RECONSTITUTED SERVICING AGREEMENT
THIS RECONSTITUTED SERVICING AGREEMENT (this "Agreement"), entered into as
of the 1st day of May, 2002, by and between XXXXXX BROTHERS BANK, FSB (the
"Bank" or "Xxxxxx Brothers Bank"), a federal savings bank and ABN AMRO MORTGAGE
GROUP, INC., a Delaware corporation (referred to herein as the "Servicer"),
recites and provides as follows:
RECITALS
WHEREAS, the Bank acquired certain conventional, residential, adjustable
rate mortgage loans (the "Mortgage Loans") from the Servicer, which Mortgage
Loans were either originated or acquired by the Servicer pursuant to the
Mortgage Loan Purchase Agreement, dated as of February 1, 2002 (the "Purchase
Agreement"), by and between the Bank and the Servicer and annexed as Exhibit B
hereto.
WHEREAS, the Bank has conveyed certain of the Mortgage Loans identified on
Exhibit C hereto (the "Serviced Mortgage Loans") to Structured Asset Securities
Corporation, a Delaware special purpose corporation ("SASCO"), which in turn has
conveyed the Serviced Mortgage Loans to JPMorgan Chase Bank, as trustee (the
"Trustee"), pursuant to a trust agreement dated as of May 1, 2002 (the "Trust
Agreement"), among the Trustee, Aurora Loan Services Inc. ("Aurora") as Master
Servicer and SASCO.
WHEREAS, the Serviced Mortgage Loans are currently being serviced by the
Servicer for the Bank pursuant to a Seller's Warranties and Servicing Agreement
between the Bank and the Servicer, dated as of February 1, 2002 (for
Conventional Residential Adjustable Rate Mortgage Loans, Group No. 2002-1)
(hereinafter, the "SWSA") and annexed hereto as Exhibit D.
WHEREAS, the Bank and the Servicer agree that the provisions of the SWSA
shall apply to the Serviced Mortgage Loans, but only to the extent provided
herein and that this Agreement shall govern the Serviced Mortgage Loans as
described herein.
WHEREAS, the Master Servicer and any successor master servicer shall be
obligated, among other things, to supervise the servicing of the Serviced
Mortgage Loans on behalf of the Trustee
WHEREAS, the Bank and the Servicer intend that each of the Master Servicer
and the Trustee is an intended third party beneficiary of this Agreement.
NOW, THEREFORE, in consideration of the mutual agreements hereinafter set
forth and for other good and valuable consideration, the receipt and adequacy of
which are hereby acknowledged, the Bank and the Servicer hereby agree as
follows:
AGREEMENT
1. Definitions. Capitalized terms used and not defined in this Agreement,
including Exhibit A hereto and any provisions of the SWSA incorporated by
reference herein (regardless if such terms are defined in the SWSA), shall have
the meanings ascribed to such terms in the Trust Agreement.
2. Custodianship. The parties hereto acknowledge that U.S. Bank, National
Association will act as custodian of the Serviced Mortgage Files for the Trustee
pursuant to a Custodial Agreement, dated May 1, 2002, between U.S. Bank,
National Association and the Trustee.
3. Servicing. The Servicer agrees, with respect to the Serviced Mortgage
Loans, to perform and observe the duties, responsibilities and obligations that
are to be performed and observed under the provisions of the SWSA, except as
otherwise provided herein and on Exhibit A hereto, and that the provisions of
the SWSA, as so modified, are and shall be a part of this Agreement to the same
extent as if set forth herein in full.
4. Trust Cut-off Date. The parties hereto acknowledge that by operation of
Section 4.05 and Section 5.01 of the SWSA, the remittance on June 18, 2002 to
the Trust Fund is to include principal due after May 1, 2002 (the "Trust Cut-off
Date") plus interest, at the Mortgage Loan Remittance Rate collected during the
related Due Period exclusive of any portion thereof allocable to a period prior
to the Trust Cut-off Date, with the adjustments specified in clauses (b), (c)
and (d) of Section 5.01 of the SWSA.
5. Master Servicing; Termination of Servicer. The Servicer, including any
successor servicer hereunder, shall be subject to the supervision of the Master
Servicer, which Master Servicer shall be obligated to ensure that the Servicer
services the Serviced Mortgage Loans in accordance with the provisions of this
Agreement. The Master Servicer, acting on behalf of the Trustee and the SASCO
2002-11A Trust Fund (the "Trust Fund") created pursuant to the Trust Agreement,
shall have the same rights as the Bank under the SWSA to enforce the obligations
of the Servicer under the SWSA and the term "Purchaser" as used in the SWSA in
connection with any rights of the Purchaser shall refer to the Trust Fund or, as
the content requires, the Master Servicer acting in its capacity as agent for
the Trust Fund, except as otherwise specified in Exhibit A hereto. The Master
Servicer shall be entitled to terminate the rights and obligations of the
Servicer under this Agreement upon the failure of the Servicer to perform any of
its obligations under this Agreement, which failure results in an Event of
Default as provided in Article X of the SWSA. Notwithstanding anything herein to
the contrary, in no event shall the Master Servicer assume any of obligations of
the Bank under the SWSA and in connection with the performance of the Master
Servicer's duties hereunder the parties and other signatories hereto agree that
the Master Servicer shall be entitled to all of the rights, protections and
limitations of liability afforded to the Master Servicer under the Trust
Agreement.
6. No Representations. Neither the Servicer nor the Master Servicer shall
be obligated or required to make any representations and warranties regarding
the characteristics of the Serviced Mortgage Loans (other than those
representations and warranties made by the Servicer in Section 3.02 of the SWSA
and pursuant to the SWSA) in connection with the transactions contemplated by
the Trust Agreement and issuance of the Certificates issued pursuant thereto.
7. Notices. All notices and communications between or among the parties
hereto (including any third party beneficiary thereof) or required to be
provided to the Trustee shall be in writing and shall be deemed received or
given when mailed first-class mail, postage prepaid, addressed to each other
party at its address specified below. Each party may designate to the other
parties in writing, from time to time, other addresses to which notices and
communications hereunder shall be sent.
All notices required to be delivered to the Master Servicer under this
Agreement shall be delivered to the Master Servicer at the following address:
Aurora Loan Services, Inc.
0000 Xxxxx Xxxxxx Xxxx, Xxxxx 000
Xxxxxx, Xxxxxxxx 00000
Attn: E. Xxxx Xxxxxxxxxx, Master Servicing,
SASCO 2002-11A
Telephone: (000) 000-0000
Facsimile: (000) 000-0000
All remittances required to be made to the Master Servicer under this
Agreement shall be made on a scheduled/scheduled basis to the following wire
account:
JPMorgan Chase Bank
New York, New York
ABA#: 000-000-000
Account Name: Aurora Loan Services Inc.,
Master Servicing Payment Clearing Account
Account Number: 066-611059
Beneficiary: Aurora Loan Services, Inc.
For further credit to: SASCO 2002-11A
All notices required to be delivered to the Trustee hereunder shall be
delivered to the Trustee at the following address:
JPMorgan Chase Bank
000 Xxxx 00xx Xxxxxx, 00xx Xxxxx
Xxx Xxxx, Xxx Xxxx 00000-0000
Attention: Corporate Trust Services Group
Telephone: (000) 000-0000
Facsimile: (000) 000-0000
All notices required to be delivered to the Bank hereunder shall be
delivered to the Bank, at the following address:
Xxxxxx Brothers Bank, FSB
000 0xx Xxxxxx, 0xx Xxxxx
Xxx Xxxx, Xxx Xxxx 00000
Attention: Xxxx Xxxxxx
Telephone: (000) 000-0000
Facsimile: (000) 000-0000
All notices required to be delivered to the Servicer hereunder shall be
delivered to its office at the address for notices as set forth in the SWSA.
8. Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, NOTWITHSTANDING NEW YORK OR
OTHER CHOICE OF LAW RULES TO THE CONTRARY.
9. Counterparts. This Agreement may be executed in any number of
counterparts, each of which when so executed shall be deemed to be an original,
but all of which counterparts shall together constitute but one and the same
instrument.
Executed as of the day and year first above written.
XXXXXX BROTHERS BANK, FSB,
as Owner
By:
----------------------------------------
Name: Xxxx Xxxxxx
Title: Vice President
ABN AMRO MORTGAGE GROUP, INC.,
as Servicer
By:
----------------------------------------
Name: Xxxxxx Xxxxxxx
Title: Senior Vice President
Acknowledged:
AURORA LOAN SERVICES INC.,
as Master Servicer
By:
----------------------------------------
Name: E. Xxxx Xxxxxxxxxx
Title: Executive Vice President
JPMORGAN CHASE BANK,
as Trustee
By:
----------------------------------------
Name: Xxxxxx Xxxx
Title: Assistant Vice President
EXHIBIT A
Modifications to the SWSA
1. Unless otherwise specified herein, the following provisions and related
definitions of the SWSA shall be disregarded for purposes relating to this
Agreement: (i) representations and warranties relating to the Mortgage
Loans and not relating to the servicing of the Mortgage Loans, (ii)
Mortgage Loan repurchase obligations, (iii) Whole Loan and Pass-Through
Transfers and Reconstitution, and (iv) Assignments of Mortgage. The
exhibits to the SWSA and all references to such exhibits shall also be
disregarded.
2. A new definition of "Realized Loss" is added to Article I immediately
following the definition of "Rating Agency" to read as follows:
Realized Loss: With respect to each Liquidated Mortgage Loan (as
defined in the Trust Agreement), an amount equal to (i) the unpaid
principal balance of such Mortgage Loan as of the date of liquidation,
minus (ii) Liquidation Proceeds received, to the extent allocable to
principal, net of amounts that are reimbursable therefrom to the
Master Servicer or the Servicer with respect to such Mortgage Loan
(other than Monthly Advances of principal) including expenses of
liquidation.
3. The parties acknowledge that the fourth paragraph of Section 2.02 shall be
inapplicable to this Agreement.
4. The parties acknowledge that Section 2.03 (Delivery of Documents) shall be
superceded by the provisions of the Trust Agreement.
5. Section 3.01(c) (No Conflicts) is hereby amended by deleting the words,
"the acquisition of the Mortgage Loans by the Company, the sale of the
Mortgage Loans to the Purchaser".
6. Section 3.01(f) (Ability to Perform) is hereby amended by deleting the
second sentence thereof.
7. Section 3.01(h) (No Consent Required) is hereby amended by deleting the
words "or the sale of the Mortgage Loans".
8. Section 3.01 (i) (Selection Process), Section 3.01(j) (Pool
Characteristics), Section 3.01(l) (Sale Treatment), Section 3.01(m)
(Financial Statements), Section 3.01(n) (No Brokers' Fees), Section 3.01(o)
(Fair Consideration) and Section 3.01(p) (Seller's Origination) shall be
inapplicable to this Agreement.
9. A new paragraph is hereby added at the end of Section 3.01 (Company
Representations and Warranties) to read as follows:
It is understood and agreed that the representations and
warranties set forth in Section 3.01 (a) through (d), (f) through (h)
and (k) shall survive the engagement of the Servicer to perform the
servicing responsibilities hereunder and the delivery of the Servicing
Files to the Servicer and shall inure to the benefit of the Trustee,
the Trust Fund and the Master Servicer. Upon discovery by either the
Servicer, the Master Servicer or the Trustee of a breach of any of the
foregoing representations and warranties which materially and
adversely affects the ability of the Servicer to perform its duties
and obligations under this Agreement or otherwise materially and
adversely affects the value of the Mortgage Loans, the Mortgaged
Property or the priority of the security interest on such Mortgaged
Property or the interest of the Trustee or the Trust Fund, the party
discovering such breach shall give prompt written notice to the other.
Within 60 days of the earlier of either discovery by or written
notice to the Servicer of any breach of a representation or warranty
set forth in Section 3.01 (a) through (d), (f) through (h) and (k)
which materially and adversely affects the ability of the Servicer to
perform its duties and obligations under this Agreement or otherwise
materially and adversely affects the value of the Loans, the Mortgaged
Property or the priority of the security interest on such Mortgaged
Property, the Servicer shall use its best efforts promptly to cure
such breach in all material respects and, if such breach cannot be
cured, the Servicer shall, at the Trustee's option, assign the
Servicer's rights and obligations under this Agreement (or respecting
the affected Loans) to a successor Servicer selected by the Trustee
with the prior consent and approval of the Master Servicer. Such
assignment shall be made in accordance with Section 12.01.
In addition, the Servicer shall indemnify (from its own funds)
the Trustee, the Trust Fund and Master Servicer and hold each of them
harmless against any costs resulting from any claim, demand, defense
or assertion based on or grounded upon, or resulting from, a breach of
the Servicer's representations and warranties contained in this
Agreement. It is understood and agreed that the remedies set forth in
this Section 3.01 constitute the sole remedies of the Master Servicer,
the Trust Fund and the Trustee respecting a breach of the foregoing
representations and warranties.
Any cause of action against the Servicer relating to or arising
out of the breach of any representations and warranties made in
Section 3.01 (a) through (d), (f) through (h) and (k) shall accrue
upon (i) discovery of such breach by the Servicer or written notice
thereof by the Trustee or Master Servicer to the Servicer, (ii)
failure by the Servicer to cure such breach within the applicable cure
period, and (iii) demand upon the Servicer by the Trustee or the
Master Servicer for compliance with this Agreement.
10. Section 4.01 (Company to Act as Servicer) is hereby amended as follows:
(i) by deleting the first, second and third sentences of the second
paragraph of such section and replacing it with the following:
Consistent with the terms of this Agreement, the Company may
waive, modify or vary any term of any Mortgage Loan or consent to the
postponement of any such term or in any manner grant indulgence to any
Mortgagor if in the Company's reasonable and prudent determination
such waiver, modification, postponement or indulgence is not
materially adverse to the Purchaser, provided, however, that unless
the Mortgagor is in default with respect to the Mortgage Loan or such
default is, in the judgment of the Company, imminent, the Company
shall not permit any modification with respect to any Mortgage Loan
that would change the Mortgage Interest Rate, forgive the payment of
principal or interest, reduce or increase the outstanding principal
balance (except for actual payments of principal) or change the final
maturity date on such Mortgage Loan.
(ii) by adding the following to the end of the second paragraph of
such section:
Promptly after the execution of any assumption, modification,
consolidation or extension of any Mortgage Loan, the Company shall
forward to the Master Servicer copies of any documents evidencing such
assumption, modification, consolidation or extension. Notwithstanding
anything to the contrary contained in this Agreement, the Company
shall not make or permit any modification, waiver or amendment of any
term of any Mortgage Loan that would cause any REMIC created under the
Trust Agreement to fail to qualify as a REMIC or result in the
imposition of any tax under Section 860F(a) or Section 860G(d) of the
Code, copies of which are attached hereto as Exhibit E.
11. Section 4.04 (Establishment of and Deposits to Custodial Account) is
hereby amended as follows:
(a) the words "in trust for the Purchaser of Conventional
Residential Adjustable Rate Mortgage Loans, Group No.
2002-1, and various Mortgagors" in the fourth and fifth
lines of the first sentence of the first paragraph shall be
replaced by the following: "in trust for SASCO 2002-11A
Trust Fund and various Mortgagors".
(b) by amending clause (viii) to read as follows:
(viii) the amount of any Prepayment Interest Shortfall
Amount, if any for the month of distribution, paid
out of the Servicer's own funds without any right
to reimbursement therefor;
12. Section 4.05 (Permitted Withdrawals From Custodial Account) is hereby
amended by replacing the last five lines of clause (ii) with the
following:
Company's right thereto shall be prior to the rights of the Trust
Fund; provided however, that in the event that the Servicer determines
in good faith that any unreimbursed Monthly Advances will not be
recoverable from amounts representing late recoveries of payments of
principal or interest respecting the particular Mortgage Loan as to
which such Monthly Advance was made or from
Liquidation Proceeds or Insurance Proceeds with respect to such
Mortgage Loan, the Servicer may reimburse itself for such amounts from
the Custodial Account, it being understood, in the case of any such
reimbursement, that the Servicer's right thereto shall be prior to the
rights of the Trust Fund;
13. Section 4.06 (Establishment of and Deposits to Escrow Account) shall be
amended by deleting the words "Purchaser of Conventional Residential
Adjustable Rate Mortgage Loans, Group 2001-2, and various Mortgagors" in
the fifth and sixth lines of the first sentence of the first paragraph, and
replacing it with the following:
"in trust for SASCO 2002-11A Trust Fund and various Mortgagors".
14. Section 4.16 (Title, Management and Disposition of REO Property) is hereby
amended by (i) replacing the reference to "one year" in the seventh line of
the second paragraph thereof with "three years" and (ii) adding two new
paragraphs after the second paragraph thereof to read as follows:
In the event that the Trust Fund acquires any REO Property in
connection with a default or imminent default on a Mortgage Loan, the
Servicer shall dispose of such REO Property not later than the end of
the third taxable year after the year of its acquisition by the Trust
Fund unless the Servicer has applied for and received a grant of
extension from the Internal Revenue Service to the effect that, under
the REMIC Provisions and any relevant proposed legislation and under
applicable state law, the applicable Trust REMIC may hold REO Property
for a longer period without adversely affecting the REMIC status of
such REMIC or causing the imposition of a federal or state tax upon
such REMIC. If the Servicer has received such an extension, then the
Servicer shall continue to attempt to sell the REO Property for its
fair market value for such period longer than three years as such
extension permits (the "Extended Period"). If the Servicer has not
received such an extension and the Servicer is unable to sell the REO
Property within the period ending 3 months before the end of such
third taxable year after its acquisition by the Trust Fund or if the
Servicer has received such an extension, and the Servicer is unable to
sell the REO Property within the period ending three months before the
close of the Extended Period, the Servicer shall, before the end of
the three year period or the Extended Period, as applicable, (i)
purchase such REO Property at a price equal to the REO Property's fair
market value or (ii) auction the REO Property to the highest bidder
(which may be the Servicer) in an auction reasonably designed to
produce a fair price prior to the expiration of the three-year period
or the Extended Period, as the case may be. The Trustee shall sign any
document or take any other action reasonably requested by the Servicer
which would enable the Servicer, on behalf of the Trust Fund, to
request such grant of extension.
Notwithstanding any other provisions of this Agreement, no REO
Property acquired by the Trust Fund shall be rented (or allowed to
continue to be rented) or otherwise used by or on behalf of the Trust
Fund in such a manner or pursuant to any terms that would: (i) cause
such REO Property to fail to qualify as
"foreclosure property" within the meaning of Section 860G(a)(8) of the
Code; or (ii) subject any Trust REMIC to the imposition of any federal
income taxes on the income earned from such REO Property, including
any taxes imposed by reason of Sections 860F or 860G(c) of the Code,
unless the Servicer has agreed to indemnify and hold harmless the
Trust Fund with respect to the imposition of any such taxes. Copies of
the Sections of the Code referred to in this Section 4.16 are attached
hereto as Exhibit E.
(iii) deleting the first sentence of the third paragraph thereto, (iv)
replacing the words "one" and "sentence" with "three" and "paragraph",
respectively, in the seventh line of the third paragraph thereto, and (v)
replacing the word "advances" in the sixth line of the fifth paragraph
thereof with "Monthly Advances";
(vi) by adding the following to the end of such Section:
Prior to acceptance by the Servicer of an offer to sell any REO
Property, the Servicer shall notify the Master Servicer of such
offer in writing which notification shall set forth all material
terms of said offer (each a "Notice of Sale"). The Master
Servicer shall be deemed to have approved the sale of any REO
Property unless the Master Servicer notifies the Servicer in
writing, within five (5) days after its receipt of the related
Notice of Sale, that it disapproves of the related sale, in which
case the Servicer shall not proceed with such sale and shall be
released of any and all liability resulting from such decision by
the Master Servicer.
15. Section 5.01 (Remittances) is hereby amended by adding the following after
the second paragraph of such Section:
All remittances required to be made to the Master Servicer shall
be made to the following wire account or to such other account as may
be specified by the Master Servicer from time to time:
JPMorgan Chase
Bank New York, New York
ABA #: 000-000-000
Account Name: Aurora Loan Services Inc.
Master Servicing Payment Clearing Account
Account Number: 066-611059
Beneficiary: Aurora Loan Services Inc.
For further credit to: Aurora Loan Services 2002-11A
16. Section 5.02 (Statements to Purchaser) is hereby amended in its entirety to
read as follows:
Section 5.02 Statements to Master Servicer.
Not later than the tenth calendar day of each month (or if such
calendar day is not a Business Day, the immediately succeeding
Business Day), the
Servicer shall furnish to the Master Servicer an electronic file
providing loan level accounting data (generated from the Servicer's
"Alltel" servicing system) for the period ending on the last calendar
day of the preceding month in such form as is reasonably acceptable to
the Master Servicer and the Servicer.
17. Section 9.01 (Indemnification; Third Party Claims) is hereby amended in its
entirety to read as follows:
The Servicer shall indemnify the Bank, the Trust Fund, the
Trustee and the Master Servicer and hold each of them harmless against
any and all claims, losses, damages, penalties, fines, forfeitures,
reasonable and necessary legal fees and related costs, judgments, and
any other costs, fees and expenses that any of such parties may
sustain in any way related to the failure of the Servicer to perform
its duties and service the Mortgage Loans in compliance with the terms
of this Agreement. The Servicer immediately shall notify the Bank, the
Master Servicer and the Trustee or any other relevant party if a claim
is made by a third party with respect to this Agreement or the
Mortgage Loans, assume (with the prior written consent of the
indemnified party, which consent shall not be unreasonably withheld or
delayed) the defense of any such claim and pay all expenses in
connection therewith, including counsel fees, and promptly pay,
discharge and satisfy any judgment or decree which may be entered
against it or any of such parties in respect of such claim. The
Servicer shall follow any written instructions received from the
Trustee in connection with such claim. The Servicer shall provide the
Trustee with a written report of all expenses and advances incurred by
the Servicer pursuant to this Section 8.01, and the Trustee from the
assets of the Trust Fund promptly shall reimburse the Servicer for all
amounts advanced by it pursuant to the preceding sentence except when
the claim is in any way relates to the failure of the Servicer to
service and administer the Mortgage Loans in compliance with the terms
of this Agreement or the gross negligence, bad faith or willful
misconduct of this Servicer.
18. Section 10.01 (Events of Default) is hereby amended by:
(a) changing any reference to "Purchaser" to "Master Servicer"
(b) changing the reference to "five days" to "two Business Days" in
clause (i); and
(c) adding the words "within the applicable cure period" after the
word "remedied" in the second line of the second paragraph.
19. Section 10.02 (Waiver of Defaults) is hereby amended by changing the
reference to "Purchaser" to "Master Servicer with the prior written consent
of the Trustee".
20. Section 11.01 (Termination) is hereby amended by restating subclause (ii)
thereof to read as below and adding the following sentence after the first
sentence of Section 11.01:
(ii) mutual consent of the Servicer and the Trustee in writing,
provided such termination is also acceptable to the Master
Servicer and the Rating Agencies.
At the time of any termination of the Servicer pursuant to
Section 11.01, the Servicer shall be entitled to all accrued and
unpaid Servicing Fees and unreimbursed Servicing Advances and Monthly
Advances; provided, however, in the event of a termination for cause
under Sections 10.01 hereof, such unreimbursed amounts shall not be
reimbursed to the Servicer until such amounts are received by the
Trust Fund from the related Mortgage Loans.
21. Section 11.02 (Termination Without Cause) is hereby amended by replacing
the first reference to "Purchaser" with "Xxxxxx Brothers Bank (with the
prior consent of the Trustee)" and by replacing all other references to
"Purchaser" with "Xxxxxx Brothers Bank."
22. Section 12.01 (Successor to Company) is hereby amended in its entirety to
read as follows:
Simultaneously with the termination of the Servicer's
responsibilities and duties under this Agreement pursuant to Sections
9.04, 10.01, 11.01(ii) or 11.02 the Master Servicer shall, in
accordance with the provisions of the Trust Agreement (i) succeed to
and assume all of the Servicer's responsibilities, rights, duties and
obligations under this Agreement, or (ii) appoint a successor meeting
the eligibility requirements of this Agreement, and which shall
succeed to all rights and assume all of the responsibilities, duties
and liabilities of the Servicer under this Agreement with the
termination of the Servicer's responsibilities, duties and liabilities
under this Agreement. Any successor to the Servicer that is not at
that time a Servicer of other mortgage loans for the Trust Fund shall
be subject to the approval of the Master Servicer, the Bank, the
Trustee and each Rating Agency (as such term is defined in the Trust
Agreement). Unless the successor servicer is at that time a servicer
of other mortgage loans for the Trust Fund, each Rating Agency must
deliver to the Trustee a letter to the effect that such transfer of
servicing will not result in a qualification, withdrawal or downgrade
of the then-current rating of any of the Certificates. In connection
with such appointment and assumption, the Master Servicer or the Bank,
as applicable, may make such arrangements for the compensation of such
successor out of payments on the Mortgage Loans as it and such
successor shall agree; provided, however, that no such compensation
shall be in excess of that permitted the Servicer under this
Agreement. In the event that the Servicer's duties, responsibilities
and liabilities under this Agreement should be terminated pursuant to
the aforementioned sections, the Servicer shall discharge such duties
and responsibilities during the period from the date it acquires
knowledge of such termination until the effective date thereof with
the same degree of diligence and prudence which it is obligated to
exercise under this Agreement, and shall take no action whatsoever
that might impair or prejudice the rights or financial condition of
its successor. The resignation or removal of the Servicer pursuant to
the
aforementioned sections shall not become effective until a successor
shall be appointed pursuant to this Section 12.01 and shall in no
event relieve the Servicer of the representations and warranties made
pursuant to Sections 3.01 and 3.02 and the remedies available to the
Trust Fund under Section 3.03 shall be applicable to the Servicer
notwithstanding any such resignation or termination of the Servicer,
or the termination of this Agreement.
Within a reasonable period of time, but in no event longer than
30 days of the appointment of a successor entity, the Servicer shall
prepare, execute and deliver to the successor entity all Servicing
Files, and do or cause to be done other things necessary or
appropriate to effect the purposes of such notice of termination. The
Servicer shall cooperate with the Trustee and the Master Servicer, as
applicable, and such successor in effecting the termination of the
Servicer's responsibilities and rights hereunder and the transfer of
servicing responsibilities to the successor Servicer, including
without limitation, the transfer to such successor for administration
by it of all cash amounts which shall at the time be credited by the
Servicer to the Account or any Escrow Account or thereafter received
with respect to the Mortgage Loans.
Any successor appointed as provided herein shall execute,
acknowledge and deliver to the Trustee, the Servicer and the Master
Servicer an instrument (i) accepting such appointment, wherein the
successor shall make an assumption of the due and punctual performance
and observance of each covenant and condition to be performed and
observed by the Servicer under this Agreement, whereupon such
successor shall become fully vested with all the rights, powers,
duties, responsibilities, obligations and liabilities of the Servicer,
with like effect as if originally named as a party to this Agreement.
Any termination or resignation of the Servicer or termination of this
Agreement pursuant to Sections 9.04, 10.01, 11.01 or 11.02 shall not
affect any claims that the Master Servicer or the Trustee may have
against the Servicer arising out of the Servicer's actions or failure
to act prior to any such termination or resignation.
The Servicer shall deliver within five (5) Business Days of the
appointment of a successor Servicer the funds in the Custodial Account
and Escrow Account and all Mortgage Files and related documents and
statements held by it hereunder to the successor Servicer and the
Servicer shall account for all funds and shall execute and deliver
such instruments and do such other things as may reasonably be
required to more fully and definitively vest in the successor all such
rights, powers, duties, responsibilities, obligations and liabilities
of the Servicer.
Upon a successor's acceptance of appointment as such, the
Servicer shall notify the Trustee and Master Servicer of such
appointment in accordance with the notice procedures set forth herein.
Except as otherwise provided in this Agreement, all reasonable
costs and expenses incurred by the Master Servicer in connection with
any transfer of
servicing hereunder (whether as a result of termination or removal of
the Servicer or resignation of the Servicer or otherwise), including,
without limitation, the reasonable costs and expenses of the Master
Servicer or any other Person in appointing a successor servicer, or of
the Master Servicer in assuming the responsibilities of the Servicer
hereunder, or of transferring the Servicing Files and the other
necessary data to the successor servicer shall be paid by the
terminated, removed or resigning Servicer from its own funds without
reimbursement.
23. Section 12.02 (Amendment) is hereby amended by replacing the words "by the
Company and the Purchaser by written agreement signed by the Company and
the Purchaser" with "written agreement by the Servicer and the Bank, with
the written consent of the Master Servicer and the Trustee".
24. Section 12.04 (Duration of Agreement) is hereby amended by deleting the
last sentence thereof.
25. Section 12.10 (Assignment by Purchaser) is hereby deleted in its entirety.
26. A new Section 12.12 is hereby added to read as follows:
Intended Third Party Beneficiaries. Notwithstanding any provision
herein to the contrary, the parties to this Agreement agree that it is
appropriate, in furtherance of the intent of such parties as set forth
herein, that the Master Servicer and the Trustee receive the benefit
of the provisions of this Agreement as intended third party
beneficiaries of this Agreement to the extent of such provisions. The
Servicer shall have the same obligations to the Master Servicer and
the Trustee as if they were parties to this Agreement, and the Master
Servicer and the Trustee shall have the same rights and remedies to
enforce the provisions of this Agreement as if they were parties to
this Agreement. The Servicer shall only take direction from the Master
Servicer (if direction by the Master Servicer is required under this
Agreement) unless otherwise directed by this Agreement.
Notwithstanding the foregoing, all rights and obligations of the
Master Servicer and the Trustee hereunder (other than the right to
indemnification) shall terminate upon termination of the Trust
Agreement and of the Trust Fund pursuant to the Trust Agreement.
EXHIBIT B
Mortgage Loan Purchase Agreement
[INTENTIONALLY OMITTED]
EXHIBIT C
Serviced Mortgage Loan Schedule
[INTENTIONALLY OMITTED]
EXHIBIT D
Seller's Warranties and Servicing Agreement
[See Exhibit #99.10]
EXHIBIT E
FINAL-REG, FTS-REGS, ss.1.860G-2. Other rules
ss.1.860G-2. Other rules
.. . . . .
(b) Assumptions and modifications--(1) Significant modifications are treated as
exchanges of obligations. If an obligation is significantly modified in a manner
or under circumstances other than those described in paragraph (b)(3) of this
section, then the modified obligation is treated as one that was newly issued in
exchange for the unmodified obligation that it replaced. Consequently--
(i) If such a significant modification occurs after the obligation has
been contributed to the REMIC and the modified obligation is not a qualified
replacement mortgage, the modified obligation will not be a qualified mortgage
and the deemed disposition of the unmodified obligation will be a prohibited
transaction under section 860F(a)(2); and
(ii) If such a significant modification occurs before the obligation
is contributed to the REMIC, the modified obligation will be viewed as having
been originated on the date the modification occurs for purposes of the tests
set out in paragraph (a)(1) of this section.
(2) Significant modification defined. For purposes of paragraph (b)(1) of
this section, a "significant modification" is any change in the terms of an
obligation that would be treated as an exchange of obligations under section
1001 and the related regulations.
(3) Exceptions. For purposes of paragraph (b)(1) of this section, the
following changes in the terms of an obligation are not significant
modifications regardless of whether they would be significant modifications
under paragraph (b)(2) of this section--
(i) Changes in the terms of the obligation occasioned by default or a
reasonably foreseeable default;
(ii) Assumption of the obligation;
(iii) Waiver of a due-on-sale clause or a due on encumbrance clause;
and
(iv) Conversion of an interest rate by a mortgagor pursuant to the
terms of a convertible mortgage.
(4) Modifications that are not significant modifications. If an obligation
is modified and the modification is not a significant modification for purposes
of paragraph (b)(1) of this section, then the modified obligation is not treated
as one that was newly originated on the date of modification.
E-2-1
(5) Assumption defined. For purposes of paragraph (b)(3) of this section, a
mortgage has been assumed if--
(i) The buyer of the mortgaged property acquires the property subject
to the mortgage, without assuming any personal liability;
(ii) The buyer becomes liable for the debt but the seller also remains
liable; or
(iii) The buyer becomes liable for the debt and the seller is released
by the lender.
(6) Pass-thru certificates. If a REMIC holds as a qualified mortgage a
pass-thru certificate or other investment trust interest of the type described
in paragraph (a)(5) of this section, the modification of a mortgage loan that
backs the pass-thru certificate or other interest is not a modification of the
pass-thru certificate or other interest unless the investment trust structure
was created to avoid the prohibited transaction rules of section 860F(a).
SEC. 860F. OTHER RULES.
860F(a) 100 PERCENT TAX ON PROHIBITED TRANSACTIONS.--
860F(a)(1) TAX IMPOSED.--There is hereby imposed for each taxable year of a
REMIC a tax equal to 100 percent of the net income derived from prohibited
transactions.
860F(a)(2) PROHIBITED TRANSACTION.--For purposes of this part, the term
"prohibited transaction" means--
860F(a)(2)(A) DISPOSITION OF QUALIFIED MORTGAGE.--The disposition of any
qualified mortgage transferred to the REMIC other than a disposition pursuant
to--
860F(a)(2)(A)(i) the substitution of a qualified replacement mortgage for a
qualified mortgage (or the repurchase in lieu of substitution of a defective
obligation),
860F(a)(2)(A)(ii) a disposition incident to the foreclosure, default, or
imminent default of the mortgage,
860F(a)(2)(A)(iii) the bankruptcy or insolvency of the REMIC, or
860F(a)(2)(A)(iv) a qualified liquidation.
860F(a)(2)(B) INCOME FROM NONPERMITTED ASSETS.--The receipt of any income
attributable to any asset which is neither a qualified mortgage nor a permitted
investment.
E-2-2
860F(a)(2)(C) COMPENSATION FOR SERVICES.--The receipt by the REMIC of any amount
representing a fee or other compensation for services.
860F(a)(2)(D) GAIN FROM DISPOSITION OF CASH FLOW INVESTMENTS.--Gain from the
disposition of any cash flow investment other than pursuant to any qualified
liquidation.
860F(a)(3) DETERMINATION OF NET INCOME.--For purposes of paragraph (1), the term
"net income derived from prohibited transactions" means the excess of the gross
income from prohibited transactions over the deductions allowed by this chapter
which are directly connected with such transactions; except that there shall not
be taken into account any item attributable to any prohibited transaction for
which there was a loss.
860F(a)(4) QUALIFIED LIQUIDATION.--For purposes of this part--
860F(a)(4)(A) IN GENERAL.--The term "qualified liquidation" means a transaction
in which--
860F(a)(4)(A)(i) the REMIC adopts a plan of complete liquidation,
860F(a)(4)(A)(ii) such REMIC sells all its assets (other than cash) within the
liquidation period, and
860F(a)(4)(A)(iii) all proceeds of the liquidation (plus the cash), less assets
retained to meet claims, are credited or distributed to holders of regular or
residual interests on or before the last day of the liquidation period.
860F(a)(4)(B) LIQUIDATION PERIOD.--The term "liquidation period" means the
period--
860F(a)(4)(B)(i) beginning on the date of the adoption of the plan of
liquidation, and
860F(a)(4)(B)(ii) ending at the close of the 90th day after such date.
860F(a)(5) EXCEPTIONS.--Notwithstanding subparagraphs (A) and (D) of paragraph
(2), the term "prohibited transaction" shall not include any disposition--
860F(a)(5)(A) required to prevent default on a regular interest where the
threatened default resulted from a default on 1 or more qualified mortgages, or
860F(a)(5)(B) to facilitate a clean-up call (as defined in regulations).
SEC. 860G. OTHER DEFINITIONS AND SPECIAL RULES.
860G(d) TAX ON CONTRIBUTIONS AFTER STARTUP DATE.--
860G(d)(1) IN GENERAL.--Except as provided in paragraph (2), if any amount is
contributed to a REMIC after the startup day, there is hereby imposed a tax for
the taxable year of the REMIC in which the contribution is received equal to 100
percent of the amount of such contribution.
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860G(d)(2) EXCEPTIONS.--Paragraph (1) shall not apply to any contribution which
is made in cash and is described in any of the following subparagraphs:
860G(d)(2)(A) Any contribution to facilitate a cleanup call (as defined in
regulations) or a qualified liquidation.
860G(d)(2)(B) Any payment in the nature of a guarantee.
860G(d)(2)(C) Any contribution during the 3-month period beginning on the
startup day.
860G(d)(2)(D) Any contribution to a qualified reserve fund by any holder of a
residual interest in the REMIC.
860G(d)(2)(E) Any other contribution permitted in regulations.
X-0-0
000X(x)(0) XXXXXXXXXXX XXXXXXXX.--Xxx term "foreclosure property" means
property--
860G(a)(8)(A) which would be foreclosure property under section 856(e) (without
regard to paragraph (5) thereof) if acquired by a real estate investment trust,
and
860G(a)(8)(B) which is acquired in connection with the default or imminent
default of a qualified mortgage held by the REMIC.
Solely for purposes of section 860D(a), the determination of whether any
property is foreclosure property shall be made without regard to section
856(e)(4).
856(e) SPECIAL RULES FOR FORECLOSURE PROPERTY.--
856(e)(1) FORECLOSURE PROPERTY DEFINED.--For purposes of this part, the term
"foreclosure property" means any real property (including interests in real
property), and any personal property incident to such real property, acquired by
the real estate investment trust as the result of such trust having bid in such
property at foreclosure, or having otherwise reduced such property to ownership
or possession by agreement or process of law, after there was default (or
default was imminent) on a lease of such property or on an indebtedness which
such property secured. Such term does not include property acquired by the real
estate investment trust as a result of indebtedness arising from the sale or
other disposition of property of the trust described in section 1221(a)(1) which
was not originally acquired as foreclosure property.
856(e)(2) GRACE PERIOD.--Except as provided in paragraph (3), property shall
cease to be foreclosure property with respect to the real estate investment
trust as of the close of the 3d taxable year following the taxable year in which
the trust acquired such property.
856(e)(3) EXTENSIONS.--If the real estate investment trust establishes to the
satisfaction of the Secretary that an extension of the grace period is necessary
for the orderly liquidation of the trust's interests in such property, the
Secretary may grant one extension of the grace period for such property. Any
such extension shall not extend the grace period beyond the close of the 3d
taxable year following the last taxable year in the period under paragraph (2).
856(e)(4) TERMINATION OF GRACE PERIOD IN CERTAIN CASES.--Any foreclosure
property shall cease to be such on the first day (occurring on or after the day
on which the real estate investment trust acquired the property) on which--
856(e)(4)(A) a lease is entered into with respect to such property which, by its
terms, will give rise to income which is not described in subsection (c)(3)
(other than subparagraph (F) of such subsection), or any amount is received or
accrued, directly or indirectly, pursuant to a lease entered into on or after
such day which is not described in such subsection,
E-2-5
856(e)(4)(B) any construction takes place on such property (other than
completion of a building, or completion of any other improvement, where more
than 10 percent of the construction of such building or other improvement was
completed before default became imminent), or
856(e)(4)(C) if such day is more than 90 days after the day on which such
property was acquired by the real estate investment trust and the property is
used in a trade or business which is conducted by the trust (other than through
an independent contractor (within the meaning of section (d)(3)) from whom the
trust itself does not derive or receive any income).
For purposes of subparagraph (C), property shall not be treated as used in a
trade or business by reason of any activities of the real estate investment
trust with respect to such property to the extent that such activities would not
result in amounts received or accrued, directly or indirectly, with respect to
such property being treated as other than rents from real property.
856(e)(5) TAXPAYER MUST MAKE ELECTION.--Property shall be treated as foreclosure
property for purposes of this part only if the real estate investment trust so
elects (in the manner provided in regulations prescribed by the Secretary) on or
before the due date (including any extensions of time) for filing its return of
tax under this chapter for the taxable year in which such trust acquires such
property. A real estate investment trust may revoke any such election for a
taxable year by filing the revocation (in the manner provided by the Secretary)
on or before the due date (including any extension of time) for filing its
return of tax under this chapter for the taxable year. If a trust revokes an
election for any property, no election may be made by the trust under this
paragraph with respect to the property for any subsequent taxable year.
856(e)(6) SPECIAL RULE FOR QUALIFIED HEALTH CARE PROPERTIES.--For purposes of
this subsection--
856(e)(6)(A) ACQUISITION AT EXPIRATION OF LEASE.--The term "foreclosure
property" shall include any qualified health care property acquired by a real
estate investment trust as the result of the termination of a lease of such
property (other than a termination by reason of a default, or the imminence of a
default, on the lease).
856(e)(6)(B) GRACE PERIOD.--In the case of a qualified health care property
which is foreclosure property solely by reason of subparagraph (A), in lieu of
applying paragraphs (2) and (3)--
856(e)(6)(B)(i) the qualified health care property shall cease to be foreclosure
property as of the close of the second tarable year after the taxable year in
which such trust acquired such property, and
856(e)(6)(B)(ii) if the real estate investment trust establishes to the
satisfaction of the Secretary that an extension of the grace period in clause
(i) is necessary to the orderly leasing or liquidation of the trust's interest
in such qualified health care property, the Secretary may grant one or more
extensions of the grace period for such qualified health care property.
Any such extension shall not extend the grace period beyond the close of the 6th
year after the taxable year in which such trust acquired such qualified health
care property.
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856(e)(6)(C) INCOME FROM INDEPENDENT CONTRACTORS.--For purposes of applying
paragraph (4)(C) with respect to qualified health care property which is
foreclosure property by reason of subparagraph (A) or paragraph (1), income
derived or received by the trust from an independent contractor shall be
disregarded to the extent such income is attributable to--
856(e)(6)(C)(i) any lease of property in effect on the date the real estate
investment trust acquired the qualified health care property (without regard to
its renewal after such date so long as such renewal is pursuant to the terms of
such lease as in effect on such date), or
856(e)(6)(C)(ii) any lease of property entered into after such date if--
856(e)(6)(C)(ii)(I) on such date, a lease of such property from the trust was in
effect, and
856(e)(6)(C)(ii)(II) under the terms of the new lease, such trust receives a
substantially similar or lesser benefit in comparison to the lease referred to
in subclause (I).
856(e)(6)(D) QUALIFIED HEALTH CARE PROPERTY.--
856(e)(6)(D)(i) IN GENERAL.--The term "qualified health care property" means any
real property (including interests therein), and any personal property incident
to such real property, which--
856(e)(6)(D)(i)(I) is a health care facility, or
856(e)(6)(D)(i)(II) is necessary or incidental to the use of a health care
facility.
856(e)(6)(D)(ii) HEALTH CARE FACILITY.--For purposes of clause (i), the term
"health care facility" means a hospital, nursing facility, assisted living
facility, congregate care facility, qualified continuing care facility (as
defined in section 7872(g)(4) ), or other licensed facility which extends
medical or nursing or ancillary services to patients and which, immediately
before the termination, expiration, default, or breach of the lease of or
mortgage secured by such facility, was operated by a provider of such services
which was eligible for participation in the medicare program under title XVIII
of the Social Security Act with respect to such facility.
FINAL-REG, 2002FEDP. (paragraph) 26,507, ss.1.856-6, Foreclosure property.--
ss.1.856-6 Foreclosure property.--
[arrow right] Caution: Reg. ss.1.856-6 does not reflect recent law changes.
For details, see (paragraph) 26,507.01.[arrow left]
(a) In general. Under section 856(e) a real estate investment trust may
make an irrevocable election to treat as "foreclosure property" certain real
property (including interests in real
E-2-7
property), and any personal property incident to the real property, acquired by
the trust after December 31, 1973. This section prescribes rules relating to the
election, including rules relating to property eligible for the election. This
section also prescribes rules relating to extensions of the general two-year
period (hereinafter the "grace period") during which property retains its status
as foreclosure property, as well as rules relating to early termination of the
grace period under section 856(e)(4). The election to treat property as
foreclosure property does not alter the character of the income derived
therefrom (other than for purposes of section 856(c)(2)(F) and (c)(3)(F)). For
example, if foreclosure property is sold, the determination of whether it is
property described in section 1221(1) will not be affected by the fact that it
is foreclosure property.
(b) Property eligible for the election--(1) Rules relating to acquisitions.
In general, the trust must acquire the property after December 31, 1973, as the
result of having bid in the property at foreclosure, or having otherwise reduced
the property to ownership or possession by agreement or process of law, after
there was default (or default was imminent) on a lease of the property (where
the trust was the lessor) or on an indebtedness owed to the trust which the
property secured. Foreclosure property which secured an indebtedness owed to the
trust is acquired for purposes of section 856(e) on the date on which the trust
acquires ownership of the property for Federal income tax purposes. Foreclosure
property which a trust owned and leased to another is acquired for purposes of
section 856(e) on the date on which the trust acquires possession of the
property from its lessee. A trust will not be considered to have acquired
ownership of property for purposes of section 856(e) where it takes control of
the property as a mortgagee-in-possession and cannot receive any profit or
sustain any loss with respect to the property except as a creditor of the
mortgagor. A trust may be considered to have acquired ownership of property for
purposes of section 856(e) even though legal title to the property is held by
another person. For example, where, upon foreclosure of a mortgage held by the
trust, legal title to the property is acquired in the name of a nominee for the
exclusive benefit of the trust and the trust is the equitable owner of the
property, the trust will be considered to have acquired ownership of the
property for purposes of section 856(e). Generally, the fact that under local
law the mortgagor has a right of redemption after foreclosure is not relevant in
determining whether the trust has acquired ownership of the property for
purposes of section 856(e). Property is not ineligible for the election solely
because the property, in addition to securing an indebtedness owed to the trust,
also secures debts owed to other creditors. Property eligible for the election
includes a building or other improvement which has been constructed on land
owned by the trust and which is acquired by the trust upon default of a lease of
the land.
(2) Personal property. Personal property (including personal property not
subject to a mortgage or lease of the real property) will be considered incident
to a particular item of real property if the personal property is used in a
trade or business conducted on the property or the use of the personal property
is otherwise an ordinary and necessary corollary of the use to which the real
property is put. In the case of a hotel, such items as furniture, appliances,
linens, china, food, etc. would be examples of incidental personal property.
Personal property incident to the real property is eligible for the election
even though it is acquired after the real property is acquired or is placed in
the building or other improvement in the course of the completion of
construction.
E-2-8
(3) Property with respect to which default is anticipated. Property is not
eligible for the election to be treated as foreclosure property if the loan or
lease with respect to which the default occurs (or is imminent) was made or
entered into (or the lease or indebtedness was acquired) by the trust with an
intent to evict or foreclose, or when the trust knew or had reason to know that
default would occur ("improper knowledge"). For purposes of the preceding
sentence, a trust will not be considered to have improper knowledge with respect
to a particular lease or loan if the lease or loan was made pursuant to a
binding commitment entered into by the trust at a time when it did not have
improper knowledge. Moreover, if the trust, in an attempt to avoid default or
foreclosure, advances additional amounts to the borrower in excess of amounts
contemplated in the original loan commitment or modifies the lease or loan, such
advance or modification will be considered not to have been made with an intent
to evict or foreclose, or with improper knowledge, unless the original loan or
lease was entered into with that intent or knowledge.
(c) Election--(1) In general.--(i) An election to treat property as
foreclosure property applies to all of the eligible real property acquired in
the same taxable year by the trust upon the default (or as a result of the
imminence of default) on a particular lease (where the trust is the lessor) or
on a particular indebtedness owed to the trust. For example, if a loan made by a
trust is secured by two separate tracts of land located in different cities, and
in the same taxable year the trust acquires both tracts on foreclosure upon the
default (or imminence of default) of the loan, the trust must include both
tracts in the election. For a further example, the trust may choose to make a
separate election for only one of the tracts if they are acquired in different
taxable years or were not security for the same loan. If real property subject
to the same election is acquired at different times in the same taxable year,
the grace period for a particular property begins when that property is
acquired.
(ii) If the trust acquires separate pieces of real property that
secure the same indebtedness (or are under the same lease) in different taxable
years because the trust delays acquiring one of them until a later taxable year,
and the primary purpose for the delay is to include only one of them in an
election, then if the trust makes an election for one piece it must also make an
election for the other piece. A trust will not be considered to have delayed the
acquisition of property for this purpose if there is a legitimate business
reason for the delay (such as an attempt to avoid foreclosure by further
negotiations with the debtor or lessee).
(iii) All of the eligible personal property incident to the real
property must also be included in the election.
(2) Time for making election. The election to treat property as foreclosure
property must be made on or before the due date (including extensions of time)
for filing the trust's income tax return for the taxable year in which the trust
acquires the property with respect to which the election is being made, or April
3, 1975, whichever is later.
(3) Manner of making the election. An election made after February 6, 1981,
shall be made by a statement attached to the income tax return for the taxable
year in which the trust acquired the property with respect to which the election
is being made. The statement shall indicate that the election is made under
section 856(e) and shall identify the property to which the election applies.
The statement shall also set forth--
E-2-9
(i) The name, address, and taxpayer identification number of the
trust,
(ii) The date the property was acquired by the trust, and
(iii) A brief description of how the real property was acquired,
including the name of the person or persons from whom the real property was
acquired and a description of the lease or indebtedness with respect to which
default occurred or was imminent.
An election made on or before February 6, 1981, shall be filed in the manner
prescribed in 26 CFR 10.1 (f) (revised as of April 1, 1977) (temporary
regulations relating to the election to treat property as foreclosure property)
as in effect when the election is made.
(4) Status of taxpayer. In general, a taxpayer may make an election with
respect to an acquisition of property only if the taxpayer is a qualified real
estate investment trust for the taxable year in which the acquisition occurs.
If, however, the taxpayer establishes, to the satisfaction of the district
director for the internal revenue district in which the taxpayer maintains its
principal place of business or principal office or agency, that its failure to
be a qualified real estate investment trust for a taxable year was due to
reasonable cause and not due to willful neglect, the taxpayer may make the
election with respect to property acquired in such taxable year. The principles
of ss.ss.1.856-7(c) and 1.856-8(d) (including the principles relating to expert
advice) will apply in determining whether, for purposes of this subparagraph,
the failure of the taxpayer to be a qualified real estate investment trust for
the taxable year in which the property is acquired was due to reasonable cause
and not due to willful neglect. If a taxpayer makes a valid election to treat
property as foreclosure property, the property will not lose its status as
foreclosure property solely because the taxpayer is not a qualified real estate
investment trust for a subsequent taxable year (including a taxable year which
encompasses an extension of the grace period). However, the rules relating to
the termination of foreclosure property status in section 856(e)(4) (but not the
tax on income from foreclosure property imposed by section 857(b)(4)) apply to
the year in which the property is acquired and all subsequent years, even though
the taxpayer is not a qualified real estate investment trust for such year.
(d) Termination of 2-year grace period; subsequent leases--(1) In general.
Under section 856(e)(4)(A), all real property (and any incidental personal
property) for which a particular election has been made (see paragraph (c)(1) of
this section) shall cease to be foreclosure property on the first day (occurring
on or after the day on which the trust acquired the property) on which the trust
either--
(i) Enters into a lease with respect to any of the property which, by
its terms, will give rise to income of the trust which is not described in
section 856(c)(3) (other than section 856(c)(3)(F)), or
(ii) Receives or accrues, directly or indirectly, any amount which is
not described in section 856(c)(3) (other than section 856(c)(3)(F)) pursuant to
a lease with respect to any of the real property entered into by the trust on or
after the day the trust acquired the property.
E-2-10
For example, assume the trust acquires, in a particular taxable year, a shopping
center upon the default of an indebtedness owed to the trust. Also assume that
the trust subsequently enters into a lease with respect to one of several stores
in the shopping center that requires the lessee to pay rent to the trust which
is not income described in section 856(c)(3) (other than section 856(c)(3)(F)).
In such case, the entire shopping center will cease to be foreclosure property
on the day the trust enters into the lease.
(2) Extensions or renewals of leases. Generally, the extension or renewal
of a lease of foreclosure property will be treated as the entering into of a new
lease only if the trust has a right to renegotiate the terms of the lease. If,
however, by operation of law or by contract, the acquisition of the foreclosure
property by the trust terminates a preexisting lease of the property, or gives
the trust a right to terminate the lease, then for purposes of section
856(e)(4)(A), a trust, in such circumstances, will not be considered to have
entered into a lease with respect to the property solely because the terms of
the preexisting lease are continued in effect after foreclosure without
substantial modification. The letting of rooms in a hotel or motel does not
constitute the entering into a lease for purposes of section 856(e)(4)(A).
(3) Rent attributable to personal property. Solely for the purposes of
section 856(e)(4)(A), if a trust enters into a lease with respect to real
property on or after the day upon which the trust acquires such real property by
foreclosure, and a portion of the rent from such lease is attributable to
personal property which is foreclosure property incident to such real property,
such rent attributable to the incidental personal property will not be
considered to terminate the status of such real property (or such incidental
personal property) as foreclosure property.
(e) Termination of 2-year grace period; completion of construction--(1) In
general. Under section 856(e)(4)(B), all real property (and any incidental
personal property) for which a particular election has been made (see paragraph
(c)(1) of this section) shall cease to be foreclosure property on the first day
(occurring on or after the day on which the trust acquired the property) on
which any construction takes place on the property, other than completion of a
building (or completion of any other improvement) where more than 10 percent of
the construction of the building (or other improvement) was completed before
default became imminent. If more than one default occurred with respect to an
indebtedness or lease in respect of which there is an acquisition, the
more-than-10-percent test (including the rules prescribed in this paragraph
relating to the test) will not be applied at the time a particular default
became imminent if it is clear that the acquisition did not occur as the result
of such default. For example, if the debtor fails to make four consecutive
payments of principal and interest on the due dates, and the trust takes action
to acquire the property securing the debt only after the fourth default becomes
imminent, the 10-percent test is applied at the time the fourth default became
imminent (even though the trust would not have foreclosed on the property had
not all four defaults occurred).
(2) Determination of percentage of completion. The determination of whether
the construction of a building or other improvement was more than 10-percent
complete when default became imminent shall be made by comparing the total
direct costs of construction incurred with respect to the building or other
improvement as of the date default became imminent with the estimated total
direct costs of construction as of such date. If the building or
E-2-11
other improvement qualifies as more than 10-percent complete under this method,
the building or other improvement shall be considered to be more than 10-percent
complete. For purposes of this subparagraph, direct costs of construction
include the cost of labor and materials which are directly connected with the
construction of the building or improvement. Thus, for example, direct costs of
construction incurred as of the date default became imminent would include
amounts paid, or for which liability has been incurred, for labor which has been
performed as of such date that is directly connected with the construction of
the building or other improvement and for building materials and supplies used
or consumed in connection with the construction as of such date. For purposes of
applying the 10-percent test the trust may also take into account the cost of
building materials and supplies which have been delivered to the construction
site as of the date default became imminent and which are to be used or consumed
in connection with the construction. On the other hand, architect's fees,
administrative costs of the developer or builder, lawyers' fees, and expenses
incurred in connection with obtaining zoning approval or building permits are
not considered to be direct costs of construction. Any construction by the trust
as mortgagee-in-possession is considered to have taken place after default
resulting in acquisition of the property became imminent. Generally, the trust's
estimate of the total direct costs of completing construction as of the date the
default became imminent will be accepted, provided that the estimate is
reasonable, in good faith, and is based on all of the data reasonably available
to the trust when the trust undertakes completion of construction of the
building or other improvement. Appropriate documentation which shows that
construction was more than 10-percent complete when default became imminent must
be available at the principal place of business of the trust for inspection in
connection with an examination of the income tax return. Construction includes
the renovation of a building, such as the remodeling of apartments, or the
renovation of an apartment building to convert units to a condominium. The
renovation must be more than 10-percent complete (determined by comparing the
total direct cost of the physical renovation which has been incurred when
default became imminent with the estimated total direct cost of renovation as of
such date) when default became imminent in order for the property not to lose
its status as foreclosure property if the trust undertakes the renovation.
(3) Modification of a building or improvement. Generally, the terms
"building" and "improvement" in section 856(e)(4)(B) mean the building or
improvement (including any integral part thereof) as planned by the mortgagor or
lessee (or other person in possession of the property, if appropriate) as of the
date default became imminent. The trust, however, may estimate the total direct
costs of construction and complete the construction of the building or other
improvement by modifying the building or other improvement as planned as of the
date default became imminent so as to reduce the estimated direct cost of
construction of the building or improvement. If the trust does so modify the
planned construction of the building or improvement, the 10-percent test is to
be applied by comparing the direct costs of construction incurred as of the date
default became imminent that are attributable to the building or improvement as
modified, with the estimated total direct costs (as of such date) of
construction of the building or other improvement as modified. The trust, in
order to meet the 10-percent test, may not, however, modify the planned building
or improvement by reducing the estimated direct cost of construction to such an
extent that the building or improvement is not functional.
Also, the trust may make subsequent modifications which increase the direct cost
of construction of the building or improvement if such modifications--
E-2-12
(i) Are required by a Federal, State, or local agency, or
(ii) Are alterations that are either required by a prospective lessee
or purchaser as a condition of leasing or buying the property or are necessary
for the property to be used for the purpose planned at the time default became
imminent.
Subdivision (ii) of the preceding sentence applies, however, only if the
building or improvement, as modified was more than 10-percent complete when
default became imminent. A building completed by the trust will not cease to be
foreclosure property solely because the building is used in a manner other than
that planned by the defaulting mortgagor or lessee. Thus, for example, assume a
trust acquired on foreclosure a planned apartment building which was 20-percent
complete when default became imminent and that the trust completes the building
without modifications which increase the direct cost of construction. The
property will not cease to be foreclosure property by reason of section
856(e)(4)(B) solely because the trust sells the dwelling units in the building
as condominium units, rather than holding them for rent as planned by the
defaulting mortgagor. (See, however, section 856(e)(4)(C) and paragraph (f)(2)
of this section for rules relating to the requirement that where foreclosure
property is used in a trade or business (including a trade or business of
selling the foreclosure property), the trade or business must be conducted
through an independent contractor after 90 days after the property is acquired.)
(4) Application on building-by-building basis. Generally the
more-than-10-percent test is to be applied on a building-by-building basis.
Thus, for example, if a trust has foreclosed on land held by a developer
building a housing subdivision, the trust may complete construction of the
houses which were more than 10-percent complete when default became imminent.
The trust, however, may not complete construction of houses which were only
10-percent (or less) complete, nor may the trust begin construction of other
houses planned for the subdivision on which construction has not begun. The
trust, however, may construct an additional building or improvement (whether or
not the construction thereof has begun) which is an integral part of another
building or other improvement that was more than 10-percent complete when
default became imminent if the additional building or improvement and the other
building or improvement, taken together as a unit, meet the more-than-10-percent
test. For purposes of this paragraph, an additional building or other
improvement will be considered to be an integral part of another building or
improvement if--
(i) It is ancillary to the other building or improvement and its
principal intended use is to furnish services or facilities which either
supplement the use of such other building or improvement or are necessary for
such other building or improvement to be utilized in the manner or for the
purpose for which it is intended, or
(ii) The buildings or improvements are intended to comprise
constituent parts of an interdependent group of buildings or other improvements.
However, a building or other improvement will not be considered to be an
integral part of another building or improvement unless the buildings or
improvements were planned as part of
E-2-13
the same overall construction plan or project before default became imminent. An
additional building or other improvement (such as, for example, an outdoor
swimming pool or a parking garage) may be considered to be an integral part of
another building or improvement, even though the additional building or
improvement was also intended to be used to provide facilities or services for
use in connection with several other buildings or improvements which will not be
completed. If the trust chooses not to undertake the construction of an
additional building or other improvement which qualifies as an integral part of
another building or improvement, so much of the costs of construction (including
both the direct costs of construction incurred before the default became
imminent and the estimated costs of completion) as are attributable to that
"integral part" shall not be taken into account in determining whether any other
building or improvement was more than 10-percent when default became imminent.
For example, assume the trust acquires on foreclosure a property on which the
defaulting mortgagor had begun construction of a motel. The motel, as planned by
the mortgagor, was to consist of a two-story building containing 30 units, and
two detached one-story wings, each of which was to contain 20 units. At the time
default became imminent, the defaulting mortgagor had completed more than 10
percent of the construction of the two-story structure but the two wings, an
access road, a parking lot, and an outdoor swimming pool planned for the motel
were each less than 10-percent complete. The trust may construct the two wings
of the motel, the access road, the parking lot, and the swimming pool, provided
that the motel and the other improvements which the trust undertakes to
construct, taken together as a unit, were more than 10-percent complete when
default became imminent. If, however, the trust chooses not to undertake
construction of the swimming pool, the costs of construction attributable to the
swimming pool, whether incurred before default became imminent or estimated as
the cost of completion, shall not be taken into account in determining whether
the trust can complete construction of the other buildings and improvements. For
another example, assume that the trust acquires a planned shopping center on
foreclosure. At the time default became imminent several large buildings
intended to house shops and stores in the shopping center were more than
10-percent complete. Less than 10 percent of the construction, however, had been
completed on a separate structure intended to house a bank. The bank was planned
as a component of the shopping center in order to provide, in conjunction with
the other shops and stores, a specific range and variety of goods and services
with which to attract customers to the shopping center. The trust may complete
construction of the bank, provided that the bank and the other buildings and
improvements which the trust undertakes to complete, taken together as a unit,
were more than 10-percent complete when default became imminent. If the trust
chooses not to construct the bank, no actual or estimated construction costs
attributable to the bank are to be taken into account in applying the 10-percent
test with respect to the other buildings and improvements in the shopping
center. For a third example, assume that a defaulting mortgagor had planned to
construct two identical apartment buildings, A and B, on the same tract of land,
that neither building is to provide substantial facilities or services to be
used in connection with the other, and that only building A was more than
10-percent complete when default became imminent. The trust, in this case, may
not complete building B. On the other hand, if the facts are the same except
that pursuant to the plans of the defaulting mortgagor, one of the buildings is
to contain the furnace and central air conditioning machinery for both buildings
A and B, the trust may complete both buildings A and B, provided that, taken
together as a unit, the two buildings meet the more-than-10-percent test.
(5) Repair and maintenance. Under this paragraph (e), "construction" does
not include--
E-2-14
(i) The repair or maintenance of a building or other improvement, such
as the replacement of worn or obsolete furniture and appliances to offset normal
wear and tear or obsolescence and the restoration of property required because
of damage from fire, storm, vandalism or other casualty,
(ii) The preparation of leased space for a new tenant which does not
substantially extend the useful life of the building or other improvement or
significantly increase its value, even though, in the case of commercial space,
this preparation includes adapting the property to the conduct of a different
business, or
(iii) The performing of repair or maintenance described in paragraph
(e)(5)(i) of this section after property is acquired that was deferred by the
defaulting party and that does not constitute renovation under paragraph (e)(2)
of this section.
(6) Independent contractor required. If any construction takes place on the
foreclosure property more than 90 days after the day on which such property was
acquired by the trust, such construction must be performed by an independent
contractor (as defined in section 856(d)(3) and ss.1.856-4(b)(5)(iii)) from whom
the trust does not derive or receive any income. Otherwise, the property will
cease to be foreclosure property.
(7) Failure to complete construction. Property will not cease to be
foreclosure property solely because a trust which undertakes the completion of
construction of a building or other improvement on the property that was more
than 10-percent complete when default became imminent does not complete the
construction. Thus, for example, if a trust continues construction of a building
that was 20-percent complete when default became imminent, and the trust
constructs an additional 40 percent of the building and then sells the property,
the property will not lose its status as foreclosure property solely because the
trust fails to complete construction of the building.
(f) Termination of 2-year grace period; use of foreclosure property in a
trade or business--(1) In general. Under section 856(e)(4)(C), all real property
(and any incidental personal property) for which a particular election has been
made (see paragraph (c)(1) of this section) shall cease to be foreclosure
property on the first day (occurring more than 90 days after the day on which
the trust acquired the property) on which the property is used in a trade or
business conducted by the trust, other than a trade or business conducted by the
trust through an independent contractor from whom the trust itself does not
derive or receive any income. (See section 856(d)(3) for the definition of
independent contractor.)
(2) Property held primarily for sale to customers. For the purposes of
section 856(e)(4)(C), foreclosure property held by the trust primarily for sale
to customers in the ordinary course of a trade or business is considered to be
property used in a trade or business conducted by the trust. Thus, if a trust
holds foreclosure property (whether real property or personal property incident
to real property) for sale to customers in the ordinary course of a trade or
business more than 90 days after the day on which the trust acquired the real
property, the trade or business of selling the property must be conducted by the
trust through an independent contractor from whom the
E-2-15
trust does not derive or receive any income. Otherwise, after such 90th day the
property will cease to be foreclosure property.
(3) Change in use. Foreclosure property will not cease to be foreclosure
property solely because the use of the property in a trade or business by the
trust differs from the use to which the property was put by the person from whom
it was acquired. Thus, for example, if a trust acquires a rental apartment
building on foreclosure, the property will not cease to be foreclosure property
solely because the trust converts the building to a condominium apartment
building and, through an independent contractor from whom the trust derives no
income, engages in the trade or business of selling the individual condominium
units.
(g) Extension of 2-year grace period --(1) In general. A real estate
investment trust may apply to the district director of the internal revenue
district in which is located the principal place of business (or principal
office or agency) of the trust for an extension of the 2-year grace period. If
the trust establishes to the satisfaction of the district director that an
extension of the grace period is necessary for the orderly liquidation of the
trust's interest in foreclosure property, or for an orderly renegotiation of a
lease or leases of the property, the district director may extend the 2-year
grace period. See section 856(e)(3) (as in effect with respect to the particular
extension) for rules relating to the maximum length of an extension, and the
number of extensions which may be granted. An extension of the grace period may
be granted by the district director either before or after the date on which the
grace period, but for the extension, would expire. The extension shall be
effective as of the date on which the grace period, but for the extension, would
expire.
(2) Showing required. Generally, in order to establish the necessity of an
extension, the trust must demonstrate that it has made good faith efforts to
renegotiate leases with respect to, or dispose of, the foreclosure property. In
certain cases, however, the trust may establish the necessity of an extension
even though it has not made such efforts. For example, if the trust demonstrates
that, for valid business reasons, construction of the foreclosure property could
not be completed before the expiration of the grace period, the necessity of the
extension could be established even though the trust had made no effort to sell
the property. For another example, if the trust demonstrates that due to a
depressed real estate market, it could not sell the foreclosure property before
the expiration of the grace period except at a distress price, the necessity of
an extension could be established even though the trust had made no effort to
sell the property. The fact that property was acquired as foreclosure property
prior to January 3, 1975 (the date of enactment of section 856(e)), generally
will be considered as a factor (but not a controlling factor) which tends to
establish that an extension of the grace period is necessary.
(3) Time for requesting an extension of the grace period. A request for an
extension of the grace period must be filed with the appropriate district
director more than 60 days before the day on which the grace period would
otherwise expire. In the case of a grace period which would otherwise expire
before August 6, 1976, a request for an extension will be considered to be
timely filed if filed on or before June 7, 1976.
(4) Information required. The request for an extension of the grace period
shall identify the property with respect to which the request is being made and
shall also include the following information:
E-2-16
(i) The name, address, and taxpayer identification number of the
trust,
(ii) The date the property was acquired as foreclosure property by the
trust,
(iii) The taxable year of the trust in which the property was
acquired,
(iv) If the trust has been previously granted an extension of the
grace period with respect to the property, a statement to that effect (which
shall include the date on which the grace period, as extended, expires) and a
copy of the information which accompanied the request for the previous
extension,
(v) A statement of the reasons why the grace period should be
extended,
(vi) A description of any efforts made by the trust after the
acquisition of the property to dispose of the property or to renegotiate any
lease with respect to the property, and
(vii) A description of any other factors which tend to establish that
an extension of the grace period is necessary for the orderly liquidation of the
trust's interest in the property, or for an orderly renegotiation of a lease or
leases of the property. The trust shall also furnish any additional information
requested by the district director after the request for extension is filed.
(5) Automatic extension. If a real estate investment trust files a request
for an extension with the district director more than 60 days before the
expiration of the grace period, the grace period shall be considered to be
extended until the end of the 30th day after the date on which the district
director notifies the trust by certified mail sent to its last known address
that the period of extension requested by the trust is not granted. For further
guidance regarding the definition of last known address, see ss.301.6212-2 of
this fchapter. In no event, however, shall the rule in the preceding sentence
extend the grace period beyond the expiration of (i) the period of extension
requested by the trust, or (ii) the one-year period following the date that the
grace period (but for the automatic extension) would expire. The date of the
postmark on the sender's receipt is considered to be the date of the certified
mail for purposes of this subparagraph. This subparagraph does not apply,
however, if the date of the notification by certified mail described in the
first sentence is more than 30 days before the date that the grace period
(determined without regard to this subparagraph) expires; moreover, this
subparagraph shall not operate to allow any period of extension that is
prohibited by the last sentence of section 856(e)(3) (as in effect with respect
to the particular extension).
(6) Extension of time for filing. If a real estate investment trust fails
to file the request for an extension of the grace period within the time
provided in paragraph (g)(3) of this section, then the district director shall
grant a reasonable extension of time for filing such request, provided (i) it is
established to the satisfaction of the district director that there was
reasonable cause for failure to file the request within the prescribed time and
(ii) a request for such extension is filed within such time as the district
director considers reasonable under the circumstances.
E-2-17
(7) Status of taxpayer. The reference to "real estate investment trust" or
"trust" in this paragraph (g) shall be considered to include a taxpayer that is
not a qualified real estate investment trust, if the taxpayer establishes to the
satisfaction of the district director that its failure to be a qualified real
estate investment trust for the taxable year was due to reasonable cause and not
due to willful neglect. The principles of ss.1.856-7(c) and ss.1.856-8(d)
(including the principles relating to expert advice) shall apply for
determining reasonable cause (and absence of willful neglect) for this purpose.
[Reg. ss.1.856-6.]
.01 Historical Comment: Proposed 7/7/78. Adopted 2/3/81 by T.D. 7767 .
Amended 1/11/2001 by T.D. 8939 . [Reg. ss.1.856-6 does not reflect P.L. 105-34
(1997) or P.L. 106-170 (1999). See 26,500.051 et seq., 26,512.08 and
26,512.085.]
TEMP-REG, 2002FED paragraph 26,511, ss.5.856-1, Extension of the grace period
for foreclosure property by a real estate investment trust (Temporary).--
ss.5.856-1 Extension of the grace period for foreclosure property by a real
estate investment trust (Temporary).--
[ARROW RIGHT] Caution: Temporary Reg. ss.5.856-1 does not reflect recent law
changes. For details, see paragraph 26,511.01.[ARROW LEFT]
(a) In general. Under section 856(e), a real estate investment trust
("REIT") may elect to treat as foreclosure property certain real property
(including interests in real property), and any personal property incident to
such real property, that the REIT acquires after December 31, 1973. In general,
the REIT must acquire the property as the result of having bid on the property
at foreclosure, or having otherwise reduced the property to ownership or
possession by agreement or process of law, after there was default (or default
was imminent) on a lease of such property (where the REIT was the lessor) or on
an indebtedness owed to the REIT which such property secured. Property that a
REIT elects to treat as foreclosure property ceases to be foreclosure property
with respect to such REIT at the end of a grace period. The grace period ends on
the date which is 2 years after the date on which the REIT acquired the
property, unless the REIT has been granted an extension or extensions of the
grace period. If the grace period is extended, the property ceases to be
foreclosure property on the day immediately following the last day of the grace
period, as extended.
(b) Rules for extensions of the grace period. In general, ss.1.856-6(g)
prescribes rules regarding extensions of the grace period. However, in order to
reflect the amendment of section 856(e)(3) of the Code by section 363(c) of the
Revenue Act of 1978, the following rules also apply:
(1) In the case of extensions granted after November 6, 1978, with
respect to extension periods beginning after December 31, 1977, the district
director may grant one or more extensions of the grace period for the property,
subject to the limitation that no extension shall extend the grace period beyond
the date which is 6 years after the date the REIT acquired the property. In any
other case, an extension shall be for a period of not more than 1 year, and not
more than two extensions can be granted with respect to the property.
E-2-18
(2) In the case of an extension period beginning after December 31, 1977,
a request for an extension filed on or before March 28, 1980, will be considered
to be timely if the limitation on the number and length of extensions in section
856(e)(3), as in effect before the amendment made by section 363(c) of the
Revenue Act of 1978, would have barred the extension.
[Temporary Reg. ss.5.856-1.]
.01 Historical Comment: Adopted 2/3/81 by T.D. 7767 . [Temporary
Reg. ss.5.856-1 does not reflect P.L. 105-34 (1997) or P.L. 106-170 (1999). See
paragraph 26,500.051 et. seq., paragraph 26,512.0732 and paragraph 26,512.028.]
E-2-19
