties as to the extent or absence of homeowners’ association fees, governmental assessments, water, sewer or municipal charges that may result in a lien against any mortgaged property that is junior to a Loan; any such fees or similar charges will be the sole responsibility of the Purchaser.
