Ratings

The transaction exhibits the following strengths:

• Of the initial pool balance, 67.0% consists of first-priority mortgage loans;
• Of the initial pool balance, 13.7% is secured by multifamily assets which Standard & Poor's Ratings Services considers to be a more stable property type; and
• Class A and B benefit from primary advancing from the advancing agent and backup advancing from Wells Fargo Bank N.A. as trustee.

This transaction exhibits the following concerns and mitigating factors:

• Of the initial pool balance, 33.0% consists of mezzanine loans or subordinated B notes. Standard & Poor's required additional credit support for this risk;
• Geographic concentration exists, with properties in New York accounting for 28.7% of the initial pool balance, California (14.8%), Texas (11.8%), Arizona (7.5%), and Georgia (5.2%). The remainder of the collateral has mortgaged properties in 10 other states, Washington, D.C., and Puerto Rico. No other state or area accounts for more than 5.0% of the initial pool balance; and
• Of the initial pool balance, 9.2% is secured by land assets, 9.1% is secured by hotel assets, and 2.6% is secured by condo construction assets which Standard & Poor's considers to be less stable property types. Standard & Poor's required additional credit support to account for this risk.

Seventeen loans (49.5% of the initial pool balance) have hard lockboxes, while two loans (7.8% of the initial pool) have soft lockboxes. Ten loans (38.4% of the initial pool) have lockboxes that spring upon an event of default and are held by the servicer for the benefit of the trust in an eligible institution.

Monthly tax escrows and monthly insurance premium escrows have been established for 24 of the loans (77.3% of the initial pool balance). Monthly capital reserves have been established for 16 loans (51.0% of the initial pool balance). Eight loans, or 80.5% of the office/industrial/retail loans, have monthly, up-front, or future-funding obligations for leasing reserves. Two loans, or 17.2% of the office/industrial/retail loans, have future funding reserves for leasing. Up-front reserves for deferred maintenance obligations are required for four loans (9.2% of the initial pool), and a total of $195,422 is required and has been put aside for these loans.

None of the loans was made to a borrower that has filed for bankruptcy protection.

Five loans (14.1% of the initial pool balance) are secured by mortgage liens on the borrowers' leasehold interests pursuant to ground leases. The ground leases generally have initial terms plus extensions that extend more than 20 years beyond the loan's maturity and provide the trust with notice and cure rights.

All loans currently maintain insurance that provides coverage against acts of terrorism.

Appraisal reports, in conformance with USPAP and FIRREA, were prepared for all of the mortgage properties. Reports for 27 loans (90.2% of the initial pool balance) were completed within 12 months of the cutoff date. Reports for four loans (8.5% of the initial pool balance) were completed within 24 months of the cutoff date, and the report for the remaining loan was completed within 36 months of the cutoff date.

Phase I environmental site assessments were prepared for all of the mortgaged properties.

Reports for 27 loans (90.2% of the initial pool balance) were completed within 12 months of the cutoff date. Reports for four loans (8.5% of the initial pool balance) were completed within 24 months of the cutoff date, and the report for the remaining loan was completed within 36 months of the cutoff date.

Nine loans (24.0% of the initial pool balance) had recommended environmental remediation. Phase II reports were required for three loans (5.1% of the initial pool balance).

Independent, licensed engineers prepared property condition reports for 27 loans (81.5% of the initial pool balance). The remaining loans were secured by land and condo conversion properties. These reports addressed both deferred maintenance items to be corrected immediately and long-term capital expenditure needs. Reports for 66.6% of the initial mortgage pool balance were completed within 12 months of the cutoff date, while reports for 13.6% were completed within 24 months of the cutoff date. The remaining reports were completed within 36 months of the cutoff date.

Ten loans (29.7% of the initial pool balance) are secured by properties located in seismic zones 3 and 4. Seismic studies were completed for seven properties, and two had had a probable maximum loss exceeding 20%. Five loans require the borrower to maintain earthquake insurance.

Table 1 highlights the top 10 assets in the pool.

Table 1

Top 10 Assets
Property/ certificate name	Property type	% of ramped trust pool	S&P value (mil. $)	S&P value ($ per unit/sq. ft.)	S&P cap rate (%)	Whole-loan balance (mil. $) *	Current trust balance (mil. $)¶	S&P all-in LTV (%)
Four Seasons Self Storage	Self-storage	5.8	39.56	7,769	10.25	58.40	58.40	147.62
Cadillac Fairview Portfolio	Retail	5.0	334.85	264	8.25	390.0	50.0	116.47
114 East 32nd Street	Condo conversion	4.7	51.60	1,171,875	12.50	93.75	46.88	181.70
40th Street Development	Land	3.8	37.4	200	N/A	44.00	37.69	117.53
The Haven	Multifamily	3.6	51.22	77,609	8.50	79.40	36.0	155.01
ResortQuest Waikiki Beach	Hospitality	3.5	93.18	170,375	10.75	70.0	34.86	112.53
Bank of America Plaza	Office	2.7	301.37	234	9.00	363	27.72	138.51
8000 Sunset Boulevard	Retail	2.7	41.43	274	9.00	54.4	26.78	147.70
Beacon Portfolio	Office	2.7	46.52	N/A	9.25	43.34	26.54	115.75
Citadel Center	Office	2.5	384.77	251	8.75	472	25.0	135.66
*Whole-loan balance includes future funding amounts. ¶Current trust balance does not include future funding amounts or pari passu positions.

Standard & Poor's analyzed all of the loans using its normal CMBS loan underwriting criteria to determine property level net cash flow. The loan balances used for modeling purposes included the whole-loan amounts and associated mezzanine loans. Where applicable, the default probabilities of the whole loans were increased due to the inclusion of mezzanine loans.

WAM is the average maturity of the assets in the portfolio, weighted by the principal balance of each asset.

WAR is the average rating of the assets in the portfolio, weighted by the principal balance of each asset.

DM describes the annualized weighted average portfolio default rate. DM is computed by taking the average default probability of the assets, weighted by the principal balance, and then annualized by finding the constant annual default rate that gives the weighted average default probability over the WAM of the portfolio. Unlike other measures of average default in use, DM encompasses all assets in the portfolio, including defaulted securities and cash, and reflects the actual maturity of the assets.

VM describes the annualized standard deviation of portfolio default rates. VM is the degree of variability of the portfolio default rate around its expected value. VM incorporates the effects of relative lumpiness of the assets in the portfolio and the correlation between these assets. It reflects the effective diversity of the portfolio in a manner directly applicable to estimating the probability of different default rates.

CM is the ratio of the standard deviation of portfolio default rates computed with correlation, divided by the standard deviation computed assuming no correlation. It measures the effect of correlation on the standard deviation in default rates. For example, if CM equals 1.3, the standard deviation of default rates is 30% greater due to correlation.

ROC is a point-in-time measure of the capability of the portfolio to support a rated CDO tranche. It is expressed as the ratio of the amount of liabilities that can be supported at a given rating level to the amount of liabilities outstanding at that rating level or higher. Unlike a standard overcollateralization ratio, ROC looks beyond the par amount of nondefaulted assets and potential recoveries on defaulted assets. ROC factors in the credit quality of the portfolio, assessing its ability to support a tranche at the scenario default rate associated with its rating. ROC explicitly takes into consideration the additional support that may be generated by excess coupon spread. By providing a meaningful measure of projected cash flows, ROC permits direct comparisons of rated liabilities across different transactions.

The cash flow analysis evaluated by Standard & Poor's uses different interest rate stress scenarios to test the impact of different interest rate environments on the structure's ability to pay timely interest and ultimate principal on the class A-1, A-2, and B notes and ultimate interest and ultimate principal on the class C through K notes. Standard & Poor's interest rate assumptions are based on historical interest rate levels and changes in these rates. Specifically, Standard & Poor's subjected the transaction's cash flows to interest rate paths that increased over time, declined over time, declined and then increased, remained constant at the swap strike rate, and followed the forward curve.

Recovery rates for whole loans and A notes will be 50%. Recovery rates for senior B notes and participations will be 35%, and recovery rates for all other B notes and participations will be 30%. Mezzanine loan recovery rates will be 25%. Recovery rates for CMBS and CDOs in this transaction will be derived through the application of Standard & Poor's ABS recovery schedule.

The collateral manager is expected to covenant in the indenture to maintain a specific Standard & Poor's minimum weighted average recovery rate for each class of notes rated by Standard & Poor's.

Table 2 outlines Standard & Poor's weighted average recovery rate ratio assumptions used in modeling the transaction for each of the liability ratings for the portfolio on the closing date.

Table 2

Weighted Average Recovery Rates
Rating	(%)
AAA	35.4
AA	35.5
A+	35.6
A	35.6
A-	35.6
BBB+	35.6
BBB	35.6
BBB-	35.6
BB	35.7
B	35.7

Based on the projected composition of the portfolio, the banker's cash flow model is used to calculate a break-even default rate for each tranche. The break-even default rate represents the maximum cumulative portfolio default rate that a tranche can withstand, while subjected to all of Standard & Poor's cash flow stresses, and still pay timely interest and ultimate principal by the stated maturity. The break-even default rates may change if the weighted average coupon or spread of the assets changes. The break-even default rates will also change over the life of the transaction if the par amount, weighted average life, or weighted average recovery rate of the portfolio collateral changes.

For a tranche to pass Standard & Poor's cash flow runs, the break-even default rate must be higher than the SDR, thereby indicating that the portfolio can withstand a higher percentage of defaults than what is required to satisfy that particular rating level. Based on the expected composition of the portfolio at the effective date, Standard & Poor's CDO Evaluator calculates the SDRs, and the cash flow modeling produces the break-even rates found on table 3.

Table 3

Break-Even Rates And Scenario Default Rates
Class	Rating	BDR (%)	SDR (%)
A-1	AAA	79.21	66.39
A-2	AAA	72.51	66.39
B	AA	66.69	57.64
C	A+	58.78	53.30
D	A	54.81	51.04
E	A-	51.37	48.69
F	BBB+	46.81	45.66
G	BBB	43.70	42.71
H	BBB-	39.51	38.80
J	BB	31.47	30.31
K	B	24.64	22.89
Preferred shares	NR	N/A	N/A
BDR—Break-even default rate. SDR—Scenario default rate.