November 2012 - CRE Finance Council - CREFC · Market Principles for Issuing European CMBS 2.0...

November 2012

Introduction .............................................................................2

The CMBS 2.0 Committee ......................................................2

Background for the Committee................................................2

Approach.................................................................................2

Best Practice Principles ...........................................................4

Part 1: Disclosure ....................................................................4

Part 2: Revenue Extraction: Excess Spread Monetisation ........8

Part 3: Investor Identification and Investor Forum ....................10

Part 4: Servicing, Transaction Counterparties and ControllingParty Rights .................................................................12

Part 5: Transaction Structural Features ....................................16

Part 6: Restructuring and Realisation Issues ............................20

Part 7: Voting Issues................................................................22

Appendix 1: List of Participant Firms .......................................23

Appendix 2: Base Case – Pre-Issuance Disclosure..................24

Appendix 3: Investor Reporting................................................28

Appendix 4: Issuer Cash Flow Model.......................................34

Appendix 5: Notifiable Events ..................................................36

contents

This document (and its contents) contains only general information and is provided forinformation purposes only. This document (and its contents) does not constitute aninvitation or offer to buy or sell any investment or an official confirmation of anytransaction. None of CRE Finance Council Europe nor any of the participant firmsnamed herein nor any of its members nor any of its employees or officers are, by meansof this document (and its contents) or otherwise, rendering or providing (or could bedeemed to be rendering or providing) investment, legal, tax, accounting or otherprofessional advice or services. This document (and its contents) is not a substitute forsuch advice or services, nor should this document (and its contents) be used (and it isnot intended to be so used) as a basis for any investment decision or action orotherwise. Before making any investment decision or action or otherwise, you shouldconsult a qualified professional adviser. None of CRE Finance Council Europe, nor anyof the participant firms named herein nor any of its members nor any of its employeesor officers shall be responsible for any loss or liability whatsoever sustained or incurredby any person relating to the use of any information contained in this document or whootherwise relies on this document or its contents.

Market Principles for Issuing European CMBS 2.0November 2012

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The CMBS 2.0 CommitteeThe Commercial Real Estate FinanceCouncil (CREFC) Europe established itsCMBS 2.0 Committee to explore bestpractice principles for CMBS transactionswith the goal of improving confidence inthe European CMBS industry. Themembers of CREFC believe thatimproved CMBS structures willstrengthen confidence by marketparticipants and therefore encourage thefurther development of the CMBS marketin Europe. An improved CMBS market inEurope will, in turn, provide an alternativesource of capital and assist with theimmediate need for capital in real estatetransactions. The Committee has takeninto account the views of a cross-sectionof both historical and active participantsin the real estate capital markets, andcomprises senior representatives fromissuing banks, investors, loan servicers,financial advisers, borrowers, trustees,lawyers and other industry experts.Consensus was not reached on all issuesand as such the principles attempt toreflect the majority view of participants.CREFC would like to thank everyone thatparticipated in the production of theseprinciples for their valuable time andcontribution to the process. A list ofcertain participating firms andorganisations is attached as Appendix 1.

Background for theCommitteeGiven the size of the commercial realestate funding gap facing the Europeanreal estate markets over the next severalyears and, to date, the limited availabilityof alternative funding sources, the capitalmarkets are potentially an importantsource of capital for the real estateindustry. However, macro-economic andbroader market issues aside, successfulissuance of future transactions will bedependent upon whether the variousmarket participants have confidence in,and a proper understanding of, CMBSstructures and the roles of the relevanttransaction counterparties.

The recent credit crisis has exposedsome of the weaknesses in historicalCMBS transaction structures, includingweaknesses relating to the direction andcoordination of the various transactioncounterparties and the availability ofappropriate levels of information. TheCommittee has also identified a numberof positive structural features in certainCMBS transactions which it believesshould be more widely implemented infuture CMBS transactions.

The CMBS 2.0 Committee has producedthese principles to address some of thekey features of CMBS. In summary, theprinciples generally cover the following:

n Disclosure (including pre-issuancedisclosure, post-issuance disclosure,investor reporting and investor notices);

n Revenue Extraction in the form ofexcess spread monetisation (includingClass X Note structures);

n Investor identification andInvestor Forum;

n The role of servicers, special servicersand other transaction counterparties(including trustees and cashmanagers); and

n CMBS structural features (includingcontrolling party rights, voting

provisions, liquidity facilities andsynthetic securitisations);

ApproachThe principles assume a certain degreeof existing knowledge and experience ofCMBS structures. They do not seek toincorporate all aspects of CMBSstructuring but instead focus on areasof particular importance that havereceived the attention of variousindustry participants.

Each market participant approachesCMBS transactions from their ownperspective. The purpose of theseprinciples is to provide a balancedapproach to specific issues in order toencourage the broadest marketparticipation. The principles are onlysuggestions of best practice and it willultimately be a matter for marketparticipants to decide whether or not toendorse them by applying them to theirtransactions. In certain instances theprinciples refer to a range of optionsrather than a preferred option. Again, inthese instances the participants areencouraged to negotiate the right optionfor their transaction and fully reflect thatoption by way of disclosure and in thepricing for the transaction. The EuropeanCMBS market benefits from a variety ofreal estate asset classes, deal types and

IntroductionBy Nassar Hussain, Chair of the CMBS 2.0 Committee


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jurisdictions and the principles will needto be adapted accordingly.

The principles make reference, incertain instances, to the requirementsof certain Central Banks such as theBank of England for sterlingdenominated transactions and theEuropean Central Bank for eurodenominated transactions in relation totheir respective eligibility collateralframeworks (e.g. the Bank of EnglandCMBS Transaction Overview Template).

The ratings criteria or methodologyapplied by the rating agencies to newCMBS transactions continues to evolve.The potential ratings impact of any of theprinciples will need to be evaluatedseparately on a transaction by transactionbasis with the relevant rating agencies.

The CMBS 2.0 Committee has tried notto overlap these principles with the

supplementary work carried out by otherCREFC Committees, including theLender, Servicer, Inter-Creditor, Hedging,Loan Due Diligence and E-IRPCommittees. The focus of the Committeehas been on matters purely related totransaction structures, transactioncounterparties and disclosure ofappropriate levels of information. Theseprinciples do not cover matters relating toloan or property underwriting,assessment of credit risk or due diligencestandards or processes. Additionally, theprinciples do not endeavour to anticipatethe form of interest rate structure orduration and related changes that newCMBS investors may require as this willevolve over time.

The CMBS 2.0 Committee’s principlestake into consideration the current marketenvironment and they shall be revisedperiodically through updates and theissuance of appendices to address new

topics as industry best practices continueto evolve.

CREFC will also operate an ongoingCMBS 2.0 Principles Comments Sectionon the CREFC Europe Website so thatindustry participants can continue toprovide feedback and receive updates onthe principles.

These principles supplement andcompliment laws and regulationsapplicable to the issue of securities suchas CMBS as well as the rules of anyapplicable stock exchange. Issuers andarrangers of CMBS transactions shouldtake their own advice on such matters toensure that their CMBS transactionscomply with the same.


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Part 1: Disclosure1.1 Introduction

The purpose of this section is toencourage improved levels of pre- andpost-issuance disclosure and transparencyand to generate industry efficiencies. Theguidelines in this section seek to:

n Promote the consistency of corereporting and uniformity of minimuminformation levels in European CMBStransactions in order to create ahigher standard for reporting and abetter means of comparing CMBStransactions; and

n Reduce the time required by marketparticipants to reconcile reporting andthe time information providers arerequired to respond to follow-upqueries from investors.

Investors should be satisfied thatdisclosure matters are adequatelyaddressed in the documentation at thetime of issuance.

In addition to the disclosure principles setforth in this section, there are specific itemsof disclosure set out in each of the othersections contained in these principles.

Prior to the issuance of any CMBS thearranger of the CMBS transaction shouldmake available to prospective investors allrelevant pre-issuance materials in electronicformat (e.g. preliminary Offering Circular,investor presentation, relevant transactiondocumentation, valuation report, dataincorporated into the relevant E-IRP files,etc.) on a pre-issuance website. Suchmaterials (updated to the final versionswhere appropriate) should be transferred tothe relevant investor reporting websitepromptly following issuance.

1.2 Offering Circular Disclosure

n In transactions with a single loan orfor any loans constituting more than5% of the total assets, there shouldbe detailed loan level disclosure inthe Offering Circular and, whereapplicable, disclosure of anyborrower level hedging.

n In order to improve transparency andfacilitate comparison betweentransactions, information in respect ofthe loan(s), underlying property andnotes should be presented in astandardised format (the “BaseCase”). Summary tables should beused in the Offering Circular to displaythe Base Case in the form set outin Appendix 2.

n The Offering Circular should contain atransaction overview similar to orbased on the Bank of England’sCMBS overview template (AFME/ESFversion for UK stand-alonetransactions), which is available at:www.crefc.org/eucmbs20/ butappropriately adapted on atransaction by transaction basis.

n Any transactions which incorporaterevenue extraction through excessspread monetisation (including ClassX Notes) or otherwise (as set out inmore detail in section 2.2) shouldinclude a separate section in theOffering Circular providing full detailsof such extraction.

n Material conflicts of interest that areknown to exist or are likely to or willexist in the future (e.g. on completion ofthe transaction) at each level of thestructure should be clearly and fullydisclosed in the Offering Circular(including conflicts relating tonoteholders, junior and mezzaninelenders, the hedging provider, therevenue extraction holder, theservicer/special servicer and othertransaction counterparties), clearlyspecifying which parties could beinvolved and how the potential conflictof interest could impact investors. Suchdisclosure would not apply to thedisclosure of the activities of a party’saffiliates or other related entities orother internal departments which areseparately operated and managed andwhich have established proceduresand protocols for the implementation ofinformation barriers to prevent the flowof information between such partiesand their affiliates, related entities orother departments. Appropriate

provision should be made in therelevant documentation that wouldpermit any transaction party thatbecomes aware of a material conflict ofinterest with respect to its own positionafter the date of the Offering Circular tobe able to disclose such information tothe cash manager in the periodicalinvestor reporting, without therequirement to disclose activities of itsaffiliates, related entities or otherdepartments which are separatelyoperated and managed, and haveestablished procedures and protocolsfor the implementation of informationbarriers to prevent the flow ofinformation between such parties andtheir affiliates, related entities orother departments.

n If possible, information on the identityof the borrower and the ultimatesponsor(s) holding at least 20% of theequity should be disclosed in theOffering Circular. This excludes limitedpartners in a fund managed by areputable and established investmentmanager. The purpose of thefinancing should be disclosed(whether acquisition or refinancing)together with the amount ofoutstanding equity of each sponsorthat remains at risk. However, theseprinciples acknowledge that the abilityto make certain of these disclosureswill rest with the relevant sponsor,who may have its own reasons for notwanting such detailed disclosure tobe made in the Offering Circular.

n The existence and amount of anyjunior debt (including B notes,mezzanine loans or othersubordinated loans or PIK typeinstruments), pari-passu debt andsuper-senior debt should bedisclosed in the Offering Circular.Further, all rights of such holders ofadditional debt (including consentrights, purchase options, cure rights,enforcement rights and amendmentrights) should be disclosed in theOffering Circular to the extent thatsuch rights relate to modifications,waivers or enforcement of the

Best Practice Principles

www.crefc.org/eucmbs20/


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securitised debt. Such disclosureshould set out the rights of theholders of the junior debt and whetherthe rights are entrenched or subjectto limitations, such as controlvaluation events or the ability of theservicer to override such action basedupon the servicing standard. Also, thesecurity attached to such other debtshould also be disclosed.

n The Base Case and ongoing reporting(as described below) should specifywhether reported income is gross ornet (and what deductions are madebetween gross and net).

n The CMBS 2.0 Committee will workwith market participants in order toproduce and publish a base set ofbest practice representations andwarranties in the near future. The formof any representations and warrantiesshould be detailed and objective. Anydisclosure or exception to arepresentation and warranty shouldbe set out immediately below thespecific representation and warranty.For conduit and true sale transactionsthere should be detailed disclosure inthe Offering Circular of all therepresentations and warrantiescontained in the loan sale agreement.For all transactions there should bedetailed disclosure in the OfferingCircular of all the representations andwarranties relating to (i) disclosure ofall material information,accuracy/omissions of informationetc. to noteholders and (ii) generalmatters including due incorporation,authority, valid and binding obligationsand insolvency.

n The Offering Circular should disclosethe identity and key information inrespect of the transactioncounterparties including the business,experience, ratings (where relevant),financial standing and ownership ofthe key transaction parties includingthe servicer, special servicer, trusteeand cash manager. In relation to theservicer and special servicer, thereshould be disclosure on theirexperience in relation to the loans and

collateral (and the country in whichthe collateral is located) which formpart of the CMBS and the ability ofthe servicer or special servicer toimplement potential work-outstrategies with or without consent(e.g. restructuring, enforcement, saleof loan). There should also bedisclosure of the servicer replacementmechanism and the circumstances inwhich servicer advances (if any) willbe provided.

n The Offering Circular should disclosethe fees payable to such transactioncounterparties. CREFC is consciousof the potential sensitivity to thevarious transaction parties ofdisclosing such fees and, therefore, itwould be acceptable in respect ofonly the ordinary, annual fees of thetransaction parties (other than theservicer and special servicer) to onlydisclose an aggregated amount thatrepresents the total, annualcompensation for all of thetransaction parties.

n The Offering Circular should alsoclarify the identity of the beneficiary ofany material ancillary cash flows suchas loan prepayment penalties, loanconsent fees, loan default interest orgains on hedge terminations.

1.3 Transaction Documents

n All CMBS level transaction documents(including the servicing agreements)should be made publicly available inelectronic format on an investorreporting website maintained by aparty to the transaction, a third partywebsite or both. The website addressshould be disclosed in the OfferingCircular and in each quarterlyinvestor report.

n In relation to loan documentation, thelevel of public disclosure will, to someextent, be determined by marketforces and reflect a balance betweenthe borrower’s need for privacy andthe note investors’ need to be able toevaluate the credit quality of thenotes. However, it is recommendedthat loan level documents which have

a material impact with respect to cashflows (e.g. the loan agreement,intercreditor agreement and hedgeagreements) should be made publiclyavailable. Regardless of whether anyof the above documents are beingmade publicly available, thesummaries in the Offering Circularshould be detailed and should includeall material information.

n The Offering Circular should containdetailed disclosure of the hedginginstruments in the transaction andsuch disclosure should include, butshould not be limited to, thefollowing information:

• The type of instruments andexplanation of the hedgingstructure;

• Borrower level or issuer level;

• The ranking(s) in the paymentwaterfall (both pre andpost acceleration);

• Details of who the hedgingcounterparty is and any rightsthat they may have (includingvoting rights and the ability toterminate the instrument);

• The notional profile of theinstrument and any elements ofoverhedging or underhedging inthe transaction;

• Payment dates including, inparticular, the maturity date;

• Whether the liquidity facility/serviceradvances are available to meethedging payments;

• Quarterly reporting of the mark-to-market valuation of the hedge bythe hedge counterparty toinvestors (through the investorreporting of the servicer or cashmanager, as the case may be); and

• How changes in hedging or interestrates may impact the level of themark to market valuation; and

• Ongoing reporting of how muchcollateral under a credit supportannex has been posted at any time.


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Any material amendments to the profile,other than partial terminations as a resultof partial redemptions, should bedisclosed as and when they occur.

In the absence of the underlying hedgedocumentation, (including the schedule,confirmations and any credit supportannex) being made publicly available, thesummaries in the Offering Circular shouldbe detailed and should include allmaterial information.

1.4 Investor Reporting, Data andCash Flow Model

n Investor Reporting – The OfferingCircular should contain information onthe content, dates of availability,access (including any restrictions onaccess (such as registration of detailsor certification of interest)) and cost (ifany) of investor reporting and whichtransaction counterparty will beresponsible for each element of theinvestor reporting (e.g. servicer/specialservicer for loan and collateralinformation and cash manager fornote level information). The pro-formaform of the investor report should bedisclosed at the time of the noteissuance. A list of the recommendedinformation/data requirements forinvestor reporting is attached asAppendix 3. The investor reportshould be made publicly available in asuitable electronic format (.pdf, .xls or

.csv file) on a reporting websitemaintained by an agent of the issueror on a third party website or both.

n Provision of Data – The OfferingCircular should contain information onthe content, dates of availability, access(including any restrictions on access(such as registration of details orcertification of interest)) and cost (if any)of transaction data in the form/templateof CREFC Europe’s Investor ReportingPackage® (E-IRP®). The most recentversion of E-IRP is v2.0. This containsthe Loan Setup File, Loan Periodic File,Property File and Bond File and isavailable at: www.crefc.org/e-irp/. TheE-IRP is in compliance with the latestrequirements of the European CentralBank and the Bank of England at thetime of issuance of these principles.The populated version should be madeavailable in a suitable electronic format(.xls or .csv file) on a reporting websitemaintained by an agent of the issuer ora third party website or both.

n The data used to compile the loaninformation in the Base Case is in thesame form as the E-IRP Loan SetupFile and should be made available atthe outset to prospective investors onthe Arranger’s pre-issuance websiteand appropriate transactioncounterparties including the servicer,to assist in their ongoing reporting. Allservicer quarterly reports and relevantinterim RIS notices issued on behalf

of the servicer should be easilyreferable to the Base Case.

n Issuer Waterfall Cash Flow Model– The Offering Circular should containinformation on the content, dates ofavailability, access (including anyrestrictions on access (such asregistration of details or certificationof interest)) and cost (if any) of anissuer waterfall cash flow model inorder that investors can project futurenote level cash flows until the notesare repaid. The model may beprovided in a variety of formats (e.g.website-hosted, downloadableprogram or spreadsheet) but shouldenable investors to input keyvariables using a recognisablespreadsheet format (e.g. .csv, .xls or.xlsx) and investors should be able toretain or record the results. The formof cash flow model should containthe information and functionalityoutlined in Appendix 4 and should atthe outset encompass relevanttransaction features includingprovision for liquidity facility orservicer advances, hedging structureand transaction triggers impactingthe waterfall.

n The arranger of the CMBS issuanceshould arrange for such cash flowmodel to be provided directly orindirectly (through a delegated cashflow model provider) to the market atissuance and to the extent the basetransaction structure changes thearranger should update it or procurethat it is updated at the relevant time.

n The quarterly investor reportingshould contain any relevant inputs forthe cash flow model which reflect thecurrent status of the transaction suchas note balances, note margins,loan/loan portfolio balance, currentliquidity facility drawing amount,balances of issuer level accounts andledgers, fixed inputs required tocalculate aggregate issuer costs andexpenses etc. and details of anytriggers that have been activated ordeactivated. Certain assumptioninputs required to operate the cashflow model to project future cashflows to the maturity or ultimaterepayment date of the notes should

www.crefc.org/e-irp/


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be determined and entered by theinvestor. Details of the appropriateinputs are contained in Appendix 4.

n In addition, on an optional basis andat an appropriate cost, the arrangeror delegated cash flow modelprovider may provide to investors:

(i) An integrated or separate modelto project loan portfolio cash flowswhich incorporates the coupons,hedging structure, balances,maturity/extensions, scheduledamortisation, prepayments etc.The outputs of such model shouldbe capable of being used directlyas inputs into the issuer waterfallcash flow model; and

(ii) An integrated or separate modelto calculate the price of the notesbased on the note cash flowsproduced by the issuer waterfallcash flow model and a discountmargin determined and input bythe investor (or vice versa using aprice to determine the discountmargin of the notes).

n All information made available to theinvestors at primary issuance shouldalso be accessible by secondarymarket investors on the investorreporting website for the life of thetransaction (including investor reportsand investor marketing presentations).

n Each of the updated investorreporting, data (E-IRP files) and Issuercash flow model should be madeavailable free of charge on therelevant investor reporting websitewithin 14 days of a note interestpayment date.

1.5 RIS Notices

n RIS notices should be published assoon as reasonably possible upon theservicer or cash manager (as the casemay be) becoming aware of a“Notifiable Event”. The servicer or cashmanager should notify the issuer of theNotifiable Event and (if appropriate)prepare the draft form of RIS and theissuer should then be responsible forissuing the RIS Notice on a promptbasis. A suggested list of NotifiableEvents is set out in Appendix 5.

n The publication of certaininformation in an RIS notice may bedelayed for the reasons specified insection 1.9 below.

n Further detail on the Notifiable Eventmay be incorporated into the quarterlyreport when and where appropriate,provided that all material informationhas been disclosed in the relevantRIS notice.

n The filing requirements for an RISnotice will vary based upon thelocation of listing and issue for anyCMBS transaction.

n RIS notices should be distributedsimultaneously via the clearingsystems and any other methodrequired in the “Notices” condition inthe Offering Circular.

n In addition to the publication requiredby law for any RIS notices, otherinformation websites such as areporting website maintained by anagent to the issuer or a third partywebsite or both should be usedtogether with electronic messagingsystems such as Bloomberg (whenand where appropriate).

1.6 Borrower Reporting

n In order to permit the transactioncounterparties to comply with theirdisclosure obligations as outlinedabove, the underlying loandocumentation should contain theappropriate information undertakingson the borrower and any otherrelevant obligors to provide theinformation and data in a mannerconsistent with the timing, nature andformat of such reporting requirementsof such transaction counterparties. Astandardised form of borrowerreporting should be encouragedacross European CMBS transactions.The CREFC is working on appropriateborrower level reporting templates.

n Information and data provided by theborrower in its regular reporting shouldbe in a format that can be used in theloan level reports prepared by theservicer (i.e. in an electronic anddownloadable format).

n The arranger of the CMBStransaction should have sufficientlydetailed discussions with theborrower to assist the borrowerwith (i) understanding thereporting requirements and(ii) being able to provide therelevant data and information.

n Borrowers should be required toprovide information within a timeframethat enables servicers to preparereports with adequate time prior tothe note interest payment dates andin accordance with the principles setout in section 1.4.

n If borrowers have not agreed tocomplete certain basic fields, orprovide enhanced reporting, or reportby the usual reporting dates, thisshould be disclosed so that investors’expectations as to ongoing disclosurecan be managed.

1.7 Valuations and PropertyInspections

n Pre-issuance: Recent valuations datedup to six months prior to the issuancedate should be made available toprospective investors on the arranger’spre-issuance website. If the originalvaluation is more than six months old,a bring-down desk-top valuationshould also be provided to investors ineach case by the arranger.

n Post-issuance: Any valuationcompleted post-issuance should bemade available by the servicer orspecial servicer on the relevantinvestor reporting website.

n All valuations should be electronicformat copies of the full valuationreport or desk-top report (asappropriate), sanitised to reflect anyexceptions provided for in section 1.9.

n The servicer/special servicer shouldundertake appropriate periodicalproperty inspections usingappropriately experience staff. Anyrelevant material findings during aproperty inspection should bedisclosed in the next quarterlyinvestor report or, if relevant, as aNotifiable Event.


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1.8 Disclosure of and Reliance onDue Diligence Reports

n All material due diligence reports(including valuations, structuralsurveys, reports on title,environmental reports, legal opinionsetc.) should provide for reliance anddisclosure in a manner appropriate fora CMBS transaction. In particular:

(i) Reliance should be provided toeach finance party under thefacility agreement as well as toany trustee with respect to anysecurities issued by any suchfinance party in connection with asecuritisation of the loan facility orany part thereof.

(ii) As set out in section 1.7, valuationsshould permit publication inconnection with the issuance of theCMBS (both at the time of issuanceand during the term of the CMBS).Therefore, the disclosure provisionsshould clearly state that suchpublication is permitted althoughreliance will be restricted to theappropriate counterparties.

For all other material duediligence, disclosure should clearlybe available to:

• All successors and assigns ofthe addressees to the report;

• Their agents and advisors;

• Their affiliates, employees,officers, directors, agents;

• Any actual or prospectivepurchaser, transferee orassignee of, or participant in,the loan facility;

• Any servicer or special servicerof the loan facility;

• Any actual or prospectiveinvestor (including its agentsand advisers) in any securitiesissued in connection with theCMBS transaction;

• Any rating agencies (actuallyor prospectively) rating suchsecurities issued in connectionwith the CMBS transactionand their respective advisers;

• Any trustee of any financeparty; and

• Where disclosure is requiredby law, court order, regulation,public authority or in respectof legal proceedings.

n In addition, the terms of due diligencereports should permit the report or areference to the report (and themethodologies and results on whichthe same is based) being included orquoted or otherwise summarised inany information memorandum,offering circular, private placementmemorandum, registration statement,prospectus or term sheet as may berequired to comply with anyapplicable laws, regulations or officialguidelines relating to the issuance ofany CMBS transaction or for anyinvestor or potential investor to be incompliance with any applicable law,regulation or requirements of anygovernmental, banking, taxation orsimilar body relating to maintaining aninvestment in, or the regulatorycapital treatment of, any securitiesissued in such CMBS transaction.

1.9 Exceptions to Ongoing DueDiligence Disclosure Requirements

n Specific items of disclosure may bedelayed, withheld or redacted if:

• There is an ability to withhold suchdisclosure under the MarketAbuse Directive or applicable law(e.g. for bankingconfidentiality/data protectionreasons), and

• Where either:

• The release of informationwould prejudice ongoingcommercially sensitivenegotiations by the borrower(e.g. sale, lease renewal or re-gearing or rent reviewnegotiations) which in thereasonable opinion of theservicer would be materiallyprejudicial to noteholders; or

• Where the servicer, specialservicer or other transactionparty has received suchinformation pursuant to a

confidentiality or other similaragreement.

n The information should bereleased promptly as soon as thelegitimate reason or confidentiality nolonger applies.

Part 2: Revenue Extraction:Use of Excess SpreadMonetisation (IncludingClass X Notes and OtherMechanisms)2.1 Introduction

n A CMBS transaction is typicallystructured so that the aggregateinterest that accrues on the loansexceeds the aggregate amount ofinterest that accrues on the CMBSnotes. This excess amount iscommonly referred to as the“Excess Spread”.

n Many CMBS transactions providerevenue for the originating or arrangingbank through the extraction or sale ofat least a portion of this ExcessSpread (“Revenue Extraction”).Sometimes part of the RevenueExtraction is utilised to recover certainupfront transaction costs of thearranger of the CMBS transaction.

n Revenue Extraction can be structuredand defined in various ways includingClass X Notes, deferred consideration,residual interest or retained interest.Revenue Extraction structures can besimple such as a skim on the loanmargin or more complicated as withClass X Note structures. However,these structures may cause a shortfallon payments of note interest as aresult of extraneous expenses nototherwise covered by Excess Spread.

n Revenue Extraction structures typicallyallocate to the beneficiary either:

(i) An amount payable by the CMBSissuer equal to the excess of allinterest earned on the underlyingloan or pool of loans over thecosts of the CMBS transaction(these costs would typicallyinclude the interest payable on theCMBS notes and some level ofexpenses for the CMBStransaction); or


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(ii) A proportion of the loan margin,which is paid outside the CMBSstructure (resulting in areduction in the amount ofinterest that is actually payableto the CMBS issuer).

n A summary example of a Class XNote formula is set forth below:

“Class X Interest Amount” for anyperiod is equal to Loan Interest minusBond Costs, with

“Loan Interest” for any period isequal to interest that has accrued orshould have accrued on the loan forsuch period at its margin; and

“Bond Costs” for any period is equalto the aggregate of: (a) certain specifiedcosts of the CMBS transaction; and (b)the aggregate of interest accrued onthe notes at their respective margins.

n Other forms of Revenue Extraction canbe calculated in a number of differentways, which can include the following:

• Two-Waterfall Structure: Asinterest is received on a loan, aspecified amount of interest isretained as an excess amount ofinterest and paid to the beneficiaryof the Revenue Extraction. Theremaining amount of collectionson the loan are then paid to theCMBS issuer and deposited into acollection account, which is thendistributed to pay expenses,

interest and principal on theCMBS notes. This structureresults in Revenue Extractionbeing stripped from the loanoutside of the CMBS structure.

• Single Waterfall Structure: Allamounts collected on the loan arepaid to the CMBS issuer anddeposited into a collectionaccount which is distributed in aspecified priority to pay expenses,interest, principal and the RevenueExtraction from a single waterfall.

2.2 Revenue Extraction Disclosure

n The Offering Circular should containclear and concise disclosure that setsforth the existence and nature of anyRevenue Extraction structure, how itis calculated and whether it is to beretained by the originating bank,servicer/special servicer or theborrower or their affiliates.

n This disclosure should be maderegardless of whether the RevenueExtraction is stripped from withinthe CMBS structure or outside ofthe CMBS structure at the loan levelor otherwise.

n Further, the disclosure in the OfferingCircular should provide the following:

(i) Expenses: There should be cleardetails as to which expenses willor will not be effectively absorbedby the Revenue Extraction. This

should result in a clear list ofitems that will be deducted or notdeducted in the calculation forthe Revenue Extraction from thecash flow.

(ii) Conflicts of Interest: Thereshould be clear disclosure as toany conflicts of interest withrespect to the Revenue Extractionat issuance, including, in particular,as to whether the servicer/specialservicer or any of its affiliates or theborrower is to be the owner of theRevenue Extraction.

(iii) Priority of Payments: Thereshould be precise disclosure as towhat payments are made to theRevenue Extraction, or effectivelypaid, senior or subordinate topayments due on the otherCMBS notes.

(iv) Liquidity Facility/ServicerAdvances: There should be cleardisclosure as to whether theliquidity facility drawings orservicer advances can be used tosupport Revenue Extraction.

n The ongoing noteholder reporting forany CMBS transaction should clearlyset forth the full breakdown of thevarious components of the calculationfor the Revenue Extraction andprovide precise amounts for its variouscomponents, such as the availablecash flow, expenses and othercomponents of such calculation.

2.3 Structural Recommendations

The Revenue Extraction should clearlybe structured to take into accountthe following:

n Default Rate Interest: The RevenueExtraction should not increase in itscalculated payment solely as a resultof interest accruing at the default rate.The portion of interest payable to thebeneficiary of the Revenue Extractionshould be limited to interest accruedat the standard rate for the loans (andshould exclude any interest thataccrues at the default rate).

n Modified Interest: The RevenueExtraction should not increase in itscalculated payment solely as a result


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of an increase in margin that is theresult of any restructuring of the loan.Again, the portion of the calculation ofsuch amounts that relate to theamount of interest earned on theloan(s) should be limited to the interestaccrued at its original interest rate (andexclude any increase in interest ormargin that occurs after the initialissuance of the CMBS transaction tothe extent that any such increase is theresult of a subsequent modification orrestructuring of the mortgage loan(s)).

n Maturity Date: The Revenue Extractionshould not be entitled to receive anyportion of interest earned on amortgage loan after its original statedmaturity (or its extended maturity date,solely to the extent that suchextension is a result of application ofan extension option that is containedin the original loan documentation atthe time of the initial issuance of theCMBS transaction).

n Loan Default: The impact of a loandefault on Revenue Extraction shouldbe determined on a transaction bytransaction basis and be fullydisclosed and the CMBS issuancepriced accordingly. Various optionscan be considered, including:

• the recipient of the RevenueExtraction should not be entitledto receive interest upon theoccurrence of specified defaultson a loan or

• loan defaults should not have anyimpact on the Revenue Extractionuntil a loss on the loan iscrystallised at which point theRevenue Extraction should beadjusted accordingly based uponthat loss.

To the extent that the CMBS transactionreceives any excess amounts on anymortgage loan as a result of the RevenueExtraction not receiving payments,pursuant to the guidance set forth above,such excess amounts should only be paidto the holder of the Revenue Extractionafter all of the CMBS notes (other than anynotes forming part of the RevenueExtraction) have been repaid in full. In themeantime these excess amounts can beapplied in a number of different ways,

which should be determined on atransaction by transaction basis, whichcan include any of the following:

n Repayment of the most seniornotes outstanding;

n Payment toward any outstandingshortfalls of any interest on the notes,prior to, and instead of, the utilisationof any liquidity facility advance orservicer advance that wouldotherwise have been applicabletoward such shortfall; or

n The build-up of a reserve fund whichcan be applied to cover principallosses on the notes.

Any surplus residual cash amounts thatmay exist after all the CMBS notes (otherthan any notes forming part of theRevenue Extraction) have been paid in fullas a result of the application of theseexcess amounts may be paid to thebeneficiary of the Revenue Extraction.

Part 3: Investor Identificationand Investor Forum3.1 Introduction

The clearing systems should beencouraged to devise and implement amore efficient mechanism for noteholdersto be identified so that interested partiesmay communicate with them in relation totheir holdings. Pending the introduction ofsuch a mechanism, a noteholder forum(the “Forum”) should be encouraged ona transaction by transaction basis as aninterim measure to facilitate theidentification of and communicationsbetween noteholders. The participatingnoteholders would be primarilyresponsible for the operation of anymeetings and subsequent actionsundertaken by the Forum.

The operation of the Forum is to facilitateinformal noteholder communication and isnot intended to replace the existing formalmechanisms in place with the clearingsystems for noteholder communicationsor noteholder resolutions.

3.2 Identification

n A “Forum Coordinator” should beappointed in connection with theissuance of the CMBS notes. The

Forum Coordinator will have thoseresponsibilities set forth in thissection. The Forum Coordinatorshould be an entity with experience ofinteracting with and/or representingnoteholders or they should be theparty that manages the relevantinvestor reporting website (typicallythe cash manager, but in astandalone role).

n On the issue date of each transaction,the lead manager(s) should providethe Forum Coordinator with a list ofthe initial investors which would formthe basis of the Forum.

n Noteholders should be invited toidentify themselves to the ForumCoordinator. Only the ForumCoordinator can use this informationto contact noteholders for thepurposes of the Forum. Noteholdersshould be made aware that if they donot identify themselves, they will notbe able to receive notices through theForum and will instead have to rely onmethods such as RIS notices, theclearing systems and Bloomberg.

n In order to prevent any conflicts ofinterests, the Forum Coordinator willbe prohibited from taking on anyadvisory or other role relating to theCMBS transaction (other than purelyadministrative service functions suchas cash manager or calculation agent).

n Borrowers, lenders and transactioncounterparties should (promptly uponbecoming aware) disclose to theForum Coordinator holdings of notesin excess of three per cent. of theprincipal amount outstanding of anyclass (held by them directly or throughaffiliates or related entities). Thisinformation would only be madeavailable to the Forum Coordinator,the cash manager and trustee. Thisdisclosure principle would excludeholdings held by such party’s affiliates,related entities or other internaldepartments which are separatelyoperated and managed and whichhave established procedures andprotocols for the implementation ofinformation barriers to prevent theflow of information between suchparties and their affiliates, relatedentities or other departments.


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n The Offering Circular should containfull descriptions of the mechanism forthe appointment and responsibilitiesof the Forum Coordinator (both in therisk factors/investment considerationssection and in the terms andconditions of the notes) and explainthat there can be no assurance of thecompleteness or accuracy of theinformation maintained by the ForumCoordinator. The Offering Circularshould also attempt to identify risks tonoteholders of participating or notparticipating in the Forum.

3.3 Website

n The investor reporting website1 foreach transaction should require eachperson logging-on to certify whetherthey are a noteholder. All parties thatidentify themselves as a noteholdershould be requested to:

(i) Provide one or more emailaddresses at which they canbe contacted;

(ii) Either (a) certify that they are notaffiliated to the borrower or anyother noteholder or lender in thetransaction or (b) disclose the factthat they are affiliated to theborrower or a noteholder or lenderbut operate with appropriateChinese walls in place; and

(iii) Specify which class or classes ofnotes they hold (but not theamount of their holding).

Any noteholder who validlycompletes this certification will beconsidered a member of the Forumfor the transaction.

n Any noteholder not logging on to theinvestor reporting website for anagreed period of time will be sent anotice by email by the ForumCoordinator stating that unless theylog on within two weeks they will beremoved from the records and ceaseto be a member of the Forum.

3.4 Communications

n All notices to noteholders from anytransaction party will be sent through

the Forum in addition to any othermeans of communication required inthe terms and conditions of the notes.

n Subject to meeting the requirementsfor the form of the notice, anynoteholder that is a member of theForum or any transaction party(including the issuer, cash manager,trustee, servicer and special servicer)will have the right to request theForum Coordinator to send a noticeon its behalf to the other members ofthe Forum. The Forum Coordinatorshould be obliged to send notices asquickly as is practically possible.

n The Forum Coordinator should postsuch notices to the website and sendthem by email to the Forum members(or to Forum members holdingparticular classes of notes) as well asthrough the other communicationmethods sanctioned by thetransaction in question. Noticesshould also be forwarded to theissuer for publication on the RISsystem of the stock exchange onwhich the notes are listed.

n Such notices should2:

(i) Have a short title which shouldseek to explain the subject matterof the notice;

(ii) Advise noteholders that they maysuffer losses (and the ForumCoordinator, cash manager, trustee,servicer and special servicer will notbe responsible for the same) if theyignore such notices;

(iii) Invite other Forum members toattend a meeting, conference callor website with appropriate detailsof the same;

(iv) Set out a short description of thepurpose of the same;

(v) Confirm that any discussionswith other noteholders willcommence with confirmation bythe party initiating thediscussions (or their advisers) asto whether any “price sensitiveinformation” is expected to be

disclosed and any proposedmechanism for “cleansing” thesame following which anynoteholders not wishing toreceive such information will begiven the opportunity to retirefrom the discussion;

(vi) Contain a warning to noteholdersparticipating in the discussionsthat they will be responsible forany “price sensitive information”they may disclose to anyother noteholders;

(vii) Be in such format or formats asare compatible with systemsmaintained by the stock exchangeon which the notes are listed andthe relevant clearing systems; and

(viii)In all other aspects comply withthe International Central SecuritiesDepository standards.

n No notice may contain a statement ofopinion on the CMBS transaction, anytransaction parties or otherwise. TheForum Coordinator will be instructednot to disseminate any noticecontaining a statement of opinion.

n Once the notice has been sent,the Forum Coordinator will have nofurther role in relation to thesubject matter of the notice(unless requested by noteholdersand if the Forum Coordinator iswilling to do so) and it will be forthe relevant noteholders to makethe necessary arrangements.

n Prior to a meeting or conferencecall being held, any participatingnoteholder holding at least 10% ofall the notes or the relevant class,as the case may be, may ask theForum Coordinator to request proofof holdings from the otherparticipating noteholders to ensurethey hold a position in theunderlying transaction. The ForumCoordinator will not be required todisclose the note amount or whichclass of notes any participatingnoteholder owns.

1 Where the website for a particular transaction is not capable of being used in this way, alternative arrangements should be made2 Care will be needed to ensure that the content is not price sensitive, defamatory or otherwise problematic. The Forum Coordinator will have the right to decline to send outany notice the content of which it determines (in its sole discretion) to be problematic


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3.5 Protective Provisions

n Forum Coordinators should beafforded the benefit of protectiveprovisions in the CMBS transactiondocuments that would relieve themfrom any responsibility for theaccuracy or completeness ofinformation provided to them for thepurposes of the Forum by anyperson, the contents of any suchnotice or the failure of any notice toreach any noteholder.

n Forum Coordinators will not beresponsible for the release of anyprice sensitive information byparticipating noteholders orresponsible for cleansing any suchprice sensitive information.

n Forum Coordinators should be entitledto charge an agreed fee for their workin establishing and maintainingForums and be paid senior out of theCMBS transaction waterfall as withother transaction counterparties.

Part 4: Servicing,Transaction Counterpartiesand Controlling Party Rights4.1 Servicer and Special Servicer

Considerations

4.1.1 Servicing Standard

n The servicing standard should includea duty to maximise recoveries at theloan level on a present value basistaking into account the interests ofthe CMBS noteholders (or all thelenders if they also service junior debt)as a collective whole as opposed toany individual tranche (other thantaking into account subordination).

n The interests of the RevenueExtraction holders should not beconsidered when analysing themaximisation of recoveries.

n The servicer and special servicershould have consistent principles forthe evaluation of any discount rateto be applied for any “presentvalue” calculation.

n The calculation of the maximisation ofrecoveries should take into accountany hedge termination payments thatreduce or increase the level of

recoveries at loan level but should notinclude the impact of liquidity facilitydrawings, servicer advances,sequential payment triggers or similarnote level mechanics.

n Whilst the servicer or special servicerneed not take into account suchnote level facilities or mechanisms indetermining and applying theirstrategy under the servicingstandard, they should be open tohearing representations fromnoteholders on the impact of theservicer’s proposed strategy on notelevel facilities or mechanisms.

4.1.2 Appointment, Function and Feesof Primary and Special Servicer

n A special servicer should always beappointed on the closing date andshould become active, automatically,upon the occurrence of prescribedtransfer events (“Servicing TransferEvents”). A Servicing Transfer Eventwould typically occur when there is afailure to pay, insolvency event,enforcement or other material default.

n Depending on the nature of thetransaction, careful considerationshould be given to which defaults orother conditions should result in aServicing Transfer Event. For instance,while it might be determined thattriggering a Servicing Transfer Eventon a breach of a conservative LTVcovenant might not be in the bestinterest of noteholders, considerationshould be given as to whether itmakes sense to provide that an LTV inexcess of 90% be included as aServicing Transfer Event.

n The respective roles of the servicerand the special servicer should beclearly defined so there is noambiguity or overlap.

n The same entity may serve as bothprimary servicer and special servicerprovided that the documents permitfor the replacement of the role ofspecial servicer by the ControllingParty or Replacing Noteholders (asdefined in section 4.2.2 below).

n The remuneration of theservicer/special servicer should bedesigned to ensure that it always acts

in the interests of the lenders (forwhom it services) and the amount andbasis of calculations of such feesshould always be adequately disclosedat the outset of a transaction. Alldetails with respect to the fees payableto the special servicer, includingliquidation and workout fees should benegotiated on a deal by deal basistaking into account factors such as thesize of the loan and the complexity,nature and jurisdictions of the assets.

n Any special servicer appointed by theControlling Party or ReplacingNoteholders should be required torepresent prior to its appointment thatit has not offered any inducement orother incentives to any ReplacingNoteholder, the Controlling Party orany transaction counterparty or theiradvisers or representatives involved inthe appointment.

n For agented CMBS transactions itwould be preferable to have anindependent third party servicer andspecial servicer appointed ordesignated as part of the structure atthe outset.

4.1.3 Ability of Servicer/SpecialServicer to Raise Capital forEssential Capex or Opex

n The servicer/special servicer shouldhave the ability, subject to certaincontrols, limitations and caps, toraise additional capital (where it isnot already provided for in theliquidity facility or through a serviceradvance facility) to fund costs andexpenses necessary to improve orpreserve the value of the underlyingproperty (e.g. payment of propertyprotection expenses, buildingsinsurance, capex to reposition aproperty) or short term opex to avoidinsolvency in less creditor friendlyjurisdictions. There should be clearand detailed disclosure in the offeringcircular of the relevant provisions andthe servicer/special servicer remainssubject to the overriding servicingstandard to maximise recoveries.

n Such ability to raise capital should be:

(i) Subject to the application of theservicing standard;


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(ii) Based on analysis that clearlydemonstrates on a “present value”basis that the use and cost of theadditional capital will improverecovery levels by an amountwhich exceeds the aggregateamount and cost of the additionalcapital by at least 1.25x;

(iii) On arm’s length and marketterms after an appropriatebidding process;

(iv) Have an appropriate securitystructure; and

(v) Be subject to non-petitionlanguage where appropriate.

n The servicer or special servicer, asapplicable, should determine that itwould be in the better interests of theissuer, as either lender or owner ofany interest in any REO property, thatsuch amounts were raised asopposed to such amounts not beingraised, taking into account therelevant circumstances, which willinclude, but not be limited to, therelated risks that the issuer would beexposed to if such amounts were notraised and whether any suchamounts would ultimately berecoverable from the obligors of therelated loan.

n Where it can be appropriatelystructured into the transaction at theoutset the servicer should use themost efficient form of capital inaccordance with the servicingstandard (e.g. super senior debt,mezzanine or equity) available at thetime in relation to cost, terms andranking of repayment and return.

4.2 Controlling Party andControlling Class

4.2.1 Determination of theControlling Party

n Typically, a “Controlling Party” isappointed with respect to each loanin a CMBS transaction.

n The Controlling Party for a particularloan typically has certain rights, mostnotably the ability to appoint anoperating adviser, the ability to

replace the special servicer and haveconsultation rights in relation toamendments for such loan.

n Depending upon the particular loan,the Controlling Party might be anotherlender (other than the issuer of theCMBS transaction) or a noteholder ornoteholders in the CMBS.

n If a lender, the Controlling Party istypically the holder of the most juniorloan which has a principal amountoutstanding at some specified level(typically 25% of the original principalamount). It is typical for loan levelControlling Parties to have some or allof their rights subject to a ControlValuation Event (see below).

n If the Controlling Party is the portion ofthe loan which has been securitised,control is typically held by the mostsubordinate class of notes (known asthe “Controlling Class”). However,the Controlling Class may changeupon a Control Valuation Event.

n The calculation of which party is theControlling Party should always bedynamic and based on:

(i) A specified valuation process; and

(ii) The principal amount outstandingof the relevant tranche whetherreduced due to amortisation,pre-payment or write-offs.

n Whilst precise definitions need to bedrafted on a transaction bytransaction basis, the followingbest practice principles shouldbe considered:

• The Controlling Class should bethe most junior ranking class ofnotes then outstanding which hasa principal amount outstanding ofat least 25% of its principalamount outstanding at originationand which is not subject to aControl Valuation Event.

• A Control Valuation Eventshould relate to the currentprincipal amount outstandingversus the current value of theproperties and is deemed to haveoccurred in respect of a particulartranche of the notes or the loan,as applicable, if:

(i) The sum of the currentprincipal amount outstandingof the relevant class or loanand all junior ranking classesor loans

LESS

(ii) The sum of any ValuationReduction Amounts and(without duplication) any lossesrealised with respect to anyenforcement of security in


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respect of the related propertiesis less than 25% of the currentprincipal amount outstanding ofthe relevant class or loan

• A Valuation Reduction Amountshould equal;

(i) The outstanding principalbalance of the loan

LESS

(ii) The excess of

(a) 90% of the most recentvaluation (net of any priorsecurity interests butincluding all reserves andsimilar amounts whichcan be used to pay theloan) above

(b) The sum of all unpaidinterest on the loan, anyprior ranking fees andexpenses (including duebut unpaid ground rentsand insurance)

4.2.2 Controlling Party, ControllingClass, Replacement ofSpecial Servicer andReplacing Noteholders

n The concept of a Controlling Class isappropriate but it is important that therights of the Controlling Class arereflective of its junior position and donot unduly empower the holder(s) of asingle tranche of debt.

n Accordingly, while the ControllingClass should benefit from consultationrights, a transaction should consider(based on the impact on demand forjunior notes and loans) if the right toreplace the special servicer should bevested solely in the Controlling Classor assigned more broadly to a widergroup or class of noteholders (the“Replacing Noteholders”).

n Several options have been proposedto define which noteholders shouldconstitute the Replacing Noteholders.Prevailing market conditions and thespecific transaction structure shoulddetermine which approach is used.Potential options are as follows:

(a) A majority of the Controlling Classhas positive appointment rights

but other classes, as defined byone of the options below, have a‘negative’ veto right:

(i) A majority of all classes(including out of the moneyclasses), in aggregate; or

(ii) A majority of all in-the-moneyclasses, in aggregate;

(b) The Controlling Class and anygroup of noteholders representingat least 10% of all notes wouldhave nomination rights to putforward a candidate for the role ofspecial servicer. Multiple classes(determined according to options(i) and (ii) above) then vote on thebasis of proposals from thecandidates. Options for a votingprocess with multiple candidatescould be:

(i) Simple majority, with aControlling Class ‘casting vote’in case of insufficient quorumor failed vote;

(ii) Simple majority with decliningquorum, eventually with theControlling Class holding a‘casting vote’; or

(iii) Quorum plus “Alternative Vote”mechanism to deal with lackof outright majority.

n The above concepts relate to therights of the Controlling Class ofNoteholders. To the extent the loanincludes a junior loan that is not part ofthe securitisation, the rights of theControlling Party should be consideredin line with these principles.

n If any borrower or equity sponsors orany (actual or prospective) transactioncounterparty (in particular a specialservicer) or their affiliates acquire orotherwise control loans or notes whichhave Controlling Party or ControllingClass rights, the relevant holder of theloan or notes should be restrictedfrom exercising any such rights.

n Cost of the relevant transactioncounterparties incurred in replacingthe special servicer should be borneby the new special servicer or theExcess Spread.

4.2.3 Conditions for Replacing aSpecial Servicer

n With respect to the replacement ofthe special servicer by the ControlParty or Replacing Noteholders, thetransaction documents shouldprovide for the following:

• No Elective Actions byOutgoing Special Servicer

The replaced special servicershould not have the ability toprevent or limit the transfer to thenew special servicer if allspecified conditions fortermination and replacementhave been met. In particular:

(i) the outgoing special servicershould not have any right tonegotiate any furtherindemnities in connection withits termination andreplacement; and

(ii) the elective or votingprocedure along with thesatisfaction of the otherreplacement conditions shouldbe sufficient action toterminate the rights andobligations of the outgoingspecial servicer

• No New Servicing Agreement

(i) the new, replacement specialservicer should not be requiredto execute a new servicingagreement. Instead, theprocess for accession by thenew special servicer to theexisting servicing agreementshould be simple andstraightforward (for example,by way of an accession deedexecuted solely by thereplacement special servicer).

(ii) Documents should be draftedin a manner to permit a simpleaccession (e.g., therepresentations and warrantiesshould be drafted to permitrepetition by any successorspecial servicer and notdrafted specifically for theinitial special servicer).


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• No Conditions That Could beUtilised to Prevent Transfer byOutgoing Special Servicer

(i) Any conditions to be met by thereplacement special servicershould be clear and objective

4.2.4 Servicer/Special Servicerinter-action with the Borrower

n The servicer (and special servicer, asthe case may be) should appoint asuitably qualified and experiencedloan manager to each loan and thecontact details of the loan manager(and any changes to the identity ofsuch loan manager) should be notifiedpromptly to the borrower. The loanmanager should be introduced to theborrower by the originator or thearranger of the CMBS transaction assoon as practicable on a servicerbeing engaged on a transaction.

4.2.5 Clarity around the appointmentand role of the Operating Advisor

n With respect to any transaction inwhich an operating advisor can beappointed by any class of noteholders,the transaction documents shouldclearly provide for the following:

(i) The documents should permit theappointment of the operatingadviser without the requirement ofa full noteholder meeting. A writtenresolution will be acceptable,provided that such a writtenresolution does not require a100 per cent. noteholder vote(although a quorum of 50 per cent.and a vote of 75 per cent of suchquorum would be permissible);

(ii) If the appointment of theoperating adviser is to occur byway of a written resolution ofnoteholders, the voting procedureshould permit the possibility ofonly one noteholder voting,provided such noteholder meets aminimum holding threshold;

(iii) The transaction documentsshould clearly provide that theoperating adviser will not be heldresponsible to any party for itsactions taken as operating

advisor, provided that theservicing agreement also providesfor a “servicing standard override”with respect to any direction orconsultation provided by theoperating advisor to either theservicer or special servicer;

(iv) There should not be anyrequirement for the operatingadvisor to accede to any of thetransaction documents in order forit to exercise any of its rights; and

(v) The documents should clearlyprovide that, if the operatingadvisor is not appointed or if theoperating advisor does not provideany direction or consultation to theservicer or special servicer, thatthe servicer/special servicer cantake any action consistent with theservicing standard without regardto any requirement toconsult/receive direction from theoperating advisor.

4.3 Replacement of TransactionParties with a Pure ServiceFunction

n If requested by more than 10% ofnoteholders in aggregate, anoteholder vote can take place toreplace certain transaction partieswithout cause (including theprimary servicer, the cash manager,forum coordinator, the note trusteeand if appropriate mechanisms areput in place, the security trustee).A resolution to replace atransaction party may be passed ifapproved by more than 50% ofeach class of notes.

• No Elective Actions by OutgoingTransaction Counterparty

The replaced transactioncounterparty should not have theability to prevent or limit thetransfer to the new transactioncounterparty, on the basis that allspecified conditions fortermination and replacement havebeen met. In particular:

(i) The outgoing transactioncounterparty should not haveany right to negotiate any

further indemnities inconnection with its terminationand replacement; and

(ii) The elective or votingprocedure along with thesatisfaction of the otherreplacement conditions shouldbe sufficient action toterminate the rights andobligations of the outgoingtransaction counterparty

• No New Agreements

(i) If possible, the newreplacement transactioncounterparty should not berequired to execute a newagreement. Instead, theprocess for accession by thenew transaction counterpartyto the existing agreementshould be simple and straightforward (for example, by way ofan accession deed executedsolely by the replacementtransaction counterparty).

(ii) Documents should be draftedin a manner to permit a simpleaccession (e.g. therepresentations and warrantiesshould be drafted to permitrepetition by any successortransaction counterparty andnot drafted specifically for theinitial transaction counterparty).

• No Conditions That Could beUtilised to Prevent Transfer byOutgoing TransactionCounterparty

Any conditions to be met by thereplacement transactioncounterparty should be clearand objective

• Delivery of Certain Advice

Certain written advice received bya transaction party during the timeit is party to the transaction will bespecific to the transaction and notspecific to the actual transactionparty. An example of this would bea security review report preparedby a law firm and delivered to aspecial servicer. This type ofadvice remains of value to the


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transaction, even if the transactionparty has been replaced.Therefore, every transaction partyshould require, when instructingadvisors in the preparation of suchreports or other forms of advice,that such information can bedelivered to the issuer and anyreplacement transaction party,even if on a non-reliance basis.

4.4 Replacement of TransactionParties with a Credit Function

n Transaction documents should detailthe process for replacing parties (e.g.bank account provider, hedgecounterparty, etc.) if they aredowngraded or become insolvent.This should also include clearreference for who needs to managethe process and which other partiesneed to provide approval.

4.5 Fees, Costs and Expenses ofTransaction Counterparties

n The Offering Circular should detail theordinary fees payable to anytransaction counterparty to thetransaction (as set out in 1.2) and anyability to vary these fees or requestadditional fees on an ad-hoc basis.Ongoing investor reporting shouldpromptly detail any additional feesinvoiced by any transactioncounterparty to the transaction withsome brief narrative on the nature andthe purpose of the work completedfor the additional fees.

n The fees payable to any professionaladvisers out of transaction cash flowsby any of the transactioncounterparties including legal,financial, property/valuation or hedgingshould be promptly disclosed on anaggregated basis for each transactioncounterparty in the ongoing quarterlyinvestor reporting with some briefnarrative on the nature and thepurpose of the advice. The primarypurpose of any professional adviceshould be to support such transactionparty with respect to its obligationsunder the transaction (but for theavoidance of doubt should not beprimarily focussed on liability issues fortransaction counterparties).

n Transaction counterparties shouldavoid appointing affiliated entities toprovide services to the transactionincluding financial, property/valuation,agency, LPA receivership andasset/property management unlessthey are suitably qualified andcompetitively priced. If any affiliatedentities are utilised, full disclosure ofthis should be made together with allfees being received by the transactioncounterparty and the affiliates.

4.6 Trustee Considerations

4.6.1 Action to be Taken by the Trustee

n The role of the trustee should belimited to oversight of mechanicalprocesses and passive monitoringof prescribed objective criteria. Anysuch processes should be clearlylaid out and defined to limit anyambiguity. CMBS transactionsshould be structured so thattrustees are generally not requiredto exercise any discretion, butwhere trustees are asked toexercise any discretion then thetrustees should have the ability toobtain appropriate expert adviceincluding legal, accounting,financial or property advice at areasonable cost which is chargedto the transaction. The trusteeshould place primary reliance onthe use of the expert advice tomake any determination and relyon the standard market liabilityterms of professional advisersrather than seeking additionalindemnities in addition to thestandard deal level senior rankingindemnity already provided.

n The documentation should establishat the outset, whether any role ofthe trustee allows the trustee torequest additional indemnification(and from whom).

n A trustee should only be permitted towithhold exercising discretion in theabsence of an indemnification whereboth the reliance on expertprofessional advice and the standarddeal indemnity are clearly insufficientin relation to the level of any potentialclaim they may face.

Part 5: TransactionStructural Features5.1 Principal Payments – Definitions

and Sequential Triggers

n The Offering Circular should include fulldisclosure of how different types ofprincipal receipts should be allocatedin all scenarios including application ofboth the allocated loan amounts andrelease premiums whether due toproperty sales or property refinancings.

n The transaction documents shouldensure that the party responsible fordetermining the allocation receives allinformation required in order todetermine how to treat the allocationof the relevant principal.

n In general, preference should begiven for simple waterfalls with alimited numbers of determinationsand triggers.

n Sequential payment triggers shouldbe based on the percentage (basedon the principal balance) of loanswhich have cumulatively entered andremain in special servicing (asopposed to separately defining thedifferent types of loan defaults thatwould apply). Also, loans which aresubject to the following scenariosshould typically be included towardsthe sequential trigger threshold:

(i) Loans that are subject to amaterial payment default afterany applicable grace or cureperiod; and

(ii) Loans that reach their originalmaturity date (unless an extensionis specifically provided for andpermitted in the original loandocumentation), regardless ofwhether a standstill or extension isagreed by all of the parties.

n The Offering Circular for a transactionshould include a detailed descriptionof the sequential payment triggercalculation. In particular, the OfferingCircular should disclose whether thesequential payment trigger has theability to “switch back”, or if once thesequential payment trigger has beenbreached, it is not subject to apossible cure.


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n The responsibility for calculating,checking and reporting on thesequential payment trigger should beclearly allocated to a single party(either the servicer or cash manager)and reported to noteholders on aregular basis. If the sequentialpayment trigger is directly linked to thedefinition of Servicing Transfer Event, itis suggested that the servicerundertakes the role of determiningwhether a sequential payment triggerhas occurred and providingappropriate notification to the market.The servicer should not be responsiblefor making any payment calculationsin such instances at note level.

5.2 Interest Shortfalls on Notes

n Where an available funds cap appliesto particular tranches of notes, thistypically results in a shortfall of intereston those notes due to the level ororder of prepayments of theunderlying loans. In such situations,there should be clear disclosure ofwhich classes of notes are potentiallyimpacted, whether the shortfall willever be recoverable (e.g. use ofdefault interest) or reversible, the levelof prepayments required to cause ashortfall and the identification of whichloans (should they prepay early) aremost likely to cause the shortfall.

n There should also be disclosure of anystructural reasons why a shortfall ofinterest may occur on classes of notessuch as the occurrence of a sequentialtrigger event which may lead to anincreased risk of non-payment ofinterest on junior notes due to theweighted average cost of the notesincreasing as the principal balance ofthe senior notes reduce over time butthe loan margin remains the same.

5.3 Liquidity Facilities

n An appropriate mechanism should beconsidered which restricts the amountthat can be drawn from the liquidityfacility to pay interest on certain notes ifthere has been a decline in thecollateral performance/value. Such alimitation on the available amounts on aliquidity facility can help to avoid asituation where liquidity drawings are

being utilised to make payment onnotes that have been valued-out. Thisis because liquidity drawings arereimbursed in priority to all notes.Therefore, liquidity drawings can resultin senior ranking liabilities being createdas a result of providing liquidity for thebenefit of out-of-the-money juniornotes, ultimately resulting in a shortfallto senior noteholders.

n The specific trigger levels or structurefor limiting liquidity facility drawingscan be determined on a transactionby transaction basis with dueconsideration to any ratings impact.Such structures may include:

(i) Reducing or eliminating availabilityof the liquidity facility to pay interestshortfalls on any notes that havebeen valued out in accordance withthe definition of Control ValuationEvent set out above (but based onvalue alone and not due to theprincipal amount outstanding beingless than 25%);

(ii) Reducing or eliminating availabilityof the liquidity facility to payinterest shortfalls on any noteswhich, on the basis of acalculation of estimated recoveryproceeds from time to time, willlikely suffer a principal loss of atleast 90% of their principalamount outstanding; or

(iii) Reducing or eliminating theavailability of the liquidity facility topay interest shortfalls on anynotes that have been writtendown (actually or notionally) as aresult of an actual loss suffered.

(iv) If a Control Valuation Event orother event referred to above nolonger applies then liquidity maybe drawn again to pay interestshortfalls on notes that werevalued out, including accrued butunpaid interest from previousinterest payment dates.

n The above restriction of paymentsshould only apply to drawings fromthe liquidity facility. In other words,these restrictions should not applywith respect to the actual applicationof interest received on the loans.

n Repayment of any drawing outstandingon the liquidity facility should be repaidfrom both principal and interestcollections on the loans, rather thansolely from interest collections.

n The maximum principal amountavailable under the liquidity facilityon each payment date from time totime should be equal to the lower ofthe agreed amount as at the closingdate and an agreed percentage ofthe aggregate principal amountoutstanding of the notes subject toa floor.

n The liquidity facility should beavailable to make payments of seniorexpenses, appropriate interest ratehedging (whether at borrower orissuer level), certain tax payments,property protection expenses andcertain types of essential capitalexpenditure or essential corporateexpenditure to avoid insolvency.

n The procedure for renewing theliquidity facility should be clearly laidout in the documentation with clearresponsibility allocated to a singletransaction counterparty (typically thecash manager) to deal with therenewal process.

n The procedure for drawing on theliquidity facility should contemplatescenarios of operation disruption withthe various transaction parties, such asthe servicer. Therefore, the procedureshould permit other methods tocalculate and implement drawingsduring any such disruption (e.g., suchas providing that the issuer may makea drawing in the circumstance wherethe cash manager or other party hasfailed to do so).

n The relevant provisions above wouldalso be applicable to serviceradvance facilities.

5.4 Hedging

n In general, the hedging instrumentsthat are utilised in a CMBStransaction should be appropriate forthe term, payment profile andstructure of the transaction.

n To the extent possible under therelevant governing law, payments to


18

the hedge counterparty should besubordinated in the case of a defaultby the hedge counterparty or atermination event that is the result of adowngrade of the hedge counterparty.

n To the extent that the term of anyhedging arrangements extendsbeyond loan maturity, considerationshould be given to including thehedging termination costs in thecalculation of any LTV or ControlValuation Event calculations.

n There should be full disclosure of thehedging details and structurepursuant to the principles in 1.3.

n There should be clarity on whichtransaction counterparty is responsiblefor managing or overseeing eachspecific hedging instrument at bothborrower and issuer level in a CMBStransaction and dealing with anyrelated amendments. The hedgingcounterparty should be dulyauthorised to communicate with thattransaction counterparty as they maynot be a party to the relevanthedging documentation.

5.5 Note Maturity

The CMBS transaction documents shouldcontain adequate provisions to addresswhat will happen if the notes are not repaidat their maturity date. The precise provision

should be determined on a transaction bytransaction basis, but potential solutionsmay include the following;

(i) Note Maturity Plan: If a loanremains outstanding twelve monthsprior to the final maturity date of theCMBS notes, the special servicer (if ithas not already done so) should becharged with providing variousoptions for noteholders to consider,including analysis of the optimummethod of enforcement and whichtype of insolvency procedure to use.The transaction structure will set forthhow any such proposed plan canbe approved.

(ii) Appoint a Receiver/AdministrativeReceiver/Administrator (orequivalent insolvency practitioner):If no option proposed by the specialservicer receives approval by therequisite number of noteholders, thenote trustee for the CMBS should bedeemed to be directed by thenoteholders to appoint the relevantinsolvency practitioner based on theanalysis of the special servicer, or, ifnone, its own professional advisers, inorder to realise the secured assets ofthe issuer at such time as the securityfor the CMBS becomes enforceable inaccordance with its terms. The notetrustee should have no liability if, havingused its reasonable endeavours, it is

unable to find a person who is willing tobe appointed as insolvency practitionerwithout additional recourse back to thenote trustee.

5.6 Cash Management Considerations

5.6.1 Time Lag between Loan andNote Interest Payment Dates

n A balance should be struck betweenminimising basis swap costs andensuring that the time lag betweenthe loan interest payment date andnote interest payment date is longenough to ensure the smoothcalculation and processing of thetransaction cash flows. Suitable timeperiods (to be determined by theoriginating bank together with therelevant transaction counterparties)should be built in between the variouskey dates (calculation, drawdown offacilities, report production, paymentdates, etc.) to avoid causing defaultsin payments and delivery ofinformation to noteholders.

5.6.2 Fee Netting Off

n No party should perform any netting offor similar arrangement outside of theprescribed waterfalls or the parametersof the transaction documents.

5.6.3 Cure Periods

n Consideration should be given tostructuring and documenting aroundany potential cure periods under theterms of the loans so that such loancure periods do not have the effect ofcausing unintended results withrespect to potential triggers or defaults.

5.7 Asset and Property Management

n An asset manager and a propertymanager should be appointed withrespect to any property that secures aloan in a CMBS transaction. Suchmanagers should be reputable firmswith relevant experience in managingproperties of a similar nature. Theterms of their appointments should beset out in separate agreements andsuch terms should be in line withmarket standards, particularly in relationto fees, termination on a materialbreach and the duties of the parties.


19

n It is recommended that should theasset management and propertymanagement be carried out by theborrower or one of its affiliates, theterms of such appointment are onan arm’s length basis and can beterminated on a loan event ofdefault occurring.

n Duty of Care agreements should beput in place, which should include theprovision of termination rights to thefinance parties, particularly in relationto breach of duties under themanagement agreements. Wherepossible, the finance parties shouldhave the ability to terminate theagreements upon a loan event ofdefault (especially if the assetmanager or property manager is theborrower or one of its affiliates). If thefinance parties do not have the directability to terminate the agreementsthey should, at the very least, havethe ability to direct the borrower toterminate the agreements.

5.8 Frequency of Valuations

n Each transaction and underlying loanagreement should provide for fullannual valuations commissioned bythe servicer. However, the servicershould have the discretion to waivethe provision of an annual or fullvaluation pursuant to the servicingstandard, provided the servicer setsout the reasons for the exercise ofsuch waiver in the next quarterlynoteholder report. A valuation shouldalways be obtained every 12 monthswhere a loan event of default hasoccurred and is continuing.

n Whilst the potential identity of anyvaluer can be discussed with theborrower and the Controlling Party orControlling Class the determination ofwhich valuer to be used and theinstruction letter to the valuer shouldonly be made by the servicer orspecial servicer.

n If the servicer or special servicerreasonably believes that there haspotentially been a material decline inthe value of the underlying property itmay also request an additionalvaluation (except within six months ofthe annual valuation), which should(unless an event of default hasoccurred) be a desktop valuation.

n Noteholders should be able to directthe servicer or the special servicer torequest either a desktop valuation ora full valuation, if a valuation has notbeen obtained within 12 months,such direction effective upon requestby 25% of the noteholders. In nocase should there be more than twovaluations, whether a full valuation ora desktop valuation, in any year.

n The costs of any such valuationsshould be borne as follows:

(i) The borrower should bear thecosts of:

(a) The initial valuation atorigination of the loan;

(b) The full annual valuationcommissioned by the servicer;

(c) Any valuation in relation toa compulsory purchaseorder; and

(d) Any valuation obtained at anytime when a default iscontinuing or is likely to occuras a result of the valuation;

(ii) The costs of any valuation notreferred to in (i) above should bepaid as a servicer expense as asenior item in the payment waterfalland should preferably be absorbedby the Excess Spread. The servicershould be mindful of not incurringunnecessary valuation costs andshould request desktop valuationswhere appropriate.

n Loan-to-value testing should bedependent on the most recentfull valuation.

n Transactions should disclose whetherthe Controlling Party has the right toask the servicer or special servicer, ifapplicable, to instruct a furthervaluation at the respective ControllingParty’s cost for the purpose ofdetermining whether they are theControlling Party. In these cases, theservicer or special servicer, ifapplicable, should retain the ultimatediscretion acting reasonably as towhich valuation to accept. Also, untilthe new valuation is obtained andtested, the transaction documentsshould clarify who remains asControlling Party during theintervening period.

5.9 Less Creditor Friendly Jurisdictions

n Where properties are located in lesscreditor-friendly jurisdictions, thecorporate structure of the borrowergroup and the related securitystructure should be designed toprovide the lenders with an efficientand effective process for takingenforcement. In particular, off-shoreholding companies or trust orfiduciary structures should, if possible,be put in place together withappropriate share pledges to allowenforcement proceedings to takeplace in creditor-friendly jurisdictions.In addition, measures should be takento ensure that the Centre of MainInterest of the holding company willremain in the creditor-friendlyjurisdiction. Further, all intercreditor


20

agreements with other subordinatecreditors should contain releaseprovisions in order to allow theservicer or special servicer to enforceover its security without obstructionas a result of these other subordinatedebt positions.

5.10 Synthetic Securitisations

n Note that the scope of factors whichaffect synthetic transactions are verybroad and this guideline is limitedin scope.

n The servicing arrangements forsynthetic CMBS securitisations shouldbe structured to adequately protectthe parties with the economic interestin the transaction, including inparticular the noteholders (and, whereapplicable, the junior lender) as wellas (if that be the case) the lender ofrecord. The servicer should beappointed by the issuer and the notetrustee (and, where applicable, thejunior lender) under a servicingagreement conferring on the servicermarket standard rights to agreeamendments and waivers to theloan(s), rather than by the originator,so that the servicer will act in the bestinterest of those parties. The servicershould be required to service theloans in accordance with a servicingstandard similar to that used on cashCMBS transactions. As far aspossible, the servicing arrangementsshould be designed to closely matchthe arrangements used on cashCMBS and create adequateincentives for the servicer to act in thebest interests of the noteholders (and,where applicable, the junior lender)without creating any conflict betweenthe duties of the servicer and theinterests of the lender of record asswap counterparty, even where thelender of record is itself performingservicing functions (whether asmaster servicer or delegate servicer).

n The ability of the credit default swapprotection buyer (typically the lendingbank) to influence any amendmentsor modifications to a loan and thedefinition of credit events in the creditdefault swap documentation shouldbe fully disclosed in detail. In

particular, careful considerationshould be given to the definition ofrestructuring event so that it alsoreflects the nature of restructuringsthat have occurred in recent years,which have primarily involvedextensions where the determination offuture receipts of principal or interestis not always certain.

5.11 Rating Agency Considerations

5.11.1 Rating Agency Confirmations

n Careful consideration should be givenon a deal by deal basis as to whichevents in a transaction should requirea Rating Agency Confirmation(“RAC”). Based upon recent marketpractice of the rating agencies, thenumber of scenarios which require atransaction counterparty to obtain aRAC before acting should be limited.

n However, if a RAC is deemednecessary, the transaction shouldprovide that if the relevant ratingagency either fails to provide a RACwithin a specified number of days of arequest being made or provides awaiver or acknowledgement statingthat it will not provide a RAC, therequirement for a RAC will be deemedto be waived.

Part 6: Restructuring andRealisation Issues6.1 Amending the Trust Documents

n The process for amending thecommercial terms of the trustdocuments after issuance should bedetailed. Trustees generally have thepower to agree changes todocumentation where they are of atechnical or minor nature without theconsent of noteholders where, in theopinion of the trustee, such changesare not materially prejudicial to theinterests of noteholders. In the eventof manifest errors in the documents,including conforming the issuerdocuments and the Offering Circular,the trustee should be authorised anddirected to implement suchamendment without the requirementto obtain the consent of anynoteholders provided that the otherrelevant parties to the document arein agreement with respect to suchamendment. It is not proposed thatother standard processes formodifications to documentation bythe trustee be changed.

6.2 The Role of the Servicer in MakingLoan Amendments/RestructuringDiscussions

n The servicing agreement shouldexplicitly state that the servicer, on


21

behalf of the issuer, can and isexpected to take such action to agreeamendments to loan documentationthat the servicer believes are consistentwith its obligations under the servicingstandard. This authority should beclearly defined so that the servicer isconfident that it has the requisite powerto act on a wide range of mattersthrough engaging appropriateprofessional advice and organising andliaising with noteholders.

6.3 Restructuring Negotiations withoutthe Servicer or Special Servicer

n The servicer and special servicershould be informed of any meetingsbetween the borrower and noteholdersand preferably should have the right(but not the obligation) to attend suchmeetings. The borrower should havethe right to meet with the noteholderswithout the servicer or special servicer,as applicable, being present, if theservicer does not confirm attendancewithin a reasonable time frame.

6.4 Ability of Servicer and Borrowerto Enter into Open Discussions

n Historically, facility agreements havestated that there will be an event ofdefault if the borrower “commencesdiscussions with one or more of itscreditors with a view to reschedulingany of its indebtedness”. Suchlanguage can inhibit discussionsbetween a borrower and a servicer asto potential restructuring strategies.

n Borrowers should approach theservicer in advance of anydiscussions and request a waiver ofthis clause in order to have an opendialogue. The servicing agreementshould clearly permit the servicer towaive such a provision in advance ofsuch discussions or allow for “withoutprejudice” discussions to take place.

6.5 Realisation of Security

n The transaction documents shouldcontain adequate provisions to permitthe possibility for a loan sale or theholding of REO Property (rather thansolely focusing on loan enforcement).In either situation, where and when

appropriate, the servicer or specialservicer should explain to noteholdersthe rationale for the preferred strategyinstead of other conventionalmethods of realisation.

(i) Sale of Loan

The servicer or special servicer, asapplicable, should have the abilityto sell a loan on behalf of theissuer if they determine that suchaction would be consistent withthe applicable servicing standard.The relevant transactiondocuments for the CMBS shouldaddress the following:

(a) No Restrictive Covenantsof the Issuer: The negativecovenants of the issuer willneed to permit the potentialsale of the loan;

(b) Sales for Less Than Par:The servicer or special servicershould be permitted to sell aloan for less than itsoutstanding amount, providedthat it has determined that thesale of the loan would be theoptimal realisation methodafter considering the estimatedproceeds for all other potentialmethods of realisation alongwith the risks, timing andcosts with respect to suchother methods;

(c) Sales to InterestedPersons: Sales of a loan to anentity affiliated with a servicer,special servicer or anotherparty affiliated with any of thetransaction parties should onlybe permitted if the note trusteehas determined that certainobjective criteria has been met(which can be based uponadvice received from anindependent advisor), such as:

• If appropriate a suitableperiod of public marketinghas passed;

• The purchase price offeredis higher than any otheroffer received; and

• The net proceeds exceedthe value of any other

method of realisation orthe other methods ofrealisation are viewed as“high” risk;

(d) Highest Offer: The sale of theloan does not need to be forthe highest offer if the serviceror special servicer, asapplicable, determines thatsuch action would beconsistent with the servicingstandard. An example of thissituation could arise where thelower offer is for cash while thehighest offer would requirevendor financing from theissuer (thereby delaying thetime until the issuer can obtainfull realisation of the offer price).

(ii) REO Property

The special servicer should havethe authority, on behalf of theissuer, to acquire or take controlover the property that is securityfor a loan, if it determines thatsuch action would be consistentwith the servicing standard. Therelevant transaction documentsfor the CMBS should addressthe following:

(a) No Restrictive Covenantsof the Issuer: The negativecovenants of the issuer shouldnot contain any restrictions onthe issuer holding an interestin any Property;

(b) Risks Related to PropertyOwnership: In making itsdetermination as to whether itwould be in the best interest ofthe transaction to acquire ortake control over the property,the special servicer shouldconsider all potential risks andliabilities to the issuer withrespect to such action andshould attempt to structuresuch acquisition in a manner toeliminate or limit such risks andliabilities. The risks and liabilitiesto be considered shouldinclude the tax implications forthe CMBS issuer to hold aninterest in property instead of adebt instrument;


22

(c) Management of REOProperty: The transactiondocuments should create clearauthority for the specialservicer to arrange for themanagement of such REOProperty. Management of theREO Property should bearranged in a mannerdesigned to maximise the netafter-tax proceeds from theREO Property;

(d) Sale of REO Property: Theacquisition of an REO Propertyshould be coupled with the goalto achieve a quick disposition ofthe property. The transactiondocuments may contain a timeperiod for sale, as long as suchtime period is reasonable (e.g.,three years upon acquisition ofthe REO Property). In anyevent, such REO Propertyshould be sold prior to the finalmaturity date of the notes. Thesale procedure for an REOProperty should be similar tothe sale of any loan, asdescribed above; and

(e) REO Loans: Upon acquisitionof any REO Property, thetransaction documents for theCMBS shall allocate all netafter-tax proceeds from suchREO Property toward interestand principal based upon theterms of the loan as theyexisted on the date prior to theacquisition of such REOProperty. The special servicerwill be required to allocatesuch amounts in such mannerand report such allocations tothe cash manager for properdistribution on the notes.

6.6 Restructuring and EnforcementCosts of CMBS Parties

n The underlying loan facilityagreements should provide for aborrower indemnity in relation to the

reimbursement of restructuring,enforcement and contingency costsof transaction counterparties andtheir professional advisers to be metby the borrower.

n The CMBS transaction documentsshould provide for the payment orreimbursement of restructuring orenforcement costs incurred by certaintransaction parties through the revenuewaterfall on a senior basis and aheadof the payment of Revenue Extractionwhere such costs cannot be recoveredfrom the relevant borrowers.

n On multi-borrower CMBS transactionsthe transaction documentation shouldbe clear as to the responsibility forany costs at issuer level which arenot specific to a single loan (e.g.such amounts are paid from ordinarycash flow or, instead, are first paidfrom amounts allocable to theExcess Spread).

Part 7: Voting Issues7.1 Disclosure of Voting Provisions

n Voting provisions, including details ofquorums and whether resolutionspassed by a certain tranche will bebinding on others should be clearlydisclosed for initial and subsequentmeetings (including where adjourned).Where appropriate a voting diagramshould be included.

7.2 Voting Rights: Negative Consent

n A negative consent process shouldbe considered for certain limitedmatters to reduce the time taken topass resolutions, therefore savingtime and costs. In this process, ameeting of the noteholders does nottake place. A formal notice detailingthe resolution should be distributedsimultaneously as an RIS, through theclearing systems and through otherelectronic mediums such asBloomberg. The notice will contain astatement requiring noteholders toinform the note trustee in writing

within 30 calendar days if they objectto such a resolution and stating thatunless more than a specifiedpercentage makes a written objectionto the resolution, it will be deemed tobe passed. Some suggestions for thespecified percentages are 25% for anextraordinary resolution and 50% foran ordinary resolution. Thesespecified percentages, together withthe process for negative consent,must be outlined in the disclosuresection of the offering circular and inthe relevant transaction documents.

n A negative consent process shouldonly be used for technical oradministrative matters by thetransaction counterparties or where aservicer would prefer to obtainnoteholder input with respect to adifficult issue. The process should notbe used as a default method for aservicer to obtain consent fromnoteholders. These limitations shouldbe clearly defined in the servicingagreement and the trust deed.

n The following matters should not bedecided by negative consent:

(i) Basic Terms Modifications3;

(ii) Waiver of a note event of default;

(iii) Acceleration of the notes;

(iv) Enforcement of the issuersecurity; and

(v) Loan maturity extensions.

7.3 Voting Rights of Connected Parties

n If any borrower or equity sponsors orany actual/prospective transactioncounterparty or their affiliates acquireor otherwise control notes, therelevant holder of the notes should beprohibited from exercising any votingrights or attending any meeting of thenoteholders. In the case of an actualor prospective transactioncounterparty the same should applywhere the subject matter of the voteor meeting relates to their current orprospective appointment.

3 Basic Terms Modifications shall include any modifications to the following; note maturity date, interest payment dates, interest rates, principal payment amounts andschedule, interest and principal priority of payments, security package, currency of payment, the definition of a Basic Terms Modification and the majority needed to passan extraordinary resolution. A Basic Terms Modification should not include any amendment, waiver of a loan that is permitted by the servicer or special servicer accordingto the terms of the servicing agreement


23

List of certain participant firms in the CMBS 2.0 Committeen Allen & Overy LLP

n Bank of America Merrill Lynch

n Barclays

n Benson Elliot

n Berwin Leighton Paisner LLP

n Brookland Partners LLP

n Cairn Capital

n Capita Asset Services

n Capita Fiduciary

n CBRE Limited

n Chalkhill Partners LLP

n Clifford Chance LLP

n Cordea Savills

n Deutsche Bank AG, London

n Deutsche Trustee Company Limited

n Eurohypo AG

n European Credit Management

n Hatfield Philips International

n HSBC Bank Plc

n J.P. Morgan

n Lloyds Banking Group

n M&G Investment Management

n Neuberger Berman Europe Ltd

n Paul Hastings (Europe) LLP

n Realstar Group

n Reed Smith

n Rothschild

n Sidley Austin LLP

Appendix 1


24

Appendix 2Base CasePre Issuance DisclosureLoan, Property and Note Information

Loan Information

Senior Junior Mezzanine/Other

Borrower

Borrower domicile

Sponsor(s) / Guarantors

Loan Purpose

[•]

[•]

[•]

[•]

[•]

[•]

[•]

[•]

[•]

[•]

[•]

[•]

Origination Date

Maturity Date

Cut-Off Date

Remaining Term

Extension Option(s) *Conditions

Interest Payment Dates

[•]

[•]

[•]

[•]

[•]

[•] [Jan, Apr, Jul, Oct]

[•]

[•]

[•]

[•]

[•]

[•]

[•]

[•]

[•]

[•]

[•]

[•]

Original Loan Balance

Cut-Off Date Balance

Undrawn Balance (e.g. Capex) *Conditions

Expected Maturity Balance

Amortisation Type

[•]

[•]

[•]

[•]

[•]

[•]

[•]

[•]

[•]

[•]

[•]

[•]

[•]

[•]

[•]

Currency

Interest Rate Type

Hedging Type

Hedging Maturity

Hedge / Swap / Cap Rate

Margin

Cut-off All in Rate / Fixed Rate Coupon

Day Count Basis

[•]

[•]

[•]

[•]

[•]

[•]

[•]

[•]

[•]

[•]

[•]

[•]

[•]

[•]

[•]

[•]

[•]

[•]

[•]

[•]

[•]

[•]

[•]

[•]

The CRE Finance Council takes no responsibility for the following material which has been produced by a third party and isreproduced here for the purpose of reference only. The tables set out in this Appendix contain terms and concepts, the meaning andapplication of which may vary considerably in particular transactions. Care should be taken when using this Appendix to disclose andexplain transaction-specific features which affect the meanings or applications of the same.


25

Senior Junior Mezzanine/Other

Origination LTV

Cut-Off LTV

LTV Covenant

Cut-Off Debt Yield

Origination ICR / DSCR

Cut-Off ICR / DSCR

ICR / DSCR Covenant

Other Financial Covenant *Comment

[•]

[•]

[•]

[•]

[•] / [•]

[•] / [•]

[•] / [•]

[•]

[•]

[•]

[•]

[•]

[•] / [•]

[•] / [•]

[•] / [•]

[•]

[•]

[•]

[•]

[•]

[•] / [•]

[•] / [•]

[•] / [•]

[•]

Call Protection / Prepayment Penalty

Substitution / Disposal *Conditions

Disposals Release Premium *Conditions

Cash flow Control

n Lockbox

n Cash Sweep *Conditions

n Cash Trap *Conditions

n Dividend Trap *Conditions

Reserves / Escrow Accounts *Conditions

[•]

[•]

[•]

[•]

[•]

[•]

[•]

[•]

[•]

[•]

[•]

[•]

[•]

[•]

[•]

[•]

[•]

[•]

[•]

[•]

[•]

[•]

[•]

[•]

Primary Loan Security Mortgage

Pledged Rent Account

Assigned Property Insurance

[•]

[•] [•]

Governing Law

n Loan Agreement / Intercreditor

n Security Agreement

[•]

[•]

[•]

[•]

[•]

[•]

In addition the above data items should also be disclosed in respect of debt which ranks pari-passu or super senior to theCMBS (in the case of multiple super senior debt facilities summary aggregate portfolio information may be provided).


26

Property Information

Single Assets/Portfolio

Main Property Type(s)

Location

Tenure

Leasehold maturity (term) and annual rent

Year Built / Refurbished

Total Net Lettable Area

Property Grading

[•]

[•]

[•]

[•]

[•] / [•] p.a. [•]

[•]

[•] sq. ft./sqm.

[•]

Number of Leases / Number of Tenants

Weighted Average Lease Term (Years) to First Break/Expiry

Economic Occupancy (weighted average by ERV)

Physical Occupancy (by Area)

Total Gross Rental Income p.a.

Net Operating Income p.a.

[•] / [•]

[•]

[•]

[•]

[•]

[•]

Valuer

Valuation Date / Cut off Date

Estimated Rental Value p.a. (ERV per sq ft / sqm)

Appraised Value

Vacant Possession Value

Gross Yield / Net Initial Yield

[•]

[•] / [•]

[•] ([•] per sq.ft./sqm) [•]

[•]

[•]

[•] / [•]

Total Cost (if acquisition financing)

Property Management

Asset Management

[•]

[•]

[•]

Top 5CommercialTenants

NLA Gross Rent p.a. % Total GrossRent

Rent ReviewType

Next RentReview Date

WeightedAverage LeaseExpiry Date

WeightedAverage NextBreak Date

[•] [•] [•] [•] [•] [•] [•] [•]

[•] [•] [•] [•] [•] [•] [•] [•]

[•] [•] [•] [•] [•] [•] [•] [•]

[•] [•] [•] [•] [•] [•] [•] [•]

[•] [•] [•] [•] [•] [•] [•] [•]

[•] [•] [•] [•] [•] [•] [•] [•]

All Tenants [•] [•] 100%


27

Notes & Reporting Information

To include for example:

Class

Initial Principal Amount

Issue Price

Interest Reference Rate

Margin

ISIN

CUSIP

Rating

Expected Maturity Date

Final Maturity Date

Expected Average Life

Day Count

Business Day Convention

Denomination

Note interest Payment Dates

First Note Interest Payment Date

CRD II Retained Amount and Method (If Applicable)

Loan Interest Payment Dates

Collection Period

Calculation/Determination Date

Investor Reporting and Data Provision Dates

Investor Reporting Websites


28

Appendix 3Post Issuance Disclosure

Investor Reporting

Investor reporting typically comprises loan and collateral reporting by the servicer and note level reporting by the cashmanager

1. General1.1 Transaction Details (Applicable To All Reports)n Reporting date;

n Reporting period start;

n Reporting period end/accrual period;

n Next interest payment date;

n Transaction party contact details – names, addresses, email addresses and telephone numbers in case of queries related to boththe report and the transaction generally for the servicer, special servicer, issuer, note trustee, cash manager or calculation agent; and

n Web link(s) to applicable transaction information (glossary, Offering Circular, transaction documents, valuation report(s), E-IRP datafiles, cash flow models).

1.2 GlossariesBoth the servicer and note level reports should contain a glossary of all definitions used in the report or make reference to theappropriate pages in the Offering Circular where such definitions can be found. Examples of terms that should be defined include, butare not restricted to:

n Default definitions (e.g. 90/180/360 days or when a borrower is classified as insolvent);

n LTVs – whether these include capitalised interest or fees. For indexed LTVs, the method used for indexing;

n ICR (interest coverage ratio), DSCR (debt service coverage ratio) including details of whether they are calculated on a backward orforward looking basis and whether rent payments from delinquent tenants are included;

n Sequential payment triggers;

n Available funds caps;

n Control Valuation Events; and

n Appraisal Reduction Amounts.

2. Servicer ReportingServicer reporting should incorporate the relevant Base Case data at loan and property level (as referred to in Appendix 2) in order thateasy comparisons can be made between loans in the same transaction and loans in different transactions. This only encompassesbase data and the requirements below are more detailed and should be adapted where appropriate to suit the relevant transaction,loan and/or property collateral.

Reporting on multi-conduit transactions should include:

(I) Portfolio level reporting, including a summary of the aggregated loan portfolio and property characteristics and performance, withportfolio level commentary; and

(II) Loan level reporting, including more detailed information/commentary on individual loan performance and the properties on whicheach loan is secured.

For single loan transactions, only certain sections of the portfolio level reporting may be pertinent (e.g. the loan summary table,portfolio redemptions, financial covenant performance tables and property summaries).


29

1 For all stratification tables with numerical values (e.g. principal balance, lease term) the maximum, minimum and weighted average values for the given variables should alsobe shown with the tables

2.1 Portfolio Level ReportingSummary Loan Portfolio CharacteristicsSummary information on the loan pool should be provided, including tabular information on the following:

n Aggregate principal balance at the beginning and end of the period;

n Aggregate number of mortgage loans;

n A loan summary table setting out for each loan:

• The original and current whole and securitised loan balances;

• Current loan to value ratio and covenants;

• Current interest coverage ratios and covenants;

• Current debt service coverage ratios and covenants;

• Amortisation type;

• Margin and all in rate (securitised loan only);

• Loan maturity date / remaining loan term;

• Loan collateral country;

• Number of properties in the loan;

• Number of leases;

• Property type for the overall portfolio;

• Aggregate current/latest market value for properties in each loan;

• Weighted average occupancy rate for each loan; and

• Weighted average remaining lease term (to next break date)

n Portfolio loan stratification tables setting out in aggregate for the loan portfolio (by number of loans, % of number of loans inportfolio, by balance and by % of total balance)1 : amortisation / repayment type; remaining loan term; interest rate; interestpayment type;

n Portfolio property tables1 setting out in aggregate for the property portfolio: the number of properties; portfolio net rental income;portfolio estimated rental value; current/latest portfolio market value; current/latest portfolio vacant possession value; currentweighted average remaining term to break and current weighted average yield;

n Portfolio property stratification tables1 (by current market value or net rental income and % of value/ net rental income asappropriate): Location; property type; tenure (freehold/leasehold); valuation date; remaining lease term; occupancy rate;

n Details of any other collateral / cash balances on a portfolio basis; and

n Portfolio lease maturity chart showing rent roll-off on the portfolio.

Portfolio Performance Tablesn Summary tables setting out the number and % of loans (by current balance):

• With covenant breaches;

• In payment default;

• Subject to a cash sweep;

• In special servicing;

• On the servicer watch list; and

• That have repaid.

n Current arrears stratification table setting out number of % (by current balance) of loans in arrears more than one month, one tothree months, three to six months, greater than six months;

n Summary financial covenant performance table setting out for each loan the last quarters ICR, DCSR and LTV performance andincluding the covenant requirement;

n Details of loans currently on the servicer watchlist;

n Details of loans currently in special servicing; and

n Current period and cumulative defaults and losses (following any recoveries) (all by number and balance).


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Portfolio Redemption InformationTabular information on any redemption related events including:n Aggregate loan collections (scheduled and unscheduled principal and interest) during the period for the portfolio;

n Details of any loan disposals or substitutions during the period, including the number and balances;

n The number, last reported market value and net rental income of any properties added to/removed from the pool during the periodand the name of the loan on which the property was secured;

n Aggregate voluntary prepayments from cash and the method of allocation (pro-rata, sequential, reverse sequential);

n Application of disposal proceeds and the method of allocation;

n Release premium allocations and calculations; and

n Any other recoveries (e.g. from proceeds from enforcement, insurance, legal claims etc.) and their allocation to repayment ofprincipal, rolled up interest, etc.).

Portfolio CommentaryThe majority of commentary is anticipated to be completed at the loan level as this provides investors with the granular detail requiredto fully assess performance. However, relevant portfolio level commentary should be included providing up to date information tonoteholders on the overall portfolio, including commentary on:

n Any significant changes to overall portfolio performance;

n Watch listed loans and events, including the reasons for transfer to the list;

n Specially serviced loans and events, including the reasons for transfer to the list; and

n Recoveries and application of proceeds on any property or loan disposals, including the application basis (i.e. pro-rata, sequentialor reverse sequential as between loans).

Loan Level Reporting:In addition to the overall portfolio reporting, servicers should report on the performance of each loan in the transaction and theassociated properties.

Summary Information for Each LoanInformation relating to the loan, including:n A summary table setting out the securitised, junior and whole loan balances at origination, currently and expected balance at

maturity;

n Date of origination;

n Loan maturity date and details of any loan extensions and any conditions/hurdles relating to such extensions and any change tothe loan terms following extension;

n Details of any syndication of the whole loan or parts thereof;

n Details of any hedging arrangements, including any hedge liabilities (i.e. current hedge termination costs), hedge maturity dates,swap fixed rates;

n Amortisation basis for the securitised loan;

n All in rate for the period and current securitised loan margin;

n Key covenants at the securitised and whole loan level (e.g. minimum interest cover and debt coverage ratios and maximum loan tovalue levels) and the definitions for such calculations per the transaction documents or references to the relevant pages of theOffering Circular;

n Tables/graphs/charts setting out at the securitised and whole loan levels:

• The 12 month trailing interest cover and debt coverage ratios at origination and currently;

• The forward looking 12 month interest cover and debt coverage ratios at origination and currently; and

• The loan to value ratio (at origination, current and estimated exit).

Property/Asset Details for Each Loan

Information relating to the underlying properties and leases for the relevant Loan, including:

n A summary table setting out by property in the loan

• The property name, location (town and country), type;

• The property net rental income and estimated rental value;

• The top three tenants and their % contribution to net rental income;


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• Occupancy by net lettable area;

• Original market value;

• Current/latest market value;

• Current/last vacant possession value;

• Date of last valuation and name of valuer; and

• Weighted average unexpired lease term

n Summary lease information on either (i) all leases in the loan, including top 10 leases, setting out net rental income, % of total loanrental income; all (and not just the next) break dates; rent review dates and lease expiration dates; or if practical depending on thesize and granularity of the property portfolio (ii) summary lease information by property, including the top five leases in eachproperty setting out net rental income, % of total property net rental income, lease break dates, rent review dates and leaseexpiration dates

n Details of any properties added, substituted or sold in the period, including the name of the property; last reported market value;date of addition or sale; % of last market value; and where such information is not confidential, the net disposal proceeds (for asale);

n Details of any material lease events (e.g. breaks, renewals, maturities etc.);

n Lease maturity summary for the loan broken down by percentage contribution to the total number of leases;

n Details of any additional collateral (including cash held on deposit or trapped cash);

n Details of Controlling Party (where there is an A/B structure) or Controlling Class; and

n Details of any Control Valuation Events that may have occurred in the period and details of the basis on which control passes fromthe junior loan to the securitised loan.

Copy Valuation reports should be provided as per the principles in section 1.7 of the CMBS 2.0 Market Principles

Loan and Property Level CommentaryRelevant servicer loan level commentary, providing up to date information to bondholders on individual loans, including commentary on:

n Any large variances in rental income, senior property costs paid and net collateral cash flow available to cover principal andinterest;

n Action on key leases (to the extent agreed by the borrower), including exercise of tenant breaks, rent review outcomes, leasematurities, new tenants;

n Any property disposals, substitutions or additions;

n Any capital expenditure projects announced or completed;

n Any property site visits undertaken by the servicer;

n Loan covenant breaches and causes as well as any cures or remedies by the borrower or junior lender (to the extent not coveredin portfolio level reporting);

n Any recovery action taken in relation to a loan, including enforcement/foreclosure, loan sale(s) and restructurings/work-outs;rationale for selecting a particular recovery option over another (all to the extent publically disclosable) (this may alternatively beincluded in the portfolio level commentary above);

n For worked-out loans, a detailed loss determination including cost items and distribution of recoveries. Breakdown of the collateralsale proceeds, e.g. sale price, sale costs, receiver cost, special servicer costs (special/work out/liquidation fees), legal costs, andallocation of the net sales proceeds in the waterfall of payment;

n Any loan extensions exercised (or exercisable) in the period or historically; and

n Any previous restructurings agreed between the finance parties.

Cash flow model inputs in the appropriate format as set out in Appendix 4 (to the extent not provided above)

3. Issuer Level (Cash Manager) ReportingTransaction DetailsIn addition to the general transaction details, details of the notes should be provided, including ISINs, stock exchange listing, CRD IIretained amount and method of retention (if applicable).


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Issuer Loan / Asset DetailsSummary information on the loan pool, including tabular information on the following:

n Aggregate number of loans;

n Summary table(s) setting out by securitised loan and in aggregate for the issuer (on a weighted average basis) and showing the %by balance and number of:

• The original, period start and end loan balance;

• Current margin and all in rate; and

• Loan maturity date / remaining loan term;

n Details of any other collateral / cash balances on a portfolio basis; and

n Details of applicable exchange rates.

Cash Reconciliation and Portfolio PerformanceIssuer cash reconciliation (i.e. cash flow sources and application of waterfalls) including:

n Issuer receipts / sources, including:

• Interest and principal collections on the securitised loan (by type of collection, e.g. available interest receipts, principal recoveryfunds, prepayment redemption funds, final redemption funds etc.);

• Net hedge payments /receipts;

• Interest on issuer accounts;

• Other cash receipts; and

• Liquidity facility drawings;

n Issuer payments / uses, including:

• Liquidity facility repayments;

• Issuer costs;

• Note interest payments;

• Note principal payments; and

• The various components of the calculation for the Revenue Extraction and precise amounts for its various components, suchas the available cash flow, expenses and other components of such calculation

n A list of all pertinent ledgers (e.g. current and cumulative appraisal reduction amount, prepayment penalty allocation), transactionaccounts, liquidity facilities and servicer advances, showing their opening balances, any aggregated debits/credits for each period,targeted values and closing balances;

n For any accounts from which eligible investments are made, the balance of investments in each of the eligible investment classesas opposed to cash, for example: sovereigns, own name securities, RMBS, ABS, commercial paper;

n A summary table setting out the number and % (by current loan balance) of loans which have repaid;

n Details of any loan interest shortfalls;

n List of all material triggers/events referred to in the Offering Circular, such as counterparty-related triggers, performance triggers,issuer events of default and available funds caps, and in particular sequential payment triggers (as per the glossary above). Thisshould include a brief summary of the consequences if it is breached (referring to the Offering Circular for details if appropriate),and the current status of the trigger/event;

n Details of issuer level fees and costs in the period including transaction counterparties; and professional advisers as recommendedin the CMBS 2.0 Market Principles; and

n Details of the Controlling Class.

Loan Redemption InformationInformation on any securitised loan redemption related events including:

n Loan collections (scheduled and unscheduled principal and interest) during the period;

n Application of any voluntary prepayments on the securitised loan and the method of allocation to the notes (pro-rata, sequential,reverse sequential);

n Application of any mandatory prepayments on the securitised loan and the method of allocation to the notes (pro-rata, sequential,reverse sequential); and

n A clear statement of which priority of payments is being applied in the current period.


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Note Distribution and Rating Information

n Summary table(s) setting out by each class of note (including the Class X Note) and in aggregate for the issuer:

• Note class and ISIN;

• Current period coupon rate and any step up coupon and step up date;

• Original, period start and end loan balance;

• Currency

• Current period principal distribution;

• Current period interest distribution;

• Current pool factor;

• Any principal deficiency amounts or losses on the notes;

• The original and current rating of the notes;

• Expected maturity date and legal final maturity date; and

• The credit enhancement and liquidity support derived from different supporting components (e.g. note subordination, over-collateralisation and reserve funds).

n The identity of any specific carve out classes such as securitised interest-only classes and their method of payment (i.e. basedupon what is due or what is received), residual class notes and any class of notes which are backed by different security to therest of the CMBS capital structure (e.g. class V) including details of such different security and any subordinated loans which havea junior lien on the CMBS assets.

Counterparty Information and Their Ratings

n List of all key parties and their current ratings (both short-term and long-term) together with any related trigger levels

n Examples of counterparties to be included are: issuer; servicer; cash manager; account bank(s); guaranteed investment contractprovider(s); liquidity facility provider(s); master servicer; special servicer; hedge provider(s) and any related back-up/standbyproviders; and

n Details of any hedging, including: counterparty and notional, applicable rates, payments made/received, any collateral postings.

Conflicts of Interest of Transaction Counterparties

n Details of any declared conflicts of interest of a transaction counterparty to the transaction.

Issuer Level Commentary

Appropriate Issuer level commentary including commentary on:

n Any liquidity facility drawings in the period;

n Any sequential payment mechanism triggers in the period;

n The application of any available funds caps, deferred interest or similar interest shortfall mechanisms; and

n Details of any rating actions.

Cash Flow Model Inputs in the appropriate format as set out in Appendix 4 (if not already provided above)


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Pre and Post Issuance DisclosureIssuer Waterfall Cash Flow Model Functionality and Inputs

1 General1. Access to the model should preferably be free to all end-users.

2. The Cash flow model may be provided in a variety of formats (e.g. website-hosted, downloadable program or spreadsheet).

3. The model should enable the end-user to input key data from a pre-configured table of inputs and output results using arecognisable spreadsheet format (e.g. .csv, .xls or .xlsx) for the relevant notes to their legal final maturity date. The results of themodel should be capable of being retained or recorded by the end-user.

4. Whilst inputs and outputs are bespoke to each transaction, at a minimum the inputs should cover asset specific (e.g., principaland interest received, delinquencies and defaults), liability specific (e.g., note balances, trigger breaches) and sundry factors (e.g.,interest and exchange rates). The output of the cash flow model should clearly show the items such as the waterfall payments, theaccount balances, the note balances etc. for the life of the transaction.

5. The model should incorporate all the static features of the transaction (e.g., note interest margins, waterfall mechanisms, costs andfees of the transaction service providers, liquidity facility commitment amounts, and any appraisal reduction mechanism etc.).

6. The model itself will be required to be updated should there be any changes to the structure which may impact the cash flows. Forexample, updates to the model would not be required to reflect the amortisation of notes (note balances should be an input to themodel) or to reflect certain transaction features that may have occurred (e.g., the breach of a given trigger, liquidity facility standbydrawing) facility for which should already have been incorporated into the model structure. Updates will be required if there arechanges which impact core structural elements (e.g. issuance of tap notes, any amendments which affect the waterfall, changesto the liquidity facility structure or hedging structure).

7. The provider of the model may have reasonable legal liability disclaimers on the cash flow models.

8. Calculations being undertaken in the model should be transparent to the user (either in the model or through separate notes). Theprovider of the model should accompany the model with guidance notes, including instructions, assumptions made and furtherinformation as well as setting out in clear detail how the model operates.

2 Model Inputs and OutputsAll models should include the following example inputs and outputs where relevant to a given transaction. This list is not intended tobe exhaustive and is provided as a guide only.

2.1 Model InputsInputs can be classified generally as:

n Current Inputs: Any inputs reflecting the current status of the transaction at the outset and on a quarterly basis, e.g., notebalances, note margins, loan portfolio balance, current liquidity facility drawing amount, balances of issuer level accounts andledgers, fixed inputs required to calculate aggregate issuer costs and expenses and details of any triggers that have beenactivated or deactivated

n Projected Inputs: Any inputs comprising future assumptions for each period of the cash flow run required to operate the cashflow model to project future cash flows to the maturity of the notes, e.g., projected principal amounts to be applied to the waterfall,projected revenue amounts to be applied to the waterfall, future LIBOR or exchange rates, future occurrence of any prepayments,stress events, trigger breaches, etc.

n The quarterly investor reporting should provide the input values for all the Current Inputs required by any end-user to operate thecash flow model.

n The input values for the Projected Inputs should be determined and entered by the end-user. The loan portfolio model, if provided,will facilitate with the generation of certain of the Projected Inputs for the end-user.

n Transaction related Inputs• Opening Balances; portfolio, outstanding notes, cash/account balances, ledgers, liquidity facility (currency) commitment

and drawn amounts

• Starting GIC / cash balances – reserve fund, accumulation (currency)

• Inputs related to all the third party costs and expenses of the issuer

Appendix 4


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n Economic Variables• Interest rate (e.g. 3M LIBOR rate) (% per period)

• Currency exchange rates (e.g. £/$ or £/€ per period)

n Cash Flows• Underlying portfolio balances (currency per period)

• Principal & revenue received by the issuer from the underlying collateral (currency per period). The model should provide facilityfor separate lines of inputs for different items of the principal and revenue streams if these different items are applied to theissuer’s waterfall differently (e.g. principal receipts from different loan buckets may be applied differently to note amortisation,prepayment fees on the loans may be applied in a different manner to the loan coupon and the default interest on the loansmay be applied in a different manner to the regular loan coupon).

• Losses allocated (currency per period)

• Other income streams (e.g. recoveries, GIC interest etc.) in the event they are applied any differently in the waterfall (currencyper period).

• If applicable to the waterfall or structure, performance variables which may influence payment rules (e.g., CPR, arrears ordelinquency percentages, NAI amounts, etc.)

n Stress Events• Insolvency event or post enforcement waterfall trigger breach (Yes/No)

• Standby drawing of liquidity facility (Yes/No)

• Transaction specific trigger event dates – where such triggers may not be driven by the liabilities model (e.g., delinquencytrigger breach, sequential amortisation trigger breach) (Yes/No)

• Appraisal reduction amounts (%) – any mechanisms designed to reduce servicer advances or liquidity facility draws to loanswhich have had their value eroded.

n Counterparty

• Counterparty Downgrade (e.g. AAA, A) or Default (Yes/No) (e.g. hedge counterparty default occurring in a given period,downgrade of any other counterparties such as liquidity facility provider, GIC provider or account bank) (Yes/ No)

• Downgrade event related to key tenant if the cash flow waterfall rules change due to such downgrade (Yes/No)

• Stressed service provider fees (e.g. servicer, account bank) (ccy per month/year as applicable or as a % of the portfolio balance)

Model Outputs

n Waterfall payments (currency per period);

n Note, account and ledger balances (currency per period);

n Interest due, paid and accrued on each class of Notes (currency per period)

n Principal payments on each class of notes (currency per period)

n Weighted Average Lives (WALs) of the Notes (years)

n Hedge payments if such payments are outside the waterfall (currency per period)


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Post-Issuance Disclosure Notifiable Events

1. The determination by the servicer that a default has occurred;

2. The formal declaration by the servicer of an event of default;

3. The formal waiver of any default or event of default;

4. The curing of any default or event of default;

5. The appointment of a receiver or other insolvency practitioner or the commencement of insolvency proceedings in relation to anyobligor;

6. A change of control in relation to any obligor (regardless of change of control covenants);

7. A change of property or asset manager (regardless of change of property or asset manager covenants);

8. Any modification to the amount or date of any payment of principal or interest due to be made by a borrower under a loanagreement;

9. Any change to a financial covenant;

10. Any change to prescribed cash flows or payment waterfalls;

11. Any other loan amendments that relate to provisions described in the Base Case;

12. Any release of a property subject to security in circumstances not expressly contemplated by the finance documents (e.g. therelease of a property for less than the specified release price);

13. The instigation of any legal proceedings against any professional adviser in connection with the origination of a material loan (toinclude details of party against whom a claim is being made and brief details of the claim);

14. Any prepayment of more than 10 per cent of a loan;

15. The surrender of any lease affecting more than 10 per cent. of the net lettable area of all the properties securing a particular Loan;

16. A change in COMI of any obligor;

17. A failure of a major tenant;

18. The presence of a material environmental hazard at any property;

19. Any material buildings insurance claims made by the borrower in respect of a property;

20. Any compulsory purchase orders in respect of a property;

21. Change of 10% or more in the value of a property (by reference to the last publicly-available valuation figure) of which the servicerbecomes aware based on professional valuations commissioned by it in the course of performing its duties including:

(a) New market value

(b) Vacant possession value

(c) Date of previous value

(d) Date of new market value

(e) Reduction/increase amount

(f) Any change in the valuer

Appendix 5


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(g) Changes in the assumptions upon which the last valuation was prepared

(h) Number of properties being valued (if part of a portfolio) and also the actual property address(es)

(i) Any special conditions in the valuation

(j) Any special events occurred (such as a subordinate lender control valuation event etc.)

22. Any legal proceedings launched against the issuer in its capacity as lender;

23. Control Valuation Events;

24. Appraisal Reductions;

25. Special servicing transfer events;

26. The first liquidity facility drawing;

27. Sequential trigger switches; and

28. A loan becoming a corrected loan.


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Commercial Real Estate Finance Council Europe46 New Broad StreetLondonEC2M 1JH United Kingdom

Tel: +44 (0) 203 651 5567Email: [email protected]/eu

www.crefc.org/eu

[email protected]

November 2012 - CRE Finance Council - CREFC · Market Principles for Issuing European CMBS 2.0...

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