Overview of Commercial Mortgage Backed Securities (CMBS) Presentation to American College of Real Estate Lawyers March

1. Overview of Commercial Mortgage Backed Securities (CMBS)Presentation to American College of Real Estate LawyersMarch 18, 2004

2. The CMBS Process • Build -A- Bond • The CMBS Market

3. The CMBS Process

4. Who The Players Are Investor Trustee/ Fiscal Agent Securities Depositor (SPE) Issuer/ Investment Banker Loan Originator/ Loan Seller Borrower Appraisal Financial Statements Engineering Reports Primary Servicer Master Servicer Special Servicer Rating Agency

5. Who The Players Are: Post Securitization Investor Trustee/ Fiscal Agent Trust Investment Bank/ Secondary Trading Borrower Primary Servicer Master Servicer Special Servicer Rating Agency

6. Where the Money Goes Assignment of Mortgage and Leases Lender Mortgage Collateral Loans Issuance Proceeds Debt Service PLUS Advances LESS Servicing Fees Debt Service Borrowers Servicer- Collection Account Trustee- Distribution Account Debt Service PLUS Draws on External Credit Enhancement Issuance Proceeds Securities Investors

8. Build -A- Bond

9. Hypothetical Structure: Credit Tranching $100MM Pool of Mortgages Last Loss Lowest Risk $85MM Investment Grade CMBS Aaa/AAA Aa/AA A/A Baa2/BBB $11 MM Non-Investment Grade CMBS Ba/BB B/B Credit Risk Loss Position $4 MM Unrated CMBS Highest Risk First Loss

10. Basic CMBS Structure $100 MM, 5-Year, Fixed Rate NR = Not rated

11. Senior / Subordinated Structure 5 Year Security • Next • 1.4 years • First • 3.6 years After 5 years A A A P + i B B B i P + i C C i i C P

12. Basic CMBS Structure $100 MM, 5-Year, Fixed Rate 1 Could be calculated as follows for Aa2-level stress: Foreclosure Frequency X Loss Severity = Loss Coverage 30% X 50% = 0.3 X 0.5 = 0.15 or 15% coverage or subordination 2 Could be calculated as follows for Baa2-level stress: Foreclosure Frequency X Loss Severity = 20% X 20% = 0.2 X 0.2 = 0.04 or 4% coverage or subordination

13. How To Decide How Much Subordination? • Loss Rate Scenarios Default 18.3% No Default 81.7% Foreclosed 46% Not Foreclosed 54% Loss rate 18% Loss Rate 36% Equally Weighted Portfolio Loss Rate = (0.36)(0.46)(0.183) + (0.18)(0.54)(0.183) 0.030 + 0.018 = 0.048 or 4.8% From: Mark P. Synderman. “Update on Commercial Mortgage Defaults. “The Real Estate Finance Journal. Summer 1994. Cumulative loss rates for about 11,000 commercial mortgages originated by eight life insurance companies between 1972 and 1986.

14. Basic CMBS Structure $100 MM, 5-Year, Fixed Rate with Interest Only Strip (IO) The INTEREST ONLY (IO) strip collects interest of 0.9%, or 90 bp on a NOTIONAL amount of $85 MM. The notional amount could be the same as the size of an associated class or the size of the entire security. Here, the interest on Classes A-1 and A-2 total the coupon of Class A alone in the previous example; this would not necessarily always be true.

15. $100 Million CMBS: Hypothetical Tranche Structure

16. $100 MM CMBS, 10-Year, Fixed Rate Classes Security Although senior classes will be sold at either a slight premium or at par, non-investment grade classes will be sold at a discount. Non-investment grade trenches are also likely to be a private placement rather than a publicly-sold issue. If C < Y, then it is a discount bond. If C = Y, then it is a par bond. If C > Y, then it is premium bond. Assumptions: 5-year Treasury = 4.6 % 10-year Treasury = 5.6 %

17. The CMBS Market

18. $ Billions

22. Share of outstandings