CMBS Overview

JUNE 2006
AN INTRODUCTION TO CMBS
CMBS RESEARCH
Alan L. Todd, CFAAC

212.834.9388
alan.l.todd@jpmorgan.com
Yuriko Iwai, CFA

212.834.9380
yuriko.iwai@jpmorgan.com
David Zhou
212.834.5302
david.x.zhou@jpmorgan.com
Agenda
Introduction 1
Market Overview 12
Loan Structure 18
Bond Structure 26
Performance 53
CMBS Derivatives 65
An Introduction to CMBS
Government actions spurred development of the commercial real
estate market
1974: ERISA passage sparked

institutional demand for
commercial property
Late ’80s-early ’90s: Tax reforms

1981: Economic 1986-1988: Saving
gave REITs greater flexibility &
Recovery Tax Act & Loan failure
facilitated institutional investment
1982: Savings &

Loan Deregulation
1981-1982: 1989: FIRREA Early 90s: RTC used Mid 90s-Present:

Back-to-back 1986: Tax Reform passed, set up RTC CMBS market to Acceptance of REIT
recessions Act of 1986 to dispose of bad dispose of non- and CMBS securities
commercial loans performing assets flourished
2
What are Commercial Mortgage-Backed Securities?
FY2005 Property
FY2005 Property Type
Type Distribution
Distribution
Commercial Mortgage Backed Securities

Other, 5%
(“CMBS”) are bonds collateralized by mortgages
Industrial,
on commercial and multifamily properties that 6%
are income-producing and operated for
economic profit. Office,
Hotel, 12%
31%
The mortgage payments are, in turn, dependent
Multi-
on the rental stream paid by tenants to the Retail,
family,
property owner (i.e., the borrower). 17%
29%
CMBS offer diversification benefits as bonds are

typically collateralized by a large number of
loans with exposure to a wide range of property
types and geographic regions. FY2005
FY2005 Deal
Deal Type
Type Distribution
Distribution
Main property types in CMBS collateral include Single
retail, office, multifamily, hotel and industrial. Asset/
Single Other, 2%
Fixed-rate conduit transactions dominate the Borrower,
new issue market, representing over 80% of all 6%
domestic new issuance in 2005.
Conduit,
Multi-
81%
borrower
Floater,
11%
3
Types of CMBS transactions
Conduit – Fixed-rate transaction involving well-diversified pool of loans (typically 100 to 250 loans)
The most granular and diversified of all CMBS transaction types.
“Conduit” was the original deal structure where underlying loans were of roughly equal size (ranging
from $1mm to $30mn) and were generally full leverage (80% loan-to-value ratio).
More recently, the structure of conduit deals has changed. Now, deals that include large loans have
become the norm. Some of the larger loans are lower-leverage “shadow-rated” investment-grade
loans.
Collateral consists primarily of 10-year fixed-rate loans with strong prepayment protection resulting in
10-year “bullet” bonds.
Contains securities rated AAA through NR, with triple-B plus through NR bonds generally placed
privately.
Through the use of credit enhancement in the form of subordination, over 85% of the transaction is
rated triple-A.
Multiborrower-floater - Transactions typically include between 2 and 20 large loans, which generally
utilize floating-rate financing
Transactions require extensive real estate due diligence and analysis due to inherent lack of diversity.
Contains investment-grade through below investment-grade securities and are placed privately.
Borrowers obtain short-term financing with prepayment flexibility. Often contains transitional,
“storied” properties.
Analysis and execution heavily dependent on pool diversity and underlying collateral.
Single Asset/Single Borrower – Transactions where credit risk hinges on a single borrower or property
Demand intensive due diligence and analysis.
These transactions can be backed by either one large asset, such as a trophy office building or shopping
mall, or by a pool of assets in which the mortgage loans are crossed-collateralized and cross-defaulted.
These transactions fell out of favor post-9/11 due to the inherent concentrated event risk (e.g., 7
World Trade Center transaction, BALL 2001-7WTC).
4
Who invests in Commercial Mortgage-Backed Securities?
2005 CMBS Participation by Investor Type
All categories of institutional investors invest in

CMBS. In fact, the number of investors in the CMBS
Other, 3% Insurance/
market has increased approximately 125% since Hedge
Fund, 10% Pension
1998.
Fund, 38%
The continued growth in transaction size and the Bank/

GSE, 24%
introduction of senior/subordinated AAA classes has
lured cross-over buyers into CMBS and away from
corporates, RMBS and Agency debentures. Money
Manager,
25%

Typical CMBS buyers by bond ratings

Typical CMBS buyers by bond ratings
Other, 4%
Class rating Typical buyers Hedge

AAA Insurance companies, pension funds, hedge funds, Fund, 5% Insurance/
money managers, government sponsored entities and
banks Pension
IO Insurance companies and hedge funds Fund, 38%
AA
Money managers and insurance companies Bank/GSE,
A
BBB CBO/CDO issuers, insurance companies, pension 41%
BBB- funds and money managers
BB Money
B B-piece buyers Manager,
NR
12%
5
Why do investors purchase commercial real estate assets?
Good diversification with respect to other institutional-grade assets

Commercial properties often contain tenants encompassing many lines of business, making the properties’
cash flows less susceptible to fluctuations of any one particular sector of the economy.
Good inflation hedge.
Excellent liquidity
Diversified real estate exposure can be easily obtained via ownership through the CMBS market.
Strong historical performance spurred interest in both direct equity investments as well as for securitized
products.
Strong institutional sponsorship for CMBS

Performance for public assets is easy to monitor and track.
CMBS have begun to replace direct investment as the medium of choice for many institutional investors,
including:
— Banks
— Insurance companies
— Pension funds/Endowments.
Excellent returns and credit performance

Historical direct, un-levered investment in commercial real estate has annually returned approximately
9.5%.
Investment-grade CMBS have realized cumulative total returns of over 60% since January 20001.
Unrated CMBS bonds currently offer annual yields of approximately 20%.
1. Commercial Mortgage Alert
6
Issuers utilize the CMBS market for a variety of reasons
Who What Why
Wall Street firms and other …securitize portfolios of newly …to empty the warehouse
operators of “conduit” originated loans… and take profits
programs…
Banks, thrifts and insurance …securitize portfolios of …to clear the balance sheet,
companies… seasoned loans… adjust exposures or exit the
sector
Wall Street firms and real …acquire and securitize …to finance the acquisition
estate “opportunity” funds… portfolios of seasoned loans… and/or cash out of the
investment
Owners of large commercial …issue securities backed by …to secure attractive

properties and pools of financing as an alternative to
mortgages on those
smaller commercial properties properties… a portfolio lender
…
7
Basic securitization concepts:
Special Purpose
Special Purpose
Receivables Monthly Seller “True Vehicle Issue
Receivables Seller Vehicle
principal Sale” CMBS
&
interest Commercial Banks
payments
Investment Banks Investors
Investors
Commercial Finance/Mtge co.
Mortgages Insurance company “Trust”
A pool of receivables is sold by originators into a special purpose vehicle. Bonds

represent an ownership interest in this pool.
Loans are typically secured by assets with relatively predictable cash flows.
Assets are legally separated from the seller, limiting investor exposure to the
seller.
Feature credit enhancements which lead to high credit ratings.
8
Overview of loan origination and securitization process
CMBS Loan Origination
Loan Origination, Underwriting,

Structuring & Pricing Closing/
Credit Committee
Documentation
Approval
CMBS Securitization
Assemble pool of
mortgages from internal
warehouse and partner
contributions
Rating Agency Private Placement of Prospectus, Pooling & CMBS

Due Diligence & Subordinate Bond Servicing Underwriting,
Subordination Levels Tranches Documentation Trading & Sales
9
Six general steps of the rating agency credit rating process
Rating agency methodology is generally consistent across securitized products
Legal Structural Rating Rating

Collateral review Due diligence
considerations analysis committee surveillance
O Delinquency O Company and O Analysis of legal O Trust structure O Evaluate transaction O Ensure rating reflects
summary mgmt. overview documents O Cash flow and credit performance and
O Collections O Origination practices O Review of legal allocations enhancement transaction structure
O Losses O Underwriting opinions O Mechanics of credit O Issue deal reports O Identify transactions
O Recoveries O Investment O Bankruptcy analysis enhancement/ O Issue rating letter to be considered for
O Credit line ranges philosophy for banks vs. non- protection ratings change
O Geographic O Cash management banks mechanisms O Maintain contact with
distribution and remittances O Evaluation of O Role of servicer issuer
O Industry O Monitoring and bankruptcy remote O Stress tests O Issue press release
distribution collection process SPVs to notify public of
O Collateral O Systems/technology O Review of legal rating change
rating/credit grade review transfers, ownership
distribution O Quality control and security interests
O Biographies of key O Tax treatment
personnel
10
Role of loan servicer
“Master” servicer collects loan payments, maintains records and provides investor
reports and payment advances to the trust.
“Special” servicer forecloses, re-structures, or works out loans that become

delinquent or suffer other adverse events
— Legal documents often provide for the holders of the first-loss securities
to control the activities of the special servicer.
Servicing of commercial mortgage loans involves greater discretion than servicing

for other types of loans – servicer must use judgment to maximize recovery value
of the property.
Rating agencies review and approve the servicer’s capabilities as an integral

element of CMBS ratings.
11
Agenda
Introduction 1
Market Overview 12
Loan Structure 18
Bond Structure 26
Performance 53
CMBS Derivatives 65
Issuance volume has grown as the market matures
Global CMBS annual volume ($ Billions)
Global CMBS annual volume ($ Billions)
250
Domestic International
200 70
150
35
100 31
21 169
1 23
29
9
50 12
4 93 89
74 78
1 67
3 57 52
0 1 47
0 37
1 1 26
14 17 15 16
0 3 8
1H
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
19
19
19
19
19
19
19
19
19
19
20
20
20
20
20
20
06
20
Source: Commercial Mortgage Alert
Cumulative domestic issuance is above $860 billion, with about $577 billion outstanding as of
the end of the first quarter in 2006.
13
CMBS issuance by deal type
CMBS Supply by Deal Type ($ millions)

CMBS Supply by Deal Type ($ millions)
% of FY2006 % yoy
FY2000 FY2001 FY2002 FY2003 FY2004 FY2005 1H 2006 Total Forecast chg
Conduit 29,795 40,462 36,274 54,282 73,960 136,160 75,679 85.3% 130,000 -5%
Multiborrower Floater 11,232 10,506 11,564 15,032 13,094 18,649 4,919 5.5% 13,000 -30%
Single Asset/Single Borrower 4,766 13,586 3,424 7,612 4,441 10,784 6,625 7.5% 12,000 11%
*
Other 1,100 2,599 812 925 1,618 2,927 1,455 1.6% 3,000 2%
U.S. Total 46,893 67,153 52,074 77,851 93,113 168,520 88,678 100% 158,000 -6%
International 12,116 22,714 28,706 20,803 35,197 70,299 30,580 61,000 -13%
**
CRE CDO 1,148 4,466 12,832 5,585 8,402 21,263 13,853 28,000 32%
Agency 1,328 4,931 6,850 7,983 6,220 4,625 3,531 6,000 30%
* Other includes lease-backed deals and seasoned loan deals.

** CRE CDO data reflect U.S. and international deals that are composed of at least 50% CMBS or commercial real estate loans.
Source: Commercial Mortgage Alert, JPMorgan
Despite the heavy fixed-rate conduit issuance in the first half of the year, we expect a
slowdown in the second half of the year from the tempering of the demand for loans due to
rising interest rates. We expect FY 2006 conduit issuance of around $130 billion, roughly 5%
less than in 2005.
Expect less multiborrower floaters with more floating rate loan candidates being originated
as shorter term fixed-rate loans or placed in CDO structures.
In sharp contrast to 2004-2005 when international issuance volume surged, international

issuance slowed in 1H 2006 due to a sharp decline in issuance in the U.K. We forecast 2006
international issuance of $61bn, a 13% drop from 2005.
14
Commercial mortgage debt outstanding
Commercial mortgage outstandings end of period, not seasonally adjusted ($ billions)

Commercial mortgage outstandings end of period, not seasonally adjusted ($ billions)
2005 2006
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Q1 Q2 Q3 Q4 Q1
Commercial Banks 420 443 473 511 584 660 731 798 868 983 1,011 1,048 1,098 1,135 1,172
Life Insurance Companies 195 191 189 196 212 218 224 232 243 255 256 259 262 267 269
Savings Institutions 114 114 111 110 119 128 137 149 167 182 184 191 193 197 202
GSEs and Federal-Related 45 50 54 65 78 91 115 136 174 190 191 191 193 195 198
Federal, State & Local Gov't 79 77 76 83 119 118 117 116 119 124 126 126 128 130 131
All Others 107 112 135 136 128 129 131 134 145 158 159 163 167 172 175
Total - Ex-CMBS 960 987 1,037 1,099 1,240 1,344 1,454 1,565 1,715 1,891 1,927 1,977 2,040 2,094 2,147
CMBS Outstandings 54 70 96 157 199 234 279 309 362 423 443 476 499 553 577
CMBS % 5.4% 6.6% 8.5% 12.5% 13.8% 14.8% 16.1% 16.5% 17.4% 18.3% 18.7% 19.4% 19.7% 20.9% 21.2%
Total 1,014 1,057 1,133 1,256 1,439 1,578 1,733 1,875 2,077 2,314 2,370 2,453 2,540 2,647 2,724
Source: Flow of Funds Accounts, Federal Reserve Board of Governors, Commercial Mortgage Alert, JPMorgan
CMBS continue to increase in share of total commercial mortgage outstandings.

CMBS represent 21% of the commercial mortgage market at $577 billion as of the end of 1Q 2006.
15
Loan concentrations change in response to property type
performance and expectations
U.S. Conduit Issuance by Property Type
U.S. Conduit Issuance by Property Type
Multi- Mobile- Warehouse/
Year Office Hotel family Nursing home Retail Industrial Other
1995 5.4% 7.5% 34.4% 6.9% 3.3% 30.6% 9.8% 2.0%
1996 8.4% 10.0% 38.9% 2.0% 3.9% 29.2% 7.2% 0.4%
1997 17.0% 10.4% 26.9% 3.9% 2.4% 30.3% 7.3% 1.6%
1998 17.3% 11.3% 25.7% 2.8% 2.0% 28.3% 7.4% 5.3%
1999 20.1% 8.1% 27.3% 2.0% 2.0% 27.9% 8.0% 4.5%
2000 25.8% 6.4% 23.1% 0.8% 1.9% 27.9% 10.5% 3.5%
2001 29.1% 5.0% 22.3% 0.1% 1.9% 29.6% 9.8% 2.3%
2002 24.9% 1.5% 23.3% 0.0% 2.1% 36.0% 10.3% 2.0%
2003 28.4% 2.6% 19.0% 0.0% 2.6% 38.5% 6.4% 2.5%
2004 31.2% 3.1% 16.3% 0.0% 4.3% 35.8% 6.8% 2.5%
2005 33.6% 7.6% 15.6% 0.1% 1.4% 32.0% 6.8% 2.9%
2006* 30.0% 11.6% 15.1% 0.2% 1.3% 31.9% 7.1% 2.8%
* As of 2Q 2006
Source: Commercial Mortgage Alert
Core property types remain office, retail and multifamily.
Property type concentrations shift as investors re-evaluate the attractiveness of each. As

shown, the hotel sector has recently made a comeback.
16
Metropolitan Statistical Area (MSA) concentrations*
Top 25 MSAs in conduit deals Top 25 MSAs in floating rate deals
Top 25 MSAs in conduit deals Top 25 MSAs in floating rate deals
Metropolitan Statistical Areas Balance ($bn) % Metropolitan Statistical Areas Balance ($bn) %
1 New York-New ark-Edison, NY-NJ-PA 60.3 13.0% 1 New York-New ark-Edison, NY-NJ-PA 5.9 18.4%
2 Los Angeles-Long Beach-Santa Ana, CA 33.9 7.3% 2 Chicago-Naperv ille-Joliet, IL-IN-WI 1.6 5.0%
3 Washington-Arlington-Alex andria, DC-VA-MD-WV 22.3 4.8% 3 Los Angeles-Long Beach-Santa Ana, CA 1.5 4.7%
4 Chicago-Naperv ille-Joliet, IL-IN-WI 15.6 3.4% 4 Washington-Arlington-Alex andria, DC-VA-MD-WV 1.0 3.1%
5 Dallas-Fort Worth-Arlington, TX 14.7 3.2% 5 Miami-Fort Lauderdale-Miami Beach, FL 1.0 3.1%
6 Houston-Bay tow n-Sugar Land, TX 12.7 2.8% 6 Orlando, FL 0.8 2.5%
7 Miami-Fort Lauderdale-Miami Beach, FL 12.2 2.6% 7 San Francisco-Oakland-Fremont, CA 0.7 2.3%
8 Philadelphia-Camden-Wilmington, PA-NJ-DE-MD 11.7 2.5% 8 Phoenix -Mesa-Scottsdale, AZ 0.7 2.1%
9 Atlanta-Sandy Springs-Marietta, GA 10.9 2.4% 9 Dallas-Fort Worth-Arlington, TX 0.6 2.0%
10 San Francisco-Oakland-Fremont, CA 10.6 2.3% 10 Houston-Bay tow n-Sugar Land, TX 0.5 1.5%
11 Phoenix -Mesa-Scottsdale, AZ 9.8 2.1% 11 Honolulu, HI 0.5 1.5%
12 Boston-Cambridge-Quincy , MA-NH 9.4 2.0% 12 Minneapolis-St. Paul-Bloomington, MN-WI 0.5 1.5%
13 Las Vegas-Paradise, NV 9.0 1.9% 13 Boston-Cambridge-Quincy , MA-NH 0.4 1.3%
14 San Diego-Carlsbad-San Marcos, CA 8.4 1.8% 14 Atlanta-Sandy Springs-Marietta, GA 0.4 1.3%
15 Detroit-Warren-Liv onia, MI 7.4 1.6% 15 San Jose-Sunny v ale-Santa Clara, CA 0.4 1.2%
16 Baltimore-Tow son, MD 6.6 1.4% 16 Springfield, MA 0.3 0.9%
17 Seattle-Tacoma-Bellev ue, WA 6.3 1.3% 17 Detroit-Warren-Liv onia, MI 0.3 0.9%
18 Riv erside-San Bernardino-Ontario, CA 5.6 1.2% 18 Pittsburgh, PA 0.3 0.9%
19 Denv er-Aurora, CO 5.2 1.1% 19 Tampa-St. Petersburg-Clearw ater, FL 0.3 0.9%
20 Orlando, FL 4.9 1.1% 20 San Diego-Carlsbad-San Marcos, CA 0.3 0.8%
21 San Jose-Sunny v ale-Santa Clara, CA 4.4 1.0% 21 Las Vegas-Paradise, NV 0.3 0.8%
22 Minneapolis-St. Paul-Bloomington, MN-WI 4.2 0.9% 22 Albany -Schenectady -Troy , NY 0.3 0.8%
23 Tampa-St. Petersburg-Clearw ater, FL 4.2 0.9% 23 Buffalo-Cheektow aga-Tonaw anda, NY 0.2 0.8%
24 Charlotte-Gastonia-Concord, NC-SC 4.0 0.9% 24 New Orleans-Metairie-Kenner, LA 0.2 0.7%
25 Sacramento--Arden-Arcade--Rosev ille, CA 3.6 0.8% 25 Nashv ille-Dav idson--Murfreesboro, TN 0.2 0.6%
Top 5 MSAs 146.9 31.7% Top 5 MSAs 11.0 34.3%
Top 25 MSAs 298.0 64.4% Top 25 MSAs 19.2 59.7%
All MSAs 463.0 100.0% All MSAs 32.1 100.0%
Source: Trepp
* As of 7/17/06
CMBS loans are concentrated in large cities including NY, LA, DC and Chicago.
17
Agenda
Introduction 1
Market Overview 12
Loan Structure 18
Bond Structure 23
Performance 50
CMBS Derivatives 63
Some important terms – Net Cash Flow
Net Cash Flow (NCF) is the property cash flow remaining after underwritten reserves are subtracted.
Examples of reserves include:
— Capital Expenditures (CapEx) – Replacement of major building systems such as roofs
— Tenant Improvements – Physical improvements to the property to attract new tenants to
new or vacated space
— Leasing Commissions – Payments for a real estate broker or leasing agent to help re-lease
vacant space
— Replacement Reserves – Property maintenance costs
Example of Net Cash Flow (NCF) Calculation
Example of Net Cash Flow (NCF) Calculation
Underwritten
Effective Gross Income $ 4,195,198
Total Expenses $ 1,102,956
Net Operating Income (NOI) $ 3,092,242
TI/LC, CapEx, & RR Reserves
CapEx $ -
Tenant Improv ements (TI) $ 10,318
Leasing Commissions (LC) $ 12,897
Replacement Reserv es (RR) $ 23,215

Total Reserves $ 46,430
Net Cash Flow (NCF) $ 3,045,812
NCF is used to calculate debt service coverage ratios (= NCF / Debt Service) and can also be used to
estimate property values (= NCF / Cap Rate).
The capitalization rate (“Cap” rate), which is calculated as “NCF / Property Price” can be seen
as a property investor’s “required rate of return”.
19
Some important terms – Loan-to-Value / Debt Service Coverage ratios
Loan to Value (LTV) and Debt Service Coverage (DSCR) Calculation
Loan to Value (LTV) and Debt Service Coverage (DSCR) Calculation
Basic formulas
LTV = Loan Amount / Property Value
DSCR = Cash Flow (NOI or NCF)/ Debt Service (i.e., Principal + Interest)
Actual LTV and DSCR - based on appraised values and actual debt service as follows:
Actual LTV = Loan Amount / Appraised Property Value = $36,750,000 / $46,100,000 = 79.7%
Actual DSCR = Net Cash Flow / Actual Debt Service Payments (during amortization period) =
$3,045,812 / $2,529,742 = 1.20
Stressed LTV and DSCR - based on rating agency cap rate and constants as follows:
Stressed LTV = Loan Amount / Est. Rating Agency Value (i.e., NCF / Rating Agency Cap Rate) =
S36,750,000 / ($3,045,812/9.25%) = 111.61%
Stressed DSCR = Net Cash Flow / Rating Agency Debt Service (i.e., Loan Amount X Rating Agency
Constant) = $3,045,812 / ($36,750,000 X 10.09%) = 0.82
LTV and DSCR are used to calculate loan proceeds and pricing.
LTV and DSCR are important indicators of default potential.

DSCR is a better predictor of term defaults.
LTV is a better predictor of balloon-date defaults.
20
Some important terms – Default risk
Definition of defaults (Fitch): Loans that are 60 days or more past due on a debt service
payment or 90 days or more past due on a balloon payment
Function of LTV and DSCR

Example
Using the earlier 80% LTV loan example, assume a large tenant representing 20% of the property cash
flow vacates at the beginning of year 5.
As a result, NOI subsequently declines 20% in Year 5 and DSCR drops below 1.0x.
In contrast, if the loan were underwritten as a 70% leverage loan, even with a large tenant vacating,
the DSCR would remain above 1.0x.
Case I – Actual 80% Leverage Case II – 70% Leverage

LTV (%)* DSCR** LTV (%)* DSCR**
Underwritten 79.7 1.20x 70.0 1.37x

Year 5 77.7 0.96x 68.2 1.10x
* LTV calculated off of appraised value at issuance.
** DSCR based off of debt service during amortization period.
21
Some important terms – Extension (Balloon) risk
Aspect of credit risk
Risk that there will not be enough income and equity to pay off the
balloon balance and the loan will extend
Most loans have 20- to 30-year amortization schedules, which help

mitigate extension risk as it lowers the principal balance due at the
balloon date
22
Mitigating prepayment risk: Common prepayment penalties for
fixed-rate conduit loans
0-6 Month Free Period

Defeasance
No Penalty
Hard Lockout
Yield Maintenance
Fixed Penalty (5-4-3-2-1)

2 to 5 Years 10 Years
23
Prepayment risk and call protection
Strong call protection in fixed-rate loans help protect CMBS investors from prepayments
(i.e., early return of principal).
Call protection terminology:

Hard lockout: No prepayments allowed.
Defeasance: Borrower cannot prepay the loan but may substitute a portfolio of US
Treasury bonds as collateral that replicates the original loan’s remaining cash flow
stream. Once a loan is defeased, the credit quality of the deal it collateralized
actually improves because there are no longer any credit concerns associated with
the loan’s future cash flows.
Yield Maintenance: Borrower can only prepay the loan by paying a penalty,
generally equal to the present value of the lost coupon when compared to US
Treasury rates, or 1%, whichever is greater. Prepayments during the yield
maintenance period often result in higher rates of return than would be obtained
otherwise.
Current exposure by type of call protection:

Hard lockout then defeasance (> 90% of all fixed-rate loans).
Hard lockout then yield maintenance (5% -10% of all fixed-rate loans).
Hard lockout then a set penalty schedule such as 5%, 4%, 3%, 2%, 1% year by year
(not common).
Lock-out followed by defeasance is preferred by bond investors because it results in the

most stable cash flow.
24
Traditional loan structure
Fixed-Rate Loans Floating-Rate Loans
Fixed-Rate Loans Floating-Rate Loans
Typically 10-year loan terms (few self- Shorter loan terms (2 to 5 years)
amortizing loans)
20 to 30 year amortization period Interest only terms
Spread + 10-year Treasury Spread + 1 month Libor; embedded

interest rate caps and floors
Stabilized property Can be transitional property
Minimum DSCR of 1.20 to 1.25x; Generally have DSCRs of 2.00 to 4.00x

Maximum LTV of 75 to 80% and LTVs of 40 to 65%
2-5 years of prepayment lock-out Typically have 1-2 years of prepayment

followed by ability to prepay via lock-out followed by ability to freely
defeasance, yield maintenance or other prepay or prepay with yield
penalty maintenance or percentage penalty
Requires TI/LC escrows, real estate tax Same

escrows, and capital expenditure
reserves
Non-recourse to the borrower Same
Structured as single asset entity and Same

special purpose vehicle
25
Agenda
Introduction 1
Market Overview 12
Loan Structure 18
Bond Structure 26
Performance 53
CMBS Derivatives 65
Investors analyze CMBS across three categories
Credit considerations Liquidity considerations Cash flow considerations
y Collateral y Liquidity y Cash flow

– Historical loan performance – Depth of investor base – Fixed/floating
(yield, losses, recoveries) – Total issuance for asset class – Currency
– Individual loan characteristics – Sector growth potential – Average life
(LTV, implied credit grade)
– Issuer name recognition – Projected principal payment
y Loan servicer/sponsor window – amortizing/bullet
– Issuer track record
– Financial strength/competitive – Principal lockout
– Established deal structure
position
– Transaction size/tranche size – Capped/uncapped
– Overview of operation and
– Public, private, 144A, ERISA, – Expected maturity
management
2a-7, global offering, etc. – Legal maturity
y Bond structure
– Bid/ask spread – Call option(s)
– Mechanics of credit
enhancement/rating
– Priority of cash flows
– Role of servicer
y Swap/derivative structure
– Counterparty exposure limits
y Legal structure
27
Classic bond structure – pre-2005 conduit transaction
Subordination
5-yr. AAA 10-yr. AAA X(IO) AAA

15.00% $210MN $980MN $1.4BN notional
10.50% AA $62MN
$1.4BN 8.10% A $35MN
Principal and interest

mortgage pool
5.50% BBB $35MN
Losses
5.00% BBB- $7MN 10-year
2.50% BB $35MN
1.25% B $18MN
Unrated $18MN
Sequential pay structure with principal and interest applied first to senior
classes and losses applied first to lower-rated bonds.
Rating agencies determine subordination levels, which sets bond class sizes.
28
A closer look at “traditional” conduit structures issued pre-2005
Triple-A bonds accounted for about 80% of the total transaction.
Most pre-2005 triple-A structures had only 2 tranches:

— 5-year average life wide-window and
— 10-year average life tight-window.
Subordination levels declined as issuers included more investment-grade loans in transactions

— Investment grade loan exposure accounted for 13% of fixed-rate conduit collateral in 2005
Weighted-average fixed-rate conduit CMBS subordination (%)

Weighted-average fixed-rate conduit CMBS subordination (%)
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
AAA 31.5 30.3 28.8 27.0 22.2 20.5 19.4 16.4 13.7 12.7
AA 25.3 24.1 23.7 22.3 17.8 16.3 15.8 13.4 11.1 10.5
A 19.7 18.5 18.7 17.3 13.7 12.7 12.0 9.8 8.2 7.8
BBB 14.8 13.3 12.6 12.3 9.6 8.5 8.2 6.2 4.9 4.6
BBB- 12.6 11.5 10.9 10.5 8.3 7.6 7.2 5.2 3.6 3.4
BB 7.9 6.0 5.8 6.1 4.5 4.4 4.1 3.2 2.7 2.5
B 3.3 3.0 3.2 2.9 2.1 2.2 2.1 1.8 1.6 1.6
Source: Rating Agency Presale Reports, JPMorgan
29
New bond structure – Late 2004 to present
Triple-A bonds now account for 85-90% of a total transaction.
Triple-A bonds have become more highly structured, which we view as inevitable in a
maturing market:
— To address investor concerns regarding declining subordination levels,

senior/subordinated triple-A bonds are now routinely included.
— Additional front-pay bonds with shorter average lives (3-year A/L).
— Tight window 5yr and 7yr triple-A bonds.
— Multifamily-directed triple-A bond.
— 7yr triple-A scheduled-pay bond (‘A-AB or ASB bond’).

— Can include triple-A bonds swapped to floating rate using a balance guaranteed
swap.
30
New bond structure –JPMCC 2006-CIBC14 conduit transaction
Subordination
3-yr. AAA 5-yr. AAA 7-yr. AAA 7-yr. ASB AAA 9.7-yr. AAA X(IO) AAA 8-yr. A1A AAA
30.000% $141 MN $120 MN $977 MN $2.5 BN not’l
$63 MN $119 MN $430 MN
AAA $279 MN
20.000%
12.375% AAA $213 MN
10.125% AA $63 MN
$2.5 BN
mortgage
pool 7.750% A $42 MN
4.500% Principal and interest BBB $28 MN

10-year
Losses
3.000% BBB- $42 MN
2.125% BB $14 MN
1.375% B $7 MN
Unrated $31 MN
Source: JPMorgan
31
Collateral pool composition
Collateral Pool
nly
nly
Interest Only
st O
est O
I
I
P&
P&
e
P&I
e r
Inter
I nt
5-year loans 7-year loans 10-year loans
32
Loan breakout by original maturity term
JPMCC
JPMCC 2006-CIBC14
2006-CIBC14
Original Maturity Term Total by Dollar Amount Total by Count
60 $ 182,076,845 7
61-84 $ 142,367,866 9
85-120 $ 2,390,315,841 183
121-180 $ 48,583,688 6
181-240 $ 24,189,313 2
Total $ 2,787,533,553 207
Original
Original Maturity
Maturity Term
Term by
by Dollar
Dollar Amount
Amount Original
Original Maturity
Maturity Term
Term by
by Count
Count
181-240, 1% 181-240, 1% 60, 3%

60, 7%
121-180, 2%
121-180, 3% 61-84, 4%
61-84, 5%
85-120, 86% 85-120, 88%
Source: JPMorgan
33
P&I payment diagram
P&I
P&I Payment
Payment Diagram
Diagram
Balloon payment
P&I
5-year loan
Balloon payment
7-year loan P&I
Balloon payment
P&I
10-year loan
Loan Term (in months) 60 84 120
34
Triple-A capital structure
JPMCC
JPMCC 2006-CIBC14
2006-CIBC14 Triple-A
Triple-A Capital
Capital Structure
Structure
Face
Amount Credit Payment
Class Rating ($mn) Support WAL window
A-1 Aaa/AAA $ 63 30.000% 2.46 4/06-7/10

A-2 Aaa/AAA $ 141 30.000% 4.48 8/10-3/11
A-3B Aaa/AAA $ 119 30.000% 7.69 3/13-3/14
A-4 Aaa/AAA $ 977 30.000% 9.73 5/15-1/16
A-SB Aaa/AAA $ 120 30.000% 6.91 7/10-5/15
A-1A Aaa/AAA $ 430 30.000% 8.82 4/06-1/16
A-M Aaa/AAA $ 279 20.000% 9.82 1/16-1/16
A-J Aaa/AAA $ 213 12.375% 9.82 1/16-1/16
Source: JPMorgan
35
Triple-A capital structure diagram
Amortization
Wide
A-1: 4/06-7/10 A-SB: 7/10-5/15
window
bonds
BONDS
A-4: A-M,
A-2: A-3B:
3/13- 5/15- A-J:
Tight 8/10-
1/16 1/16-
window 3/11 3/14
1/16
bonds
Pricing
3/06
P&I Balloon repayments

5-year loan
Balloon payment
7-year loan P&I
Balloon payment
LOANS
P&I
10-year loan
Balloon payment
Loan Term (in months) 60 84 120

36
Analyzing the bonds
Wide-window 3-year AAA:
NOT interest rate sensitive (i.e., no prepayments due to loan-level lockout)
Credit bond analysis required, although diverse repayment source (loan amortization) and
young loan age will result in few (if any) defaults.
Tight-window 5-year AAA:
NOT interest rate sensitive (hard lockout followed by 1) defeasance or 2) yield

maintenance)
Credit specific analysis required, focusing on loans with term dates that occur during bond
repayment window
− Focus on loans with full-term IO, coupon dispersion from mean, low DSCRs
− “3 CDR” type analysis does not apply
− Need to consider the possibility that loans may extend at their maturity date
Tight-window 7-year AAA:

Somewhat interest rate sensitive. Loans have exited hard lockout. May prepay via yield
maintenance.
Credit specific analysis required, focusing on loans with term dates that occur during bond
repayment window
− Focus on loans with full-term IO, coupon dispersion from mean, low DSCRs
− “3 CDR” type analysis does not apply
− Need to consider the possibility that loans may extend at their maturity date
37
Analyzing the bonds
Wide-window 7-year AAA (A-SB):
maintenance.
Credit bond analysis required, although diverse repayment source (loan amortization) will
result in few (if any) defaults.
Tight-window 10-year AAAs (A-4, A-M, A-J):
maintenance or freely prepay in the open period.
Less credit specific analysis required, since bulk of loans maturing.
“3 CDR” type analysis does apply. We recommend a more realistic 0.5 CDR, 12 month lag
to recovery, 35% severity of loss, 100% P&I advance by servicer. Can overlay loan-specific
scenarios
38
Interest only bonds (IOs)
Single IO strip Two IO strips (PAC and Support)
Traditional IO strip defined as the adjusted NWAC The PAC IO is stripped from the traditional IO.
of the loans minus the NWAC of the principal Its notional amount and size is determined
bonds assuming certain default and prepayment
scenarios
Large amount of proceeds is at times difficult to
clear in the market PAC IOs generally have a limited WAL of 6.25
years and a cash flow duration of about 3.25
years
The Support IO is the leftover and bears most of

the brunt in the event of early prepayment
Note: The general pricing scenario for IO structures assumes 100 CPR after lockout and yield maintenance
(this is also referred to as 100CPY)
39
Subordinate bonds (the B-piece)
BB+ through Unrated bonds (below investment-grade).
Bidding process
— Preliminary information sent to a group of known investors for indicative bid,
— Winning bidder then selected who performs full due diligence before providing a final bid.
Typically purchased by investors with real estate expertise, often with a capital partner.
Often have special servicing capabilities

— Ability to choose special servicer is typically held by buyer of the most subordinate class,
— Special servicer handles problem loans on behalf of the trust.
Due Diligence
— Loans are re-underwritten in a fashion similar to rating agencies,
— B-piece investors occasionally reject loans from a pool.
40
The B-piece market has become highly competitive
The combination of attractive relative yields, strong historical performance and the growth in the
CDO market has resulted in several new B-piece buyers entering the market and has created a much
more competitive environment
In 2001, GMAC, ARCap, Allied, and Lennar controlled 87% of the B-piece market. By 2003, 4 new
buyers entered the market, and that number dropped to 64% and was 39%, as of year-end 2005.
After shrinking in size by 7% in 2004 due to a significant decline in credit support levels, the B-piece
market volume grew by 57% in 2005 due to a dramatic increase in overall fixed-rate issuance.
Given the decline in credit support levels, B-piece buyers have had to increase their activity to
maintain similar investment levels; 5 B-piece buyers invested in multiple transactions during 2001;
9 B-piece buyers did so during 2005.
Over the last several years, we have seen a significant compression in B-piece spreads due to the
increase in the number of investors pursuing higher yielding bonds.
B-piece market highlights

B-piece market highlights
% change/Actual change
2001 2002 2003 2004 2005 2002—03 2003—04 2004-05
Number of deals 33 36 46 57 55 27.8% 23.9% (3.5)%
Total notional ($ billions) $33.220 $35.347 $53.379 $71.449 $120.361 51.0% 33.9% 68.5%
Number of B-piece buyers 7 7 11 10 11 57.1% (9.1)% 10.0%
Size of the B-piece market ($ billions) $2.556 $2.472 $2.765 $2.583 $4.066 11.9% (6.6)% 57.4%
Number of multiple B-piece buyers 5 7 8 9 9 14.3% 12.5% 0%
Average BB spread 547 513 428 344 297 (85) (84) (47)
Average B spread 892 923 859 810 711 (64) (49) (99)
Source: JPMorgan and Commercial Mortgage Alert
41
Floating-rate CMBS overview
Have less call protection than fixed-rate loans, which makes adverse selection
an issue:
— “Good” loans prepay leaving underperforming assets to support the trust.
With interest rates down sharply over the past several years, prepays have been
heavy in deals backed by stabilized properties.
In deals backed by turn-around properties, recession weakness and property

price declines have resulted in fewer prepays and greater exercise of extension
options; borrower must “credit-qualify” to exercise extension options.
Pro-rata structure allows for partial pay down of junior bond classes pari passu
with senior bond classes; stabilizes WAL of senior bonds while mitigating credit
concerns of B-piece investors.
42
Review of typical floating rate loan characteristics
Loans are generally uncapped & float over LIBOR.
Additional protection provided by a separate interest rate cap pledged to the trust.
Counterparty is typically AAA or AA rated
Almost always float over one month LIBOR
Mostly interest only
Loans have either a two- or a three-year initial term.

One-year extensions bring maximum term to five years
Often must pass DSCR and LTV tests to extend, & a “no default” test
Must buy additional interest rate caps to extend
Borrower usually pays a fee to extend (⅛% to ¼%) - fee typically retained in some
fashion by the loan seller
Loans are locked-out from prepayment for 1 to 2 years.

Step-down penalties for next 12 to 18 months following lockout (varies by issuer)
Prepayment penalties collected usually used to compensate the IO holders
The total debt on the property is often more than the debt securitized in the Trust.
Securitized loan is almost always shadow-rated at least BBB-
Junior participation or mezzanine debt may also exist
Many floating rate loans are collateralized by multiple properties.
43
Floating rate credit structure
Triple-A bonds have become highly structured, which we view as inevitable in a maturing market:
Senior/Subordinate structure from AAA to BBB-

Super-Senior class almost always exists
IO classes are typically AAA
Average life of bonds is typically 1-3 years, but can extend to a final maturity of 5
years
Some deals use straight sequential structure

All principal is used to retire the most senior bonds first
Interest cash flows also paid to senior class first
Many deals use a modified Pro-Rata Structure

Partial pay down of junior bond classes pari passu with senior bond classes.
Most of these deals have a trigger that switch to a sequential pay structure when only
a few loans or less than 30% of the original principal balance remains
Prepayment penalties are often used to compensate the IO; Extension fees often go to the loan
seller.
44
Floating rate bond structure
Principal Payment: Interest Payments: Misc. Fee Payments:
• Amortization, • Interest Collected • Prepayment Penalties
• Repayments, • Cap payments • Extension Fees
e
nc
• Prepayments,
na
te
• Recoveries
in
Un
Ma
ce
Fre
r
ld
ta
ely
Yie
No
in
P
Interest
rep
tP
Ca
ay
sh
re
Principal ab
pa
le
Fl
ya
ow
I
bl
e
AAA Super Senior Retained
Excess Penalties by seller
AAA IO AAA IO
AAA Subordinated Call NOT Call
AA Bonds Protected Protected

(often
A Bonds
retained)
BBB Bonds [Pari-Passu with Super Senior]
Losses 45
Floating rate structure at the triple-B level
Two Variations at the triple-B Level
Rake Structure – not used since 2003

Individual triple-B bonds are supported by specific portions of the collateral
Pooled Structure
All triple-B bonds secured by all collateral
46
Conceptual View of Rake Structure
AAA
Principal Bonds
AA+ AAA
AA IOs
AA-
A+
A
A-
BBB+ BBB+ BBB+ BBB+

BBB+ BBB BBB BBB BBB
BBB- BBB- BBB- BBB-
L1 L2 L3 L4 L5 L6 L7
B1 B2 B3 B4 B5 B6 B7
47
Conceptual View of Pooled Structure
AAA
Principal Bonds AAA
AA+ IOs
AA
AA-
A+
A
A-
BBB+
BBB
BBB-
All Collateral (First Mortgages) Pooled

L1 L2 L3 L4 L5 L6 L7
B1 B2 B3 B4 B5 B6 B7
48
Why Investors Like Large Loan Floaters
Spread: Wide compared with many other assets
U.S. Real Estate markets are improving
GOOD CARRY: Bonds can be repo’d at attractive rates and haircuts
CDO GROWTH: The Commercial Real Estate CDO market is growing

BBB floaters are a natural raw material
CDO liabilities are also mostly floating. These bonds do not require the cost of
buying (potentially amortizing) swaps
49
Why Investors Do Not Like Large Loan Floaters
Repayment is dependent on a handful of large loans.
Adverse selection results in “better” loans prepaying while “lesser quality” loans often
extend.
Transitional properties increase balloon-date default risk.
Loans are typically freely prepayable after 12 to 18 months, which introduces risk of early
repayment.
Short average life: Loans have 2- to 3-year terms extendable only to five years.
Can an investor get a floating-rate CMBS that offers:

The credit quality, diversification and subordination of a fixed-rate AAA bond.
Any WAL from 5 to 10 years – designed specifically to meet investor demand.
Cash flow stability with respect to bond extensions or shortening?
Yes, through a balance guarantee swap embedded in a fixed-rate triple-A conduit bond.
50
Typical fixed-rate capital structure
JPMCC 2005-LDP2 offered certificates
Class Rating WAL C/E Underlying bonds are positioned in the middle of the triple-A capital
(Prepayments (pure & default recoveries)
A-1 AAA 2.65 30.000%

structure and better protected than pure floating-rate CMBS from
Shortening
A-2 AAA 4.91 30.000%
Extension Risk
A-3 AAA 6.97 30.000%
Underlying bonds have the following characteristics
A-3A AAA 6.98 30.000%
20-30% subordination
A-4 AAA 9.81 30.000% Bond can be selected to match investor WAL requirements
A-SB AAA 7.01 30.000% Fixed coupon is guaranteed
A-M AAA 9.90 20.000% Most issuers price at least 1 conduit deal each quarter
Consistent supply alleviates supply/demand imbalance
A-J AAA 9.98 12.750%
Floating rate issuance equals about $15bn each year
X-2 AAA NA NA
Conduit issuance has grown steadily each of the past five years
and totaled $136bn in 2005

Losses due to default
B AA+ 9.98 12.125%
C AA 9.98 10.750% These characteristics make triple-A CMBS excellent balance

guarantee swap candidates
D AA- 9.98 9.875%
E A+ 9.98 9.000%
F A 9.98 8.000%
51
Balance guarantee swap mechanics
Balance Guarantee Swap Trade
Balance Guarantee Swap Trade
1 month Libor + 22
Investors Trust
A-M Coupon
1 month Libor + 22
(S + 32)
$
Flow JPMCC as
Options BGS
Desk Provider
Swaption
By issuing floating-rate liabilities, the Trust is exposed to the interest rate mismatch between the
fixed-rate return earned on the assets and the floating-rate payable on the liabilities
The Trust is required to execute a swap in order to eliminate any interest rate mismatch
JPMorgan will agree to pay floating to the Trust in exchange for a set fixed rate
In order to act as an effective hedge for the Trust, the swap must have a balance guarantee
feature
The swap is initially executed based on the initial size of the asset pool and amortizes based
upon the expected amortization speed of the underlying collateral
52
Agenda
Introduction 1
Market Overview 12
Loan Structure 18
Bond Structure 26
Performance 53
CMBS Derivatives 65
Recent changes in CMBS loan characteristics
Loan pricing continues to tighten as a result of increased Wall Street lending needs, re-emergence of insurance
companies looking to reinvest excess capital and the continued compression of bond spreads.
Lenders have diversified loan terms and now offer 5-,7-,15- and 20-year terms, with interest-only periods
extending out as far as 10 years or more.
Lenders have relaxed reserve requirements and have also begun to allow more yield maintenance prepayment
protection.
Despite declining subordination levels, overall leverage has increased as traditional conduit loans are less
frequently split into senior/junior components or into pari-passu participations.
Participation by tax exchange investors (1031) and the use of tenant-in-common borrower structures will
continue to increase as broker/dealers bring efficiency to this market.
U.S. conduit LTV trends U.S. conduit loans with interest-only periods
U.S. conduit LTV trends U.S. conduit loans with interest-only periods
105% 10%
100%
100% 9% 90%
80%
95% 8%
70%
90% 7%
60%
50%
85% 6% 40%
30%
80% 5%
20%
75% 4% 10%
0%
70% 3% 2001 2002 2003 2004 2005 1H2006
2001Q1
2001Q2
2001Q3
2001Q4
2002Q1
2002Q2
2002Q3
2002Q4
2003Q1
2003Q2
2003Q3
2003Q4
2004Q1
2004Q2
2004Q3
2004Q4
2005Q1
2005Q2
2005Q3
2005Q4
2006Q1
2006Q2
Full Partial Amortizing

Average Triple-B Subordination (RH Axis) Moody's Avg. Stressed LTV (LH Axis) Moody's Top-10 Loan LTV (LH Axis)
Source: JPMorgan, Trepp, rating agency presale reports

Source: JPMorgan, Moody's Investors Service
54
CMBS exhibit low aggregate delinquency rates
CMBS 30-Day and 60+ Day Delinquency Rates as of June 2006

CMBS 30-Day and 60+ Day Delinquency Rates as of June 2006
1.8%
Percent 30-Days Delinquent

1.6%
1.4% Percent 60+ Days

Delinquent
1.2%
1.0%
0.8%
0.56%
0.6%
0.4%
0.2% 0.09%
0.0%
Jun-98
Dec-98
Jun-99
Dec-99
Jun-00
Dec-00
Jun-01
Dec-01
Jun-02
Dec-02
Jun-03
Dec-03
Jun-04
Dec-04
Jun-05
Dec-05
Jun-06
Source: JPMorgan, Trepp
55
CMBS also exhibit low delinquency and default rates by property type
60+ Day Delinquencies (excluding FC/REO) and FC/REO rates by Property Type as of June 2006
60+ Day Delinquencies (excluding FC/REO) and FC/REO rates by Property Type as of June 2006
Hotel Office
4.5 1.5
4.0 Notice Scale!
3.5
3.0 1.0
Percentage
Percentage
2.5
2.0
1.5 0.5
1.0
0.5
0.0 0.0
Jun-98
Jun-99
Jun-00
Jun-01
Jun-02
Jun-03
Jun-04
Jun-05
Jun-06
Jun-98
Jun-99
Jun-00
Jun-01
Jun-02
Jun-03
Jun-04
Jun-05
Jun-06
Dec-98
Dec-99
Dec-00
Dec-01
Dec-02
Dec-03
Dec-04
Dec-05
Dec-98
Dec-99
Dec-00
Dec-01
Dec-02
Dec-03
Dec-04
Dec-05
60+ Day Delinquencies (Excl. FC/REO) Foreclosure & REO 60+ Day Delinquencies (Excl. FC/REO) Foreclosure & REO
Multi-Family Retail
1.5 1.5
1.0 1.0
Percentage
Percentage
0.5 0.5
0.0 0.0
Jun-98
Jun-99
Jun-00
Jun-01
Jun-02
Jun-03
Jun-04
Jun-05
Jun-06
Dec-98
Dec-99
Dec-00
Dec-01
Dec-02
Dec-03
Dec-04
Dec-05
Jun-98
Jun-99
Jun-00
Jun-01
Jun-02
Jun-03
Jun-04
Jun-05
Jun-06
Dec-98
Dec-99
Dec-00
Dec-01
Dec-02
Dec-03
Dec-04
Dec-05
60+ Day Delinquencies (Excl. FC/REO) Foreclosure & REO 60+ Day Delinquencies (Excl. FC/REO) Foreclosure & REO
Source: JPMorgan, Trepp
56
CMBS exhibit excellent rating stability
CMBS W.A. Annual Rating Transition 1985 - 2005

Upgrade/
AAA AA A BBB BB B CCC CC C D Stable (%) Downgrade (%)
AAA 99.6 0.4 0 0 0 0 0 0 0 0 99.6 0.4
AA 10.8 88.1 0.8 0.3 0 0.1 0 0 0 0 98.9 1.1
A 3.2 6.6 87.9 2 0.2 0 0 0 0 0 97.7 2.3
BBB 1.0 2.7 5.4 88 2.1 0.6 0.1 0 0 0.2 97.1 2.9
BB 0.3 0.2 0.6 4.9 89.9 2.6 0.8 0.1 0.2 0.4 95.9 4.1
B 0 0 0.1 0.3 3.2 90.5 3.9 0 0 2.0 94.1 5.9
CCC 0 0 0.4 0.4 1.1 4.2 77.6 0.4 0 16.0 83.7 16.3
CC 0 0 0 0 0 0 0 85.7 0 14.3 85.7 14.3
Source: Standard & Poor’s
57
…especially against competing asset classes!
W.A. Annual Rating Transitions*
Upgrade/Stable Ratios (%)
CMBS ABS Corporates RMBS

AAA 99.6 99.3 92.4 99.9
AA 98.9 95.4 91.4 98.8
A 97.7 94.3 93.2 99.1
BBB 97.1 93.2 94.0 98.5
BB 95.9 82.6 89.8 97.5
B 94.1 55.8 89.3 96.0
CCC 83.7 65.9 68.8 54.9
CC 85.7 60.3 N/A 78.3
* CMBS rating transitions measured between 1985-2005

ABS rating transitions measured between 1982-2005

Corporate rating transitions measured between 1982-2005
RMBS rating transitions measured between 1978-2005
Source: Standard & Poor’s
58
10yr triple-A spread movement
10yr triple-A CMBS basis Spread to swaps (bp)
10yr triple-A CMBS basis Spread to swaps (bp)
96
86
76
66
56
46
36
26
16
1/98 7/98 1/99 7/99 1/00 7/00 1/01 7/01 1/02 7/02 1/03 7/03 1/04 7/04 1/05 7/05 1/06
Source: JPMorgan
Triple-A CMBS spreads have come back in from its recent wides in December 2005 as
investors found that CMBS offered attractive spreads versus other sectors.
Good performance in CMBS as well as less fixed-rate issuance in competing sectors, such as
corporate bonds and ABS, should help maintain a strong technical backdrop for CMBS
spreads.
59
Relative value trades:
10yr triple-A CMBS versus 10-year Agency debentures
10yr Triple-A CMBS basis – 10yr Agencies Asset Swap Spread Spread Differential (bp)
10yr Triple-A CMBS basis – 10yr Agencies Asset Swap Spread Spread Differential (bp)
55
50
45
40
35
30
25
20
15
1/02 4/02 7/02 10/02 1/03 4/03 7/03 10/03 1/04 4/04 7/04 10/04 1/05 4/05 7/05 10/05 1/06 4/06
Trading near the largest spread differential since 2002.
60
Triple-A CMBS versus Single-A Corporate Bank paper
10yr Triple-A CMBS basis – JULI US Banks A 7 - 10 Par Asset Swap Spread Differential (bp)
10yr Triple-A CMBS basis – JULI US Banks A 7 - 10 Par Asset Swap Spread Differential (bp)
10
-10
-20
-30
-40
-50
-60
1/00 5/00 9/00 1/01 5/01 9/01 1/02 5/02 9/02 1/03 5/03 9/03 1/04 5/04 9/04 1/05 5/05 9/05 1/06 5/06
Source: JPMorgan
10yr triple-A CMBS are currently trading near parity with single-A rated bank
paper.
61
10yr triple-A CMBS versus 30yr CC FNMA
10yr Triple-A CMBS basis – 30yr CC FNMA LOAS Spread Differential (bp)
10yr Triple-A CMBS basis – 30yr CC FNMA LOAS Spread Differential (bp)
60
50
40
30
20
10
0
1/01 4/01 7/01 10/01 1/02 4/02 7/02 10/02 1/03 4/03 7/03 10/03 1/04 4/04 7/04 10/04 1/05 4/05 7/05 10/05 1/06 4/06
Source: JPMorgan
10yr triple-A CMBS are currently trading near their widest spread differential
to 30-yr current coupon FNMA paper.
62
Triple-A / triple-B CMBS credit curve has flattened
dramatically this year
Triple-A CMBS basis – Triple-B CMBS Spread Differential (bp)
Triple-A CMBS basis – Triple-B CMBS Spread Differential (bp)
115
105
95
85
75
65
55
45
1/00 5/00 9/00 1/01 5/01 9/01 1/02 5/02 9/02 1/03 5/03 9/03 1/04 5/04 9/04 1/05 5/05 9/05 1/06 5/06
Source: JPMorgan
Triple-B spreads have rallied dramatically in early 2006 due to demand by

CDO issuers and the search for assets with spread/yield.
63
CMBS remains one of the best performing structured finance sectors
Real estate fundamentals are firm and improving
Low delinquency and default rates
Good relative value vs competing asset classes, including

— A-rated bank-name corporate bonds (both cash and CDX)
— 30-year residential mortgage pass-throughs
— 10-year Agency debentures
— 10-year Credit Card paper
Good relative value within the CMBS capital structure, including

— Junior AAA vs. ultra-senior AAA and double-A
— Seasoned 5-year A/L AAA vs. new issue 5-year AAA
— PAC IO vs. 3-year current-pay AAA
Favorable technical support

— Less 10-year fixed-rate issuance in competing sectors

— CDO issuer and money-manager bid for triple-B spreads
— Investors still looking to allocate money to commercial real estate
Strong spread & ratings stability
64
Agenda
Introduction 1
Market Overview 12
Loan Structure 18
Bond Structure 26
Performance 53
CMBS Derivatives 65
Examples of CMBS derivative structures
Total Return Swaps (TRS)
Commercial real estate CDOs

Synthetic, collateralized wholly by a basket of single-name
CDS
Hybrid, collateralized by both CMBS cash bonds and single-
name CDS
Credit default swaps (CDS)
CMBX.NA index
66
What is a CMBS Index Total Return Swap (TRS)?
The CMBS Index TRS is a derivative contract governed by ISDA

documentation in which one party (the receiver) receives total returns or
excess return on a CMBS index from a second party (the payer) in return for
a financing cost.
TRS Payers (short CMBS) are either: 1.) dealers who seek to hedge their
large loan pipelines and/or bond portfolios or 2.) investors looking to profit
from widening spreads.
TRS Receivers (long CMBS) are investors seeking to gain CMBS exposure to a
broad, well-diversified, highly-rated portfolio and also take advantage of
financing and leverage terms, which are usually attractive relative to terms
available for cash bonds.
There are two types of TRS:

Traditional TRS (or TRS with duration): Receiver receives the total
return of the index and hence is exposed to both spread and interest
rate risk.
Duration-neutral TRS: Version of TRS which removes interest rate risk
and isolates spread risk (most common form today).
67
Traditional TRS periodic cash flow diagram*
Total Return on CMBS Index
Index Return * Notional
TRS Payer TRS Receiver

(short CMBS) (long CMBS)
Financing Cost
(LIBOR - spread) * N/360 * Notional Pay fixed
Swap
Counterparty
Receive
3mL flat
TRS Payer pays total return on CMBS Index, if return is positive.

Return is composed of: 1.) Return due to price changes in underlying bonds over the holding
period; 2.) return from reinvested interest and 3.) gain or loss from the return of principal
(at par) on bonds that were priced at a discount or premium.
TRS Receiver pays financing cost. In addition, if return is negative, Receiver must pay the
Payer the absolute value of the return amount.

TRS Receiver is exposed to interest rate risk embedded in an index’s total return and
can choose to hedge that risk with an interest rate swap.
TRS Receiver will pledge collateral equal to 1 to 5% of the notional amount of the trade
depending on counterparty credit.
* The direction of the total return flows in the diagram reflects the assumption of a positive return on the index. If negative, the direction would be reversed.
68
Duration-neutral TRS periodic cash flow diagram
Index spread return amount

Notional amount * [Index spread + Funding advantage
(or - funding disadvantage)] * N/360
TRS Payer TRS Receiver

(short CMBS) (long CMBS)
Spread change amount
Notional amount *(Spread0 – Spread1) * index duration
Duration-neutral TRS focuses exclusively on the change in spread of a given index. Price
changes in the index due to prepayments, defaults or interest rate movements no longer, or
minimally, affect either party.
TRS Payer pays the excess return of a given index, if return is positive.
Netted with funding advantage
TRS Receiver pays funding advantage. In addition, if return is negative, Receiver must pay the
Payer the absolute value of the spread return amount.
Similar to the traditional TRS, Receiver will pledge collateral equal to 1% to 5% of the
notional amount.
Unlike traditional TRS, an interest rate swap is unnecessary.
69
What indices are used for the Index TRS?
Typically 8.5+yr AAA Index published by Lehman Brothers
8.5+yr AAA Lehman Brothers Index Stats as of June 30th, 2006

Number Mod. Adj. Avg Avg Avg Average Nominal Market Value % 0f % of
Issues Duration Coupon Life Price Yield Spread ($mn) Index Main
232 7.01 5.21 9.12 95.36 5.96 24.3 80,157 21.46% 16.44%
Also, 10yr AAA Index published by Bank of America
10yr AAA Bank of America Index Stats as of June 30th, 2006

Number Mod. Adj. Avg Avg Avg Average Nominal Index % of % of
Issues Duration Coupon Life Price Yield Spread Level Index Main
88 6.87 N/A 8.90 94.99 5.94 22.95 N/A N/A N/A
Other indices- Broad indices (e.g., Lehman ERISA, Lehman Investment-grade), BBB Index,
Long investment-grade indices.
70
What are commercial real estate CDOs (CRE CDOs)?
A CDO is comparable to a finance company.

Borrows money (liabilities)
Invests in collateral (assets)
Has residual value (equity)
The equity of a CDO represents an ownership stake in an entity and first loss
position.
The assets are typically managed by a seasoned asset manager with a strong
track record in the respective CDO asset class.
Repayment of liabilities relies on the performance of the underlying

collateral pool and asset manager.
Credit enhancement and tranching create different rating levels, allowing

involvement of a wide investor base.
71
CDO motivations: Balance sheet
Balance Sheet CDOs

Objectives
Redistribute credit risk off balance sheet
Reduce regulatory and economic capital requirements (improve ROE)
Reduce balance sheet to improve ROA or free risk capacity for future business
Exit certain lines of business and have them run-off
Assets
Investment Grade or HY bonds/loans
Revolving credit facilities
ABS, RMBS, CMBS and other Structured Products
Issuers
Predominantly Commercial Banks, Insurance Companies
Corporate Issuers, Hedge Funds
Structures
Almost exclusively Cash Flow in the late 1990’s
Often static pools (not actively managed; assets are administered and run-off)
Portfolio is usually close to 100% ramped at closing
In recent years, synthetic transactions allow for more efficient execution
72
CDO motivations: Arbitrage
Arbitrage CDOs
Objectives
Capture market arbitrage by issuing liabilities at low costs of funding and invest in higher yielding
assets on a levered basis
Asset managers sell their expertise in managing specific asset classes and allow other investors to
broaden their credit exposures
Increase assets under management and grow franchise
Receive fee income
Assets
HY bonds and leveraged loans
Investment Grade bonds/Credit Default Swaps
ABS/CMBS/CDOs/Whole Loans and other Structured Products
Issuers
Asset Managers including money managers, hedge funds, banks and insurance companies
Credit Structures
Portfolio actively managed (invested/monitored/traded)
Cash, synthetic or hybrid format
Portfolio often not fully acquired at closing
73
CDO issuance format: Cash collateral
Cash Flow
Cash CDOs involve outright purchases (true sale) of assets and funded issuance of notes
Liabilities comprises Senior and Mezzanine debt, supported by the Equity (First Loss) tranche
In a Cash CDO, cash raised = cash used
Hedge
Class A Notes
Counterparties
Class B Notes
Asset
Cash CDO SPV
Portfolio
Class C Notes
Trustee & Equity/First

Custodian Loss
74
CDO issuance format: Synthetic collateral
Synthetic
Synthetic CDOs, or Collateralized Swap Obligations (CSOs), gain credit exposure by entering into credit
default swaps referencing specific names
Issued as static portfolios or managed transactions
Synthetic CDO collateral tends to be investment grade (BBB or better)
High quality Synthetic CDO collateral allows for a very large, unfunded portion of synthetic CDO
liabilities (the ‘Super Senior Swap’), which cheapens overall liabilities
Super senior tranche’s credit quality is assumed to be better the AAA-rating level
Portfolio Tranched risk Cheaper Liabilities

credit
Investment-grade default
credit default swaps Typically

swaps Super Unfunded
BBB Synthetic Senior Swap
A CDO
AA Issuer
Senior Funded
AAA
Notes or
Mezzanine Unfunded
Equity Swaps
75
CDO issuance format: Cash vs. synthetic
Synthetic
Synthetic CDOs have increased as a percentage of all CMBS CDOs, especially after the
standardization of ISDA documentation in June, 2005.
($millions)
14,000
Cash Synthetic
12,000
10,000
8,000
6,000
4,000
2,000
0
2001 2002 2003 2004 2005 2006YTD*
*As of year-to-date March 2006
Source: JPMorgan
76
What is a credit default swap (CDS)?
An agreement between two counterparties in which one party wishes to gain

exposure to a particular reference asset (i.e., the protection seller), while
the other party wishes to eliminate exposure to the same asset (i.e., the
protection buyer).
The most common reasons for CDS include
To hedge, or reduce the risk of owning a particular cash bond, in the

event one does not want, or is unable, to sell it
To gain credit exposure to a particular asset in an unfunded format, which

allows for more efficient deployment of capital
To express either a positive or negative credit opinion on a particular

asset that
▬ May be executed separately from other exposures to the same asset or
▬ Can not be easily attained in the cash market.
77
Notional CDS outstanding (Corporate, ABS, CMBS & RMBS)
CDS volume has grown dramatically over the past several years
Cumulative notional outstanding volume ($bn)

17,278
12,430
8,422
5,442
3,779
2,192 2,688
1,563
632 919
1H2001 2H2001 1H2002 2H2002 1H2003 2H2003 1H2004 2H2004 1H2005 2H2005
Source: JPMorgan
78
Who are the CMBS CDS participants?
Protection sellers/risk buyers Protection buyers/risk sellers
Hedge funds
Proprietary trading desks
Money Managers
Loan originators
Whole loan desks

Insurance Cos
SF CDO Issuers
79
Basic CDS trade mechanics
Contingent floating-
rate payment
Protection Protection
Seller Buyer
Fee/Premium Fixed-
Long risk Short risk
rate payment
Sell CDS/Protection Buy CDS/Protection
Receive fixed periodic Pay fixed periodic
payments payments
Economically similar to Economically similar to
owning a cash bond shorting a cash bond
Protection Buyer: The counterparty that wants to eliminate, or reduce, credit risk.
The buyer pays a fixed periodic premium, which is quoted in basis points as a percentage of
the notional amount of the trade.

The premium amount is directly related to the riskiness (either perceived or real) of the
reference asset: the riskier the reference asset, the greater the premium required.
Protection Seller: The counterparty that wants to gain exposure to the reference asset.
Collects periodic fixed payment from the protection buyer, but is obligated to pay the
protection buyer in the instance a credit event occurs (e.g., write-down, interest shortfall or
failure to pay principal).
80
Settlement mechanisms vary
Physical Protection Deliver bond Protection

settlement Seller Buyer
$100 (Par)
$100 (Par)—
Cash Protection Recovery rate
Protection
settlement Seller Buyer
Source: JPMorgan
Physical Settlement: Cash Settlement:

deliver bonds solicit dealer bids

Limited cash bonds Selection bias
Possibility of short squeeze Liquidity constraints
81
Pay-As-You-Go (PAYG or PAUG) Settlement
The settlement method of choice for

Example
structured finance CDS
Eliminates many inefficiencies that $10 million notional, annual premium of 135bp
may be introduced through either cash

Payment prior to a credit event
or physical settlement
Given a credit event, two events follow No Payment
under PAYG Protection Protection
The protection seller pays the buyer Seller Buyer
a floating payment equal to the Fixed payment
amount of the write-down, ($10mn notional)*(1.35%)=$135,000
principal shortfall or interest
shortfall Payment following a $3mn credit event
In the event of a write-down, the
$3mn floating
notional amount of the trade is payment
written down by the amount of the Protection Protection
floating payment Seller Buyer
Fixed payment
($10-$3mn notional)*(1.35%)=$94,500
Source: JPMorgan
82
PAYG reimbursement given a credit event reversal
Payment following a $3mn credit event
$3mn floating payment

Protection Protection
Seller Buyer
Fixed payment
($10-$3mn notional)*(1.35%)=$94,500
Source: JPMorgan
Payment following a reversal of the prior $3mn credit event
No payment
Protection $3mn reimbursal payment

Protection
Seller Buyer
Fixed “premium” payment
($10-$3mn notional)*(1.35%)=$94,500
Source: JPMorgan
83
Interest shortfall nuances: Fixed-cap versus uncapped
Fixed-cap
Limits interest shortfall payment to the fixed-rate premium paid by protection buyer.
Shortfall that exceeds the fixed-rate premium is not covered by the protection seller.
Uncapped
Mandates full reimbursement for the entire coupon that suffers a shortfall.
Not limited to the fixed-rate premium paid by buyer. Protection seller may be required to pay
the amount equal to (Shortfall-Premium) out of own pocket.
84
Recap: PAYG credit events & resulting cash settlement
Credit Event Cash settlement
Interest shortfall The CDS premium is reduced by the

shortfall. Protection seller
Fixed-cap: receive max(Prem-SF,0)
Uncapped: receive max(Prem-SF,0)
If SF> Prem, pays SF-Prem
Failure to pay principal Percent of class not paid at termination

date of CDS times notional balance
Principal Writedown Percent of class written down times

notional balance
85
Valuing CDS: Mark-to-Market
Measures the change in value of a CDS position from trade date to the current date
Æ important when determining upfront payment for novation trades.
Based on the PV01, or the Present Value of a bp.
PV01 is the contract’s sensitivity to a 1bp spread change.
Mark-to-market value = (St-S0)*PV01.
Reference obligations with longer durations have higher PV01s than do reference
obligations with shorter durations and are more sensitive to spread movements.
86
2006 non-structured CMBS (non CLN) CDS trading activity
Vintage views have been narrowly focused BBB- received the most interest
BB A
2003 1% 13%
8%
2005
47% BBB
2004
19%
45% BBB-
67%
Source: JPMorgan Source: JPMorgan
CDS spreads have tightened, indicating more protection sellers than protection buyers
Rating level YE2005 1Q2006 6/30/06
A 45bp 28bp 32bp

BBB 100bp 70bp 76bp
BBB- 185bp 120bp 118bp
Source: JPMorgan
87
Valuing CDS: Carry and break-even spread movements
Carry is the annualized contract premium times the notional trade amount
= {Premium (in bp)} * Trade Notional Amt * Act/360.
Selling protection is a positive carry trade, buying protection is a negative carry trade.
Protection buyers need to consider the amount of spread widening needed to break even
={Offer Spread * Trade Horizon (in yrs)} / (Horizon Duration) + Bid/Offer Spread.
Spread widening required to break even (bp)
70 Break even for BBB Break even for BBB-

50
30
10
3-Month 6-Month 9-Month 1.00 Year 1.25 Years 1.50 Years 1.75 Years 2.00 Years
Source: JPMorgan
88
CMBX.NA launched on March 7, 2006
Summary of CMBX.NA Terms
Traded Indices CMBX.NA.AAA
(rolled every 6 months) CMBX.NA.AA
CMBX.NA.A
CMBX.NA.BBB
CMBX.NA.BBB-
Reference Obligations Each index is an equally-weighted composite of the corresponding
tranche of the same rating from 25 newly issued CMBS transactions
Structure ISDA, Pay-As-You-Go (PAYG)
Roll Dates October 25, April 25 (or next business day, respectively)
Scheduled Termination Date Legal final maturity of reference obligation
Notional Each reference obligation must have a current factor of 1.0
Fixed Rate Payments Established on the roll date
Floating Rate Payments Interest shortfall, principal shortfall, writedown

Additional Fixed Payments Reimbursements of interest shortfall, principal shortfall, writedown
Quotations Spread
Credit Event Writedown, interest shortfall, principal shortfall
Settlement Cash settlement
Source: JPMorgan, Markit
89
Rules for inclusion for CMBX
Since CMBX was designed to replicate an investment in a diversified basket of newly issued CMBS at a
given rating level, standardized rules for inclusion were carefully drafted to maximize the
transparency of the index’s components, which should enhance trading liquidity.
Deal-level criteria:
All bonds must be US dollar denominated, fixed-rate securities.
The transaction must be rated by at least any two of Fitch, Moody’s or S&P.
The deal’s aggregate balance must be greater than $700mn.
The deal must include securities with tranches rated AAA/Aaa, AA/Aa2, A/A2, BBB/Baa2
and BBB-/Baa3. In instances where there are more than one triple-A class with equal
credit enhancement, the tranche with the longest weighted average life will be included.
In instances where a tranche is split-rated, the lower of the ratings will be used.
The securities must be collateralized by at least 50 separate mortgages that are

obligations of at least 10 borrowers who are unaffiliated with each other or with the
issuer of the CMBS transaction.
The maximum concentration of any single property-type can not exceed 60% by dollar
value.
The maximum concentration in any single state must not exceed 40% by dollar value.
90
Rules for inclusion for CMBX
Tranche-level criteria:
The identity and principal economic terms must be listed on Bloomberg
For the triple-A sub-index the aggregate principal amount of the tranche must be greater
than $100mn
For the CMBX.NA.AAA index, each reference obligation must have an expected weighted
average life of greater than eight years and less than 12 years from the date of issuance
using a 0% CPY scenario
Furthermore, the expected weighted average life can not decrease by more than one year
when calculated using a 100% CPP scenario and by more than two years when calculated
using a 100% CPY scenario
91
CMBX.NA reference obligation tranches
Reference Obligation Entity Name CMBX.NA.AAA.1 CMBX.NA.AA.1 CMBX.NA.A.1 CMBX.NA.BBB.1 CMBX.NA.BBB-.1
1 BACM 2005-4 A-5A B D G H
2 BACM 2005-5 A-4 B D G H
3 BACM 2005-6 A-4 C F J K
4 BSCMS 2005-PWR10 A-4 C F J K
5 BSCMS 2005-PWR9 A-4A C E H J
6 BSCMS 2005-TOP20 A-4A C E H J
7 CD 2005-CD1 A-4 C E H J
8 CSFB 2005-C5 A-4 C F J K
9 CSFB 2005-C6 A-4 B E H J
10 GCCFC 2005-GG5 A-5A B D G H
11 GECMC 2005-C4 A-4 C E H J
12 GMACC 2006-C1 A-4 B E H J
13 JPMCC 2005-CIBC13 A-4 B D G H
14 JPMCC 2005-LDP4 A-4 B D G H
15 JPMCC 2005-LDP5 A-4 C F J K
16 LBUBS 2005-C5 A-4 C F J K
17 LBUBS 2005-C7 A-4 C F J K
18 LBUBS 2006-C1 A-4 C F J K
19 MLMT 2005-CKI1 A-6 B D G H
20 MLMT 2005-LC1 A-4 B D G H
21 MSC 2005-HQ7 A-4 C F J K

22 MSC 2005-IQ10 A-4A B D G H
23 MSC 2006-TOP21 A-4 B D G H
24 WBCMT 2005-C21 A-4 B D G H
25 WBCMT 2005-C22 A-4 C E H J
Source: Markit
92
CMBX.NA reference obligation statistics*
IO% Rating Agency LTV Loan Size ($mn) Loan Concentrations Property Type Mix
Deal Loan/ % Inv.
Pricing Size Property Grade %TIC Full Partial Multi-
Date Deal Name ($mn) Count Loans Borrower Term Term Total Fitch S&P Moody's Max Min Avg. Top 3 Top 5 Top 10 Office Retail family Hotel Ind. Other
09/15/2005 BACM 2005-4 $1,586 128/149 1.1% 6.4% 30.1% 42.8% 72.9% 100.8% 102.1% N/A $110.0 $1.0 $12.4 20.7% 31.7% 46.2% 34.2% 26.0% 23.3% 7.6% 5.1% 3.8%
09/30/2005 BACM 2005-5 $1,962 106/120 7.9% 7.6% 29.2% 44.4% 73.6% N/A 104.9% 102.1% $116.0 $1.2 $18.5 16.2% 25.9% 42.6% 40.8% 27.0% 18.5% 4.4% 3.3% 6.0%
12/16/2005 BACM 2005-6 $2,942 163/919 23.8% 7.2% 23.8% 37.8% 61.6% N/A 90.6% 92.5% $260.0 $1.0 $16.8 19.6% 28.2% 43.3% 38.6% 15.6% 23.6% 11.4% 1.5% 9.3%
12/09/2005 BSCMS 2005-PWR10 $2,634 212/232 9.2% 4.4% 19.6% 45.9% 65.5% 95.2% 98.0% N/A $275.7 $1.0 $12.4 23.6% 31.4% 40.2% 14.5% 42.5% 18.8% 10.1% 4.2% 9.9%
09/14/2005 BSCMS 2005-PWR9 $2,152 200/229 1.4% 4.4% 14.0% 41.9% 55.9% N/A 98.4% 97.4% $137.5 $1.0 $10.8 14.8% 19.7% 29.9% 15.8% 45.9% 22.0% 8.6% 4.2% 3.5%
10/20/2005 BSCMS 2005-TOP20 $2,073 221/285 28.9% 4.5% 33.5% 22.0% 55.5% 83.1% N/A 86.5% $121.1 $0.5 $9.4 16.4% 24.4% 36.0% 26.4% 38.0% 8.8% 10.1% 7.6% 9.3%
10/27/2005 CD 2005-CD1 $3,903 225/261 23.1% 12.2% 24.7% 43.5% 68.2% N/A 99.1% 98.5% $290.0 $1.3 $17.3 17.8% 23.2% 32.8% 40.1% 29.8% 14.9% 6.6% 3.5% 5.2%
10/26/2005 CSFB 2005-C5 $2,937 281/337 17.2% 13.2% 10.3% 60.1% 70.4% 93.9% 93.5% N/A $310.0 $0.5 $10.5 18.0% 23.1% 33.3% 26.0% 30.6% 25.3% 8.6% 1.2% 8.5%
12/14/2005 CSFB 2005-C6 $2,505 229/241 6.2% 8.8% 17.8% 47.5% 65.3% N/A 97.7% 102.3% $175.0 $0.9 $10.9 19.0% 25.0% 34.0% 29.0% 29.9% 29.1% 5.8% 3.3% 3.0%
10/20/2005 GCCFC 2005-GG5 $4,295 173/267 2.7% 6.0% 30.5% 48.4% 78.9% N/A 106.0% 104.3% $320.0 $1.5 $24.8 20.7% 30.0% 41.4% 33.0% 35.3% 6.4% 15.4% 8.8% 1.1%
12/02/2005 GECMC 2005-C4 $2,398 167/225 5.1% 9.3% 16.2% 43.8% 60.0% N/A 105.9% 105.5% $122.0 $1.9 $14.4 13.3% 20.8% 34.5% 29.8% 35.8% 14.1% 8.2% 2.3% 9.8%
01/25/2006 GMACC 2006-C1 $1,730 121/216 12.4% 6.7% 26.5% 50.0% 76.5% 96.8% 101.6% N/A $106.3 $1.0 $14.2 17.4% 27.2% 43.4% 29.9% 26.1% 29.2% 7.8% 2.4% 4.6%
11/18/2005 JPMCC 2005-CIBC13 $2,721 236/281 0.0% 9.7% 24.4% 41.2% 65.6% 102.4% N/A 102.0% $180.9 $0.9 $11.5 16.7% 21.8% 31.6% 36.1% 27.3% 22.2% 7.8% 5.7% 0.9%
09/22/2005 JPMCC 2005-LDP4 $2,677 186/244 5.0% 7.2% 29.0% 39.7% 68.7% 100.8% N/A 100.5% $349.7 $1.1 $14.4 21.7% 27.7% 38.5% 29.6% 35.4% 18.6% 3.3% 11.1% 1.9%
12/16/2005 JPMCC 2005-LDP5 $4,322 195/313 11.1% 4.6% 34.3% 40.9% 75.2% 95.1% 98.1% 97.1% $335.0 $0.9 $21.5 20.7% 29.4% 45.0% 44.7% 25.5% 20.8% 2.1% 4.1% 2.7%
08/15/2005 LBUBS 2005-C5 $2,344 117/215 34.4% 9.9% 37.3% 33.8% 71.1% 89.4% 91.8% N/A $285.1 $1.1 $20.0 33.0% 43.9% 57.1% 37.3% 34.9% 10.5% 11.6% 1.3% 4.4%
10/25/2005 LBUBS 2005-C7 $2,347 143/227 36.3% 6.9% 40.5% 31.8% 72.3% 90.0% 91.0% N/A $285.1 $1.3 $16.4 27.0% 36.9% 53.5% 50.1% 23.0% 12.2% 10.0% 1.2% 3.6%
01/20/2006 LBUBS 2006-C1 $2,476 145/273 33.5% 3.7% 41.6% 30.1% 71.7% 90.1% 97.9% N/A $420.8 $1.1 $16.9 28.2% 38.1% 57.1% 38.6% 26.9% 7.4% 21.4% 2.7% 3.0%
12/01/2005 MLMT 2005-CKI1 $3,074 169/299 9.9% 8.6% 19.6% 42.5% 62.1% N/A 98.8% 98.4% $255.0 $0.3 $18.2 18.5% 26.0% 39.7% 24.3% 43.4% 8.4% 10.0% 5.0% 8.9%
12/16/2005 MLMT 2005-LC1 $1,546 142/176 8.1% 6.9% 3.8% 65.7% 69.5% N/A 99.9% 100.8% $125.7 $1.0 $10.9 19.9% 26.5% 37.5% 24.5% 33.2% 27.2% 7.3% 2.9% 4.9%
11/17/2005 MSC 2005-HQ7 $1,957 279/328 0.0% 15.4% 16.3% 31.9% 48.2% N/A 104.2% 103.2% $141.0 $0.3 $7.0 14.6% 19.3% 26.5% 30.6% 31.9% 13.6% 10.5% 4.1% 9.4%
10/12/2005 MSC 2005-IQ10 $1,547 210/220 11.6% 8.7% 24.1% 35.2% 59.3% N/A 95.2% 93.1% $196.0 $0.8 $7.3 23.4% 31.4% 46.6% 34.2% 23.8% 23.7% 7.4% 2.1% 8.7%
01/20/2006 MSC 2006-TOP21 $1,376 121/177 36.8% 7.0% 36.6% 28.2% 64.8% N/A 83.8% 83.1% $137.0 $0.7 $11.4 25.2% 37.3% 52.9% 25.1% 49.2% 8.1% 13.1% 2.5% 2.0%
10/14/2005 WBCMT 2005-C21 $3,250 233/329 5.2% 11.7% 31.9% 48.3% 80.2% 100.7% 103.7% 101.1% $200.0 $0.6 $13.9 17.6% 25.8% 39.6% 45.2% 15.7% 20.4% 6.9% 2.6% 9.2%
12/15/2005 WBCMT 2005-C22 $2,534 151/238 3.7% 14.4% 21.6% 56.1% 77.7% 101.0% 104.1% 101.7% $162.5 $1.4 $16.8 18.3% 27.9% 39.2% 25.5% 22.3% 23.2% 11.2% 3.3% 14.5%
Average $2,532 182/272 13.4% 8.2% 25.5% 42.1% 67.6% 95.3% 98.5% 98.3% $216.7 $1.0 $14.3 20.1% 28.1% 40.9% 32.2% 31.0% 18.0% 9.1% 3.8% 5.9%
* The statistics are based on rating agency presale reports so they may not reflect the precise composition at the launch of the indices.
Source: JPMorgan, Rating Agency Presale Reports
93
The CMBX: Some important facts
Represents a standardized basket of CMBS CDS that references a basket of newly

issued CMBS reference obligations.
Rolled every six months and includes bonds from most recently issued deals, which
mitigates the potential for reference obligations to exhibit credit-specific nuances.
Third parties, and no single dealer, are responsible for administering and marking
the Index, while 14 dealers contribute prices.
94
The CMBX: Activity to date
Since its launch, activity in the CMBX.NA.AAA sub-index has dwarfed that
of the other sub-indices by a ratio of approximately 10:1.
The majority of the activity, though, has been inter-dealer. Only a few
retail accounts have participated.
95
The CMBX: Performance to date
Spreads have tightened and the credit curve has flattened.
Spreads have tightened across the credit curve The CMBX credit curve has flattened
At Roll Date Closing Spread Spread Change
Fixed Versus 160
coupon June 30th, fixed
Sub index (strike) 2006 Day Week Month coupon 140
CMBX.NA.AAA 10.00 7.50 -0.09 0.00 0.50 -2.50

120
100
CMBX.NA.AA 25.00 18.58 -0.04 -0.09 0.72 -6.42 80
60
CMBX.NA.A 35.00 30.12 -0.12 0.54 1.95 -4.88
40
20
CMBX.NA.BBB 76.00 71.67 -0.95 -1.33 5.03 -4.33
0
AAA AA A BBB BBB-
CMBX.NA.BBB- 134.00 115.00 -0.19 -0.92 1.71 -19.00

06/30/2006 06/23/2006 At Roll Date
Source: Markit Source: JPMorgan, Markit
96
The CMBX & single-name CDS: Potential applications
May be used by cross-sector investors that want broad-based exposure at a

given rating level and do not have the expertise or resources to allocate to
bond-specific due diligence.
Trade Date CMBX.NA.AAA CMBX.NA.AA CMBX.NA.A CMBX.NA.BBB CMBX.NA.BBB-
06/30/2006 7.5900 18.6200 30.2400 72.6200 115.1900
Clean Price 100.17% 100.47% 100.35% 100.24% 101.39%

Dirty Price 100.18% 100.47% 100.36% 100.25% 101.41%
Accrued Interest $13.89 $34.72 $48.61 $105.56 $186.11
PV01 ($715.12) ($730.53) ($726.52) ($729.91) ($748.30)
Clean PV/MTM $1,739.88 $4,687.48 $3,502.77 $2,411.23 $13,914.72

Dirty PV/MTM $1,753.77 $4,722.21 $3,551.38 $2,516.78 $14,100.83
Annualized spread
widening break even 1.06 bp 2.55 bp 4.16 bp 9.95 bp 15.39 bp
97
Basis trades, which are trading strategies based on the spread differential
between a cash bond and a single-name CDS contract.
CDS cheaper vs. cash CDS richer vs. cash

Sell cash bond, sell protection Buy cash bond, buy protection
190 Cash BBB- (LH Axis) 0 170 (5)
CDS BBB- (LH Axis)
180
Basis (RH Axis) 160
(5) (10)
170
150
160
(10) (15)
150 140
140 130
(15) (20)
130
120
120 Cash BBB- (LH Axis)
(20) (25)
110 CDS BBB- (LH Axis)
110
Basis (RH Axis)
100 (25) 100 (30)
02/16/2006 02/21/2006 02/26/2006 03/03/2006 03/08/2006 03/08/2006 03/13/2006 03/18/2006 03/23/2006
Source: JPMorgan Source: JPMorgan
98
Synthetic cross-sector or capital structure arbitrage, in which an investor

simultaneously buys (or sells) an index in one sector (e.g., the CDX, ABX or
CMBX) and sells (or buys) an index in the same or in a different sector against it.
In the example below, the CMBX.NA.AA has tightened more than any other CMBX
sub-index on a percentage basis. One possible trade would be to sell a “credit
butterfly” by buying CMBX.NA.AAA and CMBX.NA.A and selling the CMBX.NA.AA.
Spread Change (bp) Percent
Fixed Closing Versus Tightening 6-month Historical
Coupon Spread Fixed Since Roll Cash Spread
Sub Index (Strike) 03/24/2006 Day Week Month Coupon Date Volatility (bp)
CMBX.NA.AAA 10.00 7.50 -0.06 -0.91 N/A -2.50 -25% 1.37
CMBX.NA.AA 25.00 17.29 -0.21 -1.46 N/A -7.71 -31% 2.12
CMBX.NA.A 35.00 27.64 0.02 -1.17 N/A -7.36 -21% 2.45
CMBX.NA.BBB 76.00 60.93 -0.88 -0.95 N/A -15.07 -20% 10.00

CMBX.NA.BBB- 134.00 111.29 -1.03 -2.96 N/A -22.71 -17% 13.00
99
Exploit pricing inefficiencies among trading vehicles, such as among the

CMBX, single-name CDS, cash bonds or TRS.
Example: Compare the difference between buying $50 million of the
CMBX.NA.AAA at 10bp versus buying $50 million of AAA CMBS at S+26bp.
Step Pay (per annum) Receive (per annum)
1. Finance cash bond L+3 $50mn

2. Buy cash bond $50mn 26bp
3. Buy IR swap -26bp L+12bp
Net total: 9bp
In this example, an investor would pick up 1bp by buying the CMBX.NA.AAA

at 10bp instead of buying cash CMBS AAAs at S+26bp.
100
Conclusion
The growth of the CMBS industry has broadened its investor base and has
increased their sophistication.
This has led to more efficient structures

Ability to gain/shed risk speculatively
Transfer economic exposure without selling cash asset
Hedge an existing portfolio
Create structures otherwise impossible if one was limited to cash bond
assets
Should ultimately lead to more efficient pricing

101
Analyst Certification
The analyst(s) denoted by an “AC” certifies that: (1) all of the views expressed in this research accurately reflect his or her personal views about any and all of the subject securities or issuers; and
(2) no part of any of the analyst’s compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the analyst(s) in this research.
Important Disclosures
* JPMSI or an affiliate has managed or co-managed an offering of securities within the past twelve months.
^ A senior employee, executive officer, or director of JPMSI and/or its affiliates is a director of the company.
Explanation of Credit Research Ratings:
Ratings System: JPMorgan uses the following sector/issuer portfolio weightings: Overweight (over the next three months, the recommended risk position is expected to outperform the relevant index, sector, or benchmark), Neutral (over the
next three months, the recommended risk position is expected to perform in line with the relevant index, sector, or benchmark), and Underweight (over the next three months, the recommended risk position is expected to underperform the
relevant index, sector, or benchmark)
Valuation & Methodology: In JPMorgan’s credit research, we assign a rating to each issuer (Overweight, Underweight or Neutral) based on our credit view of the issuer and the relative value of its securities, taking into account the ratings
assigned to the issuer by credit rating agencies and the market prices for the issuer’s securities. Our credit view of an issuer is based upon our opinion as to whether the issuer will be able service its debt obligations when they become due and
payable. We assess this by analyzing, among other things, the issuer’s credit position using standard credit ratios such as cash flow to debt and fixed charge coverage (including and excluding capital investment). We also analyze the issuer’s
ability to generate cash flow by reviewing standard operational measures for comparable companies in the sector, such as revenue and earnings growth rates, margins, and the composition of the issuer’s balance sheet relative to the operational
leverage in its business.
Analysts’ Compensation: The research analysts responsible for the preparation of this report receive compensation based upon various factors, including the quality and accuracy of research, client feedback, competitive factors and overall
firm revenues. The firm’s overall revenues include revenues from its investment banking and fixed income business units.
Other Disclosures
CMBXTM is a service mark of the CDX IndexCo LLC and has been licensed for use by JPMorgan. CDS IndexCo does not sponsor, promote or endorse this publication
Options related research: If the information contained herein regards options related research, such information is available only to persons who have received the proper option risk disclosure documents. For a copy of the Option Clearing
Corporation’s Characteristics and Risks of Standardized Options, please contact your JPMorgan Representative or visit the OCC’s website at http://www.optionsclearing.com/publications/risks/riskstoc.pdf.
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CMBS Overview

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JUNE 2006

Alan L. Todd, CFAAC

Yuriko Iwai, CFA

1974: ERISA passage sparked

Late ’80s-early ’90s: Tax reforms

1982: Savings &

1981-1982: 1989: FIRREA Early 90s: RTC used Mid 90s-Present:

commercial loans performing assets flourished

 Commercial Mortgage Backed Securities

 CMBS offer diversification benefits as bonds are

 All categories of institutional investors invest in

 The continued growth in transaction size and the Bank/

2002 CMBS Participation by Investor Type

Typical CMBS buyers by bond ratings

Class rating Typical buyers Hedge

 Good diversification with respect to other institutional-grade assets

 Strong institutional sponsorship for CMBS

 Excellent returns and credit performance

Who What Why

Owners of large commercial …issue securities backed by …to secure attractive

 A pool of receivables is sold by originators into a special purpose vehicle. Bonds

 Feature credit enhancements which lead to high credit ratings.

CMBS Loan Origination

Loan Origination, Underwriting,

Rating Agency Private Placement of Prospectus, Pooling & CMBS

Rating agency methodology is generally consistent across securitized products

Legal Structural Rating Rating

 “Special” servicer forecloses, re-structures, or works out loans that become

 Servicing of commercial mortgage loans involves greater discretion than servicing

 Rating agencies review and approve the servicer’s capabilities as an integral

CMBS Supply by Deal Type ($ millions)

* Other includes lease-backed deals and seasoned loan deals.

less than in 2005.

 In sharp contrast to 2004-2005 when international issuance volume surged, international

Commercial mortgage outstandings end of period, not seasonally adjusted ($ billions)

 CMBS continue to increase in share of total commercial mortgage outstandings.

 Core property types remain office, retail and multifamily.

 Property type concentrations shift as investors re-evaluate the attractiveness of each. As

Replacement Reserv es (RR) $ 23,215

 LTV and DSCR are important indicators of default potential.

 Function of LTV and DSCR

Case I – Actual 80% Leverage Case II – 70% Leverage

Underwritten 79.7 1.20x 70.0 1.37x

 Aspect of credit risk

 Most loans have 20- to 30-year amortization schedules, which help

0-6 Month Free Period

Fixed Penalty (5-4-3-2-1)

 Call protection terminology:

 Current exposure by type of call protection:

 Lock-out followed by defeasance is preferred by bond investors because it results in the

 20 to 30 year amortization period  Interest only terms

 Spread + 10-year Treasury  Spread + 1 month Libor; embedded

 Stabilized property  Can be transitional property

 Minimum DSCR of 1.20 to 1.25x;  Generally have DSCRs of 2.00 to 4.00x

 2-5 years of prepayment lock-out  Typically have 1-2 years of prepayment

 Requires TI/LC escrows, real estate tax  Same

 Non-recourse to the borrower  Same

 Structured as single asset entity and  Same

Credit considerations Liquidity considerations Cash flow considerations

y Collateral y Liquidity y Cash flow

5-yr. AAA 10-yr. AAA X(IO) AAA

$1.4BN 8.10% A $35MN

Principal and interest

Commercial Mortgage Backed Securities

CMBS offer diversification benefits as bonds are

All categories of institutional investors invest in

The continued growth in transaction size and the Bank/

Good diversification with respect to other institutional-grade assets

Strong institutional sponsorship for CMBS

Excellent returns and credit performance

A pool of receivables is sold by originators into a special purpose vehicle. Bonds

Feature credit enhancements which lead to high credit ratings.

“Special” servicer forecloses, re-structures, or works out loans that become

Servicing of commercial mortgage loans involves greater discretion than servicing

Rating agencies review and approve the servicer’s capabilities as an integral

In sharp contrast to 2004-2005 when international issuance volume surged, international

CMBS continue to increase in share of total commercial mortgage outstandings.

Core property types remain office, retail and multifamily.

Property type concentrations shift as investors re-evaluate the attractiveness of each. As

LTV and DSCR are important indicators of default potential.

Function of LTV and DSCR

Aspect of credit risk

Most loans have 20- to 30-year amortization schedules, which help

Call protection terminology:

Current exposure by type of call protection:

Lock-out followed by defeasance is preferred by bond investors because it results in the

20 to 30 year amortization period Interest only terms

Spread + 10-year Treasury Spread + 1 month Libor; embedded

Stabilized property Can be transitional property

Minimum DSCR of 1.20 to 1.25x; Generally have DSCRs of 2.00 to 4.00x

2-5 years of prepayment lock-out Typically have 1-2 years of prepayment

Requires TI/LC escrows, real estate tax Same

Non-recourse to the borrower Same

Structured as single asset entity and Same

Most pre-2005 triple-A structures had only 2 tranches:

Subordination levels declined as issuers included more investment-grade loans in transactions

NOT interest rate sensitive (i.e., no prepayments due to loan-level lockout)

NOT interest rate sensitive (hard lockout followed by 1) defeasance or 2) yield

Tight-window 7-year AAA:

Tight-window 10-year AAAs (A-4, A-M, A-J):

BB+ through Unrated bonds (below investment-grade).

Often have special servicing capabilities

In deals backed by turn-around properties, recession weakness and property

Loans have either a two- or a three-year initial term.

Loans are locked-out from prepayment for 1 to 2 years.

Prepayment penalties collected usually used to compensate the IO holders

Many floating rate loans are collateralized by multiple properties.

Senior/Subordinate structure from AAA to BBB-

Some deals use straight sequential structure

Many deals use a modified Pro-Rata Structure

Rake Structure – not used since 2003

Spread: Wide compared with many other assets

U.S. Real Estate markets are improving

GOOD CARRY: Bonds can be repo’d at attractive rates and haircuts

CDO GROWTH: The Commercial Real Estate CDO market is growing

Repayment is dependent on a handful of large loans.

Transitional properties increase balloon-date default risk.

The credit quality, diversification and subordination of a fixed-rate AAA bond.

Any WAL from 5 to 10 years – designed specifically to meet investor demand.

Cash flow stability with respect to bond extensions or shortening?