10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)
 

ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2008

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to _____________

Commission File Number 1-14788

Capital Trust, Inc.

(Exact name of registrant as specified in its charter)

Maryland	94-6181186
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
410 Park Avenue, 14th Floor, New York, NY	10022
(Address of principal executive offices)	(Zip Code)
Registrant's telephone number, including area code:	(212) 655-0220

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x   No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.  (Check one):

Large accelerated filer o Accelerated filer ý Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes o   No ý

APPLICABLE ONLY TO CORPORATE ISSUERS:

The number of outstanding shares of the registrant's class A common stock, par value $0.01 per share, as of July 29, 2008 was 22,090,131.

Part I.	Financial Information
	Item 1:	Financial Statements	1
		Consolidated Balance Sheets – June 30, 2008 (unaudited) and December 31, 2007 (audited)	1
		Consolidated Statements of Income – Three and Six Months Ended June 30, 2008 (unaudited) and 2007 (unaudited)	2
		Consolidated Statements of Changes in Shareholders' Equity – Six Months Ended June 30, 2008 (unaudited) and 2007 (unaudited)	3
		Consolidated Statements of Cash Flows – Six Months Ended June 30, 2008 (unaudited) and 2007 (unaudited)	4
		Notes to Consolidated Financial Statements (unaudited)	5
	Item 2:	Management's Discussion and Analysis of Financial Condition and Results of Operations	29
	Item 3:	Quantitative and Qualitative Disclosures About Market Risk	46
	Item 4:	Controls and Procedures	48
Part II.	Other Information
	Item 1:	Legal Proceedings	49
	Item 1A:	Risk Factors	49
	Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds	49
	Item 3:	Defaults Upon Senior Securities	49
	Item 4:	Submission of Matters to a Vote of Security Holders	49
	Item 5:	Other Information	49
	Item 6:	Exhibits	50
	Signatures		51

Capital Trust, Inc. and Subsidiaries
Consolidated Balance Sheets
June 30, 2008 and December 31, 2007
(in thousands, except per share data)
	June 30,			December 31,
Assets	2008			2007
	(unaudited)			(audited)
Cash and cash equivalents	$	95,262		$	25,829
Restricted cash		14,645			5,696
Commercial mortgage backed securities		861,792			876,864
Loans receivable, net		2,126,965			2,257,563
Equity investment in unconsolidated subsidiaries		974			977
Deposits and other receivables		4,488			3,927
Accrued interest receivable		12,241			15,091
Interest rate hedge assets		81			—
Deferred income taxes		4,160			3,659
Prepaid and other assets		18,607			21,876
Total assets	$	3,139,215		$	3,211,482
Liabilities & Shareholders' Equity
Liabilities:
Accounts payable and accrued expenses	$	30,092		$	65,682
Repurchase obligations		800,742			911,857
Collateralized debt obligations		1,170,573			1,192,299
Senior unsecured credit facility		100,000			75,000
Junior subordinated debentures		128,875			128,875
Participations sold		410,109			408,351
Interest rate hedge liabilities		17,002			18,686
Deferred origination fees and other revenue		1,128			2,495
Total liabilities		2,658,521			2,803,245
Shareholders' equity:
Class A common stock $0.01 par value 100,000 shares authorized, 21,722 and 17,166 shares issued and outstanding at June 30, 2008 and December 31, 2007, respectively ("class A common stock")		217			172
Restricted class A common stock $0.01 par value, 385 and 424 shares issued and outstanding at June 30, 2008 and December 31, 2007, respectively ("restricted class A common stock" and together with class A common stock, "common stock")		4			4
Additional paid-in capital		553,622			426,113
Accumulated other comprehensive loss		(8,695	)		(8,684	)
Accumulated deficit		(64,454	)		(9,368	)
Total shareholders' equity		480,694			408,237
Total liabilities and shareholders' equity	$	3,139,215		$	3,211,482
See accompanying notes to consolidated financial statements.

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Capital Trust, Inc. and Subsidiaries
Consolidated Statements of Income
Three and Six Months Ended June 30, 2008 and 2007
(in thousands, except share and per share data)
(unaudited)
	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2008			2007			2008			2007
Income from loans and other investments:
Interest and related income	$	49,030		$	68,797		$	105,585		$	126,247
Less: Interest and related expenses		32,799			40,192			70,743			76,293
Income from loans and other investments, net		16,231			28,605			34,842			49,954
Other revenues:
Management fees		4,154			582			6,350			1,331
Incentive management fees		—			—			—			962
Servicing fees		44			45			222			112
Other interest income		638			272			825			582
Total other revenues		4,836			899			7,397			2,987
Other expenses:
General and administrative		6,208			7,832			13,108			14,644
Depreciation and amortization		22			60			127			1,388
Total other expenses		6,230			7,892			13,235			16,032
Gain on extinguishment of debt		6,000			—			6,000			—
(Provision for)/recovery of losses on loan impairment		(56,000	)		4,000			(56,000	)		4,000
Gain on sale of investments		374			—			374			—
Income/(loss) from equity investments		69			(230	)		76			(933	)
(Loss) Income before income taxes		(34,720	)		25,382			(20,546	)		39,976
Income tax provision (benefit)		98			—			(501	)		(254	)
Net (loss) income	$	(34,818	)	$	25,382		$	(20,045	)	$	40,230
Per share information:
Net (loss) earnings per share of common stock:
Basic	$	(1.59	)	$	1.45		$	(1.01	)	$	2.29
Diluted	$	(1.59	)	$	1.43		$	(1.01	)	$	2.27
Weighted average shares of common stock outstanding:
Basic		21,915,175			17,558,493			19,928,912			17,536,245
Diluted		21,915,175			17,728,180			19,928,912			17,715,810
Dividends declared per share of common stock	$	0.80		$	0.80		$	1.60		$	1.60
See accompanying notes to consolidated financial statements.

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Capital Trust, Inc. and Subsidiaries

Consolidated Statements of Changes in Shareholders' Equity

For the Six Months Ended June 30, 2008 and 2007

(in thousands)

(unaudited)

	Comprehensive Income (Loss)			Class A Common Stock		Restricted Class A Common Stock		Additional Paid-In Capital		Accumulated Other Comprehensive Income/(Loss)			Accumulated Deficit			Total
Balance at January 1, 2007				$	169	$	5	$	417,641	$	12,717		$	(4,260	)	$	426,272
Net income	$	40,230			—		—		—		—			40,230			40,230
Unrealized gain on derivative financial instruments		9,644			—		—		—		9,644			—			9,644
Unrealized gain on available for sale security		110			—		—		—		110			—			110
Amortization of unrealized gain on securities		(837	)		—		—		—		(837	)		—			(837	)
Currency translation adjustments		810			—		—		—		810			—			810
Issuance of stock relating to asset purchase		—			—		—		707		—			—			707
Deferred loss on settlement of swap		(153	)		—		—		—		(153	)		—			(153	)
Amortization of deferred gains and losses on settlement of swaps		(137	)		—		—		—		(137	)		—			(137	)
Sale of shares of class A common stock under stock option agreement		—			—		—		952		—			—			952
Restricted class A common stock earned		—			2		—		2,464		—			—			2,466
Dividends declared on common stock		—			—		—		—		—			(27,975	)		(27,975	)
Balance at June 30, 2007	$	49,667		$	171	$	5	$	421,764	$	22,154		$	7,995		$	452,089
Balance at January 1, 2008				$	172	$	4	$	426,113	$	(8,684	)	$	(9,368	)	$	408,237
Net loss	$	(20,045	)											(20,045	)		(20,045	)
Unrealized gain on derivative financial instruments		1,764			—		—		—		1,764			—			1,764
Unrealized gain on available for sale security		277			—		—		—		277			—			277
Reclassification to gain on sale of investments		(482	)		—		—		—		(482	)		—			(482	)
Amortization of unrealized gain on securities		(853	)		—		—		—		(853	)		—			(853	)
Deferred loss on settlement of swap		(612	)		—		—		—		(612	)		—			(612	)
Amortization of deferred gains and losses on settlement of swaps		(105	)		—		—		—		(105	)		—			(105	)
Shares of class A common stock issued in public offering		—			40		—		112,567		—			—			112,607
Shares of class A common stock issued under dividend reinvestment plan and stock purchase plan		—			5		—		12,835		—			—			12,840
Sale of shares of class A common stock under stock option agreement		—			—		—		180		—			—			180
Restricted class A common stock earned		—			—		—		1,927		—			—			1,927
Dividends declared on common stock		—			—		—		—		—			(35,041	)		(35,041	)
Balance at June 30, 2008	$	(20,056	)	$	217	$	4	$	553,622	$	(8,695	)	$	(64,454	)	$	480,694

See accompanying notes to consolidated financial statements.

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Capital Trust, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 2008 and 2007
(in thousands)
(unaudited)
	Six Months Ended
	June 30,
	2008			2007
Cash flows from operating activities:
Net (loss) income	$	(20,045	)	$	40,230
Adjustments to reconcile net (loss) income to net cash provided by
operating activities:
Depreciation and amortization		127			1,388
Gain on extinguishment of debt		(6,000	)		—
Provision for losses		56,000			—
Gain on sale of investment		(374	)		—
(Income)/loss from equity investments		(76	)		933
Deferred income taxes		(501	)		—
Distributions of income from equity investments in unconsolidated
subsidiaries		—			320
Restricted class A common stock earned		1,927			2,464
Amortization of premiums and discounts on loans, CMBS,
and debt, net		(3,347	)		(1,022	)
Amortization of deferred gains and losses on settlement of swaps		(105	)		(137	)
Amortization of finance costs		2,786			2,605
Changes in assets and liabilities, net:
Deposits and other receivables		593			1,616
Accrued interest receivable		2,851			(662	)
Prepaid and other assets		574			(1,382	)
Deferred origination fees and other revenue		(1,160	)		(1,074	)
Accounts payable and accrued expenses		(5,784	)		2,676
Net cash provided by operating activities		27,466			47,955
Cash flows from investing activities:
Purchases of CMBS		(660	)		(110,550	)
Principal collections on and proceeds from CMBS		15,806			29,968
Origination, purchase and fundings of loans receivable		(94,435	)		(1,005,084	)
Principal collections on and proceeds from loans receivable		171,859			442,442
Equity investments in unconsolidated subsidiaries		—			(3,919	)
Return of capital from equity investments in unconsolidated subsidiaries		—			1,616
Proceeds from total return swaps		—			1,815
Purchase of equipment and leasehold improvements		(30	)		(307	)
Payments for business purchased		—			(1,853	)
Payment of capitalized costs		—			(115	)
Increase in restricted cash		(8,949	)		(2,080	)
Net cash provided by (used in) investing activities		83,591			(648,067	)
Cash flows from financing activities:
Proceeds from repurchase obligations		131,018			1,163,636
Repayment of repurchase obligations		(236,133	)		(903,272	)
Proceeds from credit facilities		25,000			100,000
Repayment of credit facilities		—			(25,000	)
Issuance of junior subordinated debentures		—			77,325
Purchase of common equity in CT Preferred Trust I & CT Preferred
Trust II		—			(2,325	)
Repayment of collateralized debt obligations		(21,569	)		(12,598	)
Proceeds from participations sold		—			239,742
Settlement of interest rate hedges		(612	)		(153	)
Payment of financing costs		(108	)		(2,218	)
Sale of class A common stock upon stock option exercise		180			952
Stock issuance for business purchased		—			707
Dividends paid on common stock		(64,847	)		(38,347	)
Proceeds from sale of shares of class A common stock		123,108			—
Proceeds from dividend reinvestment plan		2,339			—
Net cash (used in) provided by financing activities		(41,624	)		598,449
Net increase (decrease) in cash and cash equivalents		69,433			(1,663	)
Cash and cash equivalents at beginning of year		25,829			26,142
Cash and cash equivalents at end of period	$	95,262		$	24,479

See accompanying notes to consolidated financial statements.

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Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(unaudited)

1.   Organization

References herein to “we,” “us” or “our” refer to Capital Trust, Inc. and its subsidiaries unless the context specifically requires otherwise.

We are a fully integrated, self-managed finance and investment management company that specializes in credit-sensitive structured financial products. To date, our investment programs have focused on loans and securities backed by commercial real estate assets. We invest for our own account directly on our balance sheet and for third parties through a series of investment management vehicles. From the commencement of our finance business in 1997 through June 30, 2008, we have completed over $10.8 billion of investments in the commercial real estate debt arena. We conduct our operations as a real estate investment trust, or REIT, for federal income tax purposes and we are headquartered in New York City.

2.    Summary of Significant Accounting Policies

The accompanying unaudited consolidated interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. The accompanying unaudited consolidated interim financial statements should be read in conjunction with the financial statements and the related management’s discussion and analysis of financial condition and results of operations filed with our Annual Report on Form 10-K for the fiscal year ended December 31, 2007.  In our opinion, all material adjustments (consisting of normal, recurring accruals) considered necessary for a fair presentation have been included. The results of operations for the six months ended June 30, 2008 are not necessarily indicative of results that may be expected for the entire year ending December 31, 2008.  Our accounting and reporting policies conform in all material respects to generally accepted accounting principles, or GAAP, in the United States.

Principles of Consolidation

The accompanying unaudited consolidated interim financial statements include, on a consolidated basis, our accounts, the accounts of our wholly-owned subsidiaries and our interests in variable interest entities in which we are the primary beneficiary.  All significant intercompany balances and transactions have been eliminated in consolidation. Our interests in CT Preferred Trust I and CT Preferred Trust II, the issuers of trust securities backed by our junior subordinated debentures, are accounted for using the equity method and their assets and liabilities are not consolidated into our financial statements due to our determination that CT Preferred Trust I and CT Preferred Trust II are variable interest entities in which we are not the primary beneficiary under Financial Accounting Standards Board, or FASB, Interpretation No. 46(R) “Consolidation of Variable Interest Entities”, or FIN 46R. We account for our co-investment interest in the private equity funds we co-sponsored and continue to manage, CT Mezzanine Partners III, Inc., or Fund III, and CT Opportunity Partners I, LP, or CTOPI, under the equity method of accounting. We also accounted for our investment in Bracor Investimentos Imobiliarios Ltda., or Bracor, under the equity method of accounting until we sold our investment in December 2007. As such, we report a percentage of the earnings of the companies in which we have such investments equal to our ownership percentage on a single line item in the consolidated statement of income as Income from equity investments. CTOPI is an investment company (under the AICPA Investment Company Guide) and therefore it maintains its financial records on a fair value basis. We have retained such accounting relative to our investment in CTOPI pursuant to the Emerging Issues Task Force, or EITF, Issue No. 85-12 “Retention of Specialized Accounting for Investments in Consolidation.”

Revenue Recognition

Interest income from our loans receivable is recognized over the life of the investment using the effective interest method and is recorded on the accrual basis. Fees, premiums, discounts and direct costs in connection with these investments are deferred until the loan is advanced and are then recognized over the term of the loan as an adjustment to yield. Fees on commitments that expire unused are recognized at expiration. For loans where we have unfunded commitments, we amortize the appropriate items on a straight line basis. Income recognition is generally suspended for loans at the earlier of the date at which payments become 90 days past due or when, in the opinion of management, a full recovery of income and principal becomes doubtful. Income recognition is resumed when the loan becomes contractually current and performance is demonstrated to be resumed.

Fees from special servicing and asset management services are recognized as services are rendered. We account for incentive fees we earn from our investment management business in accordance with Method 1 of EITF D-96, “Accounting for Management Fees Based on a Formula”. Under Method 1, no incentive income is recorded until all contingencies have been eliminated.

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Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

Cash and Cash Equivalents

We classify highly liquid investments with original maturities of three months or less from the date of purchase as cash equivalents.  At June 30, 2008 and December 31, 2007, a majority of the cash and cash equivalents consisted of overnight deposits in demand deposit and money market accounts.  As of, and for the periods ended, June 30, 2008 and December 31, 2007, we had bank balances in excess of federally insured amounts.  We have not experienced any losses on our demand deposits, commercial paper or money market investments.

Restricted Cash

Restricted cash at June 30, 2008 was comprised of $14.6 million that is on deposit with the trustee for our collateralized debt obligations, or CDOs, and is expected to be used to pay contractual interest and principal and to purchase replacement collateral for our reinvesting CDOs during their respective reinvestment periods. Restricted cash at December 31, 2007 was $5.7 million.

Commercial Mortgage Backed Securities

We classify our commercial mortgage backed securities, or CMBS, pursuant to FASB Statement of Financial Accounting Standards No. 115, “Accounting for Certain Investments in Debt and Equity Securities”, or FAS 115, on the date of acquisition of the investment. On August 4, 2005, we made a decision to change the accounting classification of our CMBS investments from available-for-sale to held-to-maturity. Held-to-maturity investments are stated at cost adjusted for the amortization of any premiums or discounts and any premiums or discounts are amortized through the consolidated statements of income using the effective interest method.  Other than in the instance of impairment, these held-to-maturity investments are shown in our financial statements at their adjusted values pursuant to the methodology described above.

We may also invest in CMBS and certain other securities which may be classified as available-for-sale. Available-for-sale securities are carried at estimated fair value with the net unrealized gains or losses reported as a component of accumulated other comprehensive income/(loss) in shareholders’ equity. Many of these investments are relatively illiquid and management must estimate their values. In making these estimates, management utilizes market prices provided by dealers who make markets in these securities, but may, under certain circumstances, adjust these valuations based on management’s judgment. Changes in the valuations do not affect our reported income or cash flows, but impact shareholders’ equity and, accordingly, book value per share.

Income on these securities is recognized based upon a number of assumptions that are subject to uncertainties and contingencies. Examples include, among other things, the rate and timing of principal payments, including prepayments, repurchases, defaults and liquidations, the pass-through or coupon rate and interest rates. Additional factors that may affect our reported interest income on our mortgage backed securities include interest payment shortfalls due to delinquencies on the underlying mortgage loans and the timing and magnitude of credit losses on the mortgage loans underlying the securities that are impacted by, among other things, the general condition of the real estate market, including competition for tenants and their related credit quality, and changes in market rental rates. These uncertainties and contingencies are difficult to predict and are subject to future events that may alter the assumptions.

We account for CMBS under EITF 99-20, “Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets”, or EITF 99-20. Under EITF 99-20, when significant changes in estimated cash flows from the cash flows previously estimated occur due to actual prepayment and credit loss experience and the present value of the revised cash flows using the current expected yield is less than the present value of the previously estimated remaining cash flows, adjusted for cash receipts during the intervening period, an other than temporary impairment is deemed to have occurred. Accordingly, the security is written down to fair value with the resulting charge being included in income and a new cost basis established with the original discount or premium written off when the new cost basis is established. In accordance with this guidance, on a quarterly basis, when significant changes in estimated cash flows from the cash flows previously estimated occur due to actual prepayment and credit loss experience, we calculate a revised yield based upon the current amortized cost of the investment, including any other than temporary impairments recognized to date, and the revised cash flows. The revised yield is then applied prospectively to recognize interest income. Management must also assess whether unrealized losses on securities reflect a decline in value that is other than temporary, and, accordingly, write down the impaired security to its fair value, through a charge to income. Significant judgment of management is required in this analysis that includes, but is not limited to, making assumptions regarding the collectability of the principal and interest, net of related expenses, on the underlying loans.

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Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

During the fourth quarter of 2004, we concluded that two of our CMBS investments had incurred other-than-temporary impairment and we incurred a charge of $5.9 million through the income statement.  At June 30, 2008, we believe there has not been any adverse change in estimated cash flows relating to existing CMBS investments; therefore we did not recognize any additional other than temporary impairment on any CMBS investments.  Significant judgment of management is required in this analysis that includes, but is not limited to, making assumptions regarding the collectability of the principal and interest, net of related expenses, on the underlying loans.

From time to time we purchase CMBS and other investments in which we have a level of control over the issuing entity; we refer to these investments as controlling class investments. The presentation of controlling class investments in our financial statements is governed in part by FIN 46R. FIN 46R could require that certain controlling class investments be presented on a consolidated basis. Based upon the specific circumstances of certain of our CMBS investments that are controlling class investments and our interpretation of FIN 46R, specifically the exemption for qualifying special purpose entities as defined under FASB Statements of Financial Accounting Standard No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”, or FAS 140, we have concluded that the entities that have issued the controlling class investments should not be presented on a consolidated basis. We are aware that FAS 140 is currently under review by standard setters and that, as a result of this review, our current interpretation of FIN 46R and FAS 140 may change.

Loans Receivable and Reserve for Possible Credit Losses

We purchase and originate commercial real estate debt and related instruments, or Loans, to be held as long term investments at amortized cost. Management must periodically evaluate each of these Loans for possible impairment. Impairment is indicated when it is deemed probable that we will not be able to collect all amounts due according to the contractual terms of the Loan. If a Loan were determined to be permanently impaired, we would write down the Loan through a charge to the reserve for possible credit losses. Given the nature of our Loan portfolio and the underlying commercial real estate collateral, significant judgment on the part of management is required in determining permanent impairment and the resulting charge to the reserve, which includes but is not limited to making assumptions regarding the value of the real estate that secures the loan. Each Loan in our portfolio is evaluated at least quarterly using our loan risk rating system which considers loan-to-value, debt yield, cash flow stability, exit plan, loan sponsorship, loan structure and other factors deemed necessary by management to assess the likelihood of delinquency or default. If we believe that there is a potential for delinquency or default, a downside analysis is prepared to estimate the value of the collateral underlying our Loan, and this potential loss is multiplied by the default likelihood to determine the size of the reserve. Actual losses, if any, could ultimately differ from these estimates.

Deferred Financing Costs

The deferred financing costs which are included in prepaid and other assets on our consolidated balance sheets include issuance costs related to our debt and are amortized using the effective interest method or a method that approximates the effective interest method.

Repurchase Obligations

In certain circumstances, we have financed the purchase of investments from a counterparty through a repurchase agreement with that same counterparty. We currently record these investments in the same manner as other investments financed with repurchase agreements, with the investment recorded as an asset and the related borrowing under any repurchase agreement as a liability on our consolidated balance sheets. Interest income earned on the investments and interest expense incurred on the repurchase obligations are reported separately on the consolidated statements of income. In February 2008, the FASB issued FASB Staff Position 140-3, “Accounting for Transfers of Financial Assets and Repurchase Financing Transactions, or FSP 140-3, which provides guidance on accounting for transfers of financial assets and repurchase financings.  FSP 140-3 presumes that an initial transfer of a financial asset and a repurchase financing shall not be evaluated as a linked transaction and shall be evaluated separately under FAS 140.  If the linked transaction does not meet the requirements for sale accounting, the linked transaction shall generally be accounted for as a forward contract, as opposed to the current presentation, where the purchased asset and the repurchase liability are reflected separately on the balance sheet.

FSP 140-3 is effective on a prospective basis for fiscal years beginning after November 15, 2008, with earlier application not permitted.  Given that FSP 140-3 is to be applied prospectively, we do not expect that the adoption of FSP 140-3 will have a material impact on the Company’s financial statements.

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Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

Interest Rate Derivative Financial Instruments

In the normal course of business, we use interest rate derivative financial instruments to manage, or hedge, cash flow variability caused by interest rate fluctuations. Specifically, we currently use interest rate swaps to effectively convert variable rate liabilities, that are financing fixed rate assets, to fixed rate liabilities. The differential to be paid or received on these agreements is recognized on the accrual basis as an adjustment to the interest expense related to the attendant liability. The interest rate swap agreements are generally accounted for on a held-to-maturity basis, and, in cases where they are terminated early, any gain or loss is generally amortized over the remaining life of the hedged item. These swap agreements must be effective in reducing the variability of cash flows of the hedged items in order to qualify for the aforementioned hedge accounting treatment. Changes in value of effective cash flow hedges are reflected in our financial statements through accumulated other comprehensive income/(loss) and do not affect our net income. To the extent a derivative does not qualify for hedge accounting, and is deemed a non-hedge derivative, the changes in its value are included in net income.

To determine the fair value of derivative instruments, we use third parties to periodically value our interests.

Income Taxes

Our financial results generally do not reflect provisions for current or deferred income taxes on our REIT taxable income. Management believes that we operate in a manner that will continue to allow us to be taxed as a REIT and, as a result, do not expect to pay substantial corporate level taxes (other than taxes payable by our taxable REIT subsidiaries which are accounted for in accordance with FASB Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes”, or FAS 109). Many of these requirements, however, are highly technical and complex. If we were to fail to meet these requirements, we may be subject to federal, state and local income tax on current and past income, and we may also be subject to penalties.

In June 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes an interpretation of FASB Statement No. 109”, or FIN 48.  This interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FAS 109. This interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. This interpretation was effective January 1, 2007 for us. The adoption of FIN 48 did not have a material impact on our financial results.

Accounting for Stock-Based Compensation

We account for stock based compensation in accordance with FASB Statement of Financial Accounting Standards No. 123(R) “Share Based Payment,” or FAS 123(R).  Upon adoption of FAS 123(R), as of January 1, 2006, we have elected to utilize the modified prospective method, and there was no impact from this adoption.  Compensation expense for the time vesting of stock based compensation grants is recognized on the accelerated attribution method and compensation expense for performance vesting of stock based compensation grants is recognized on a straight line basis.  Compensation expense relating to stock-based compensation is recognized in net income using a fair value measurement method.

Comprehensive Income

We comply with the provisions of the FASB Statement of Financial Accounting Standards No. 130, “Reporting Comprehensive Income”, or FAS 130, in reporting comprehensive income and its components in the full set of general purpose financial statements. Total comprehensive (loss)/income was ($20.1) million and $50.0 million, for the periods ended June 30, 2008 and 2007, respectively.  The primary components of comprehensive income other than net loss were the unrealized gain/(loss) on derivative financial instruments and CMBS.  At June 30, 2008, accumulated other comprehensive loss was $8.7 million, comprised of unrealized gains on CMBS of $7.5 million, unrealized losses on cash flow swaps of $16.9 million, and $771,000 of deferred realized gains on the settlement of cash flow swaps.

Earnings per Share of Common Stock

Earnings per share of common stock are presented based on the requirements of the FASB Statement of Accounting Standards No. 128, “Earnings per Share”, or FAS 128. Basic EPS is computed based on the net earnings applicable to common stock and stock units divided by weighted average number of shares of common stock and stock units outstanding during the period. Diluted EPS is based on the net earnings allocable to common stock and stock units, divided by weighted average number of shares of common stock and stock units and potentially dilutive common stock options.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results may ultimately differ from those estimates.

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Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

Reclassifications

Certain reclassifications have been made in the presentation of the prior periods consolidated financial statements to conform to the June 30, 2008 presentation.

Segment Reporting

We operate in two reportable segments. We have an internal information system that produces performance and asset data for the two segments along service lines.

The “Balance Sheet Investment” segment includes our portfolio of interest earning assets (including our co-investments in investment management vehicles) and the financing thereof.

The “Investment Management” segment includes the activities of our wholly-owned investment management subsidiary, CT Investment Management Co. LLC, or CTIMCO, and its subsidiaries. CTIMCO is a taxable REIT subsidiary and serves as the investment manager of Capital Trust, Inc., all of our investment management vehicles and all of our CDOs and serves as senior servicer and special servicer on certain of our investments and for third parties. In addition, CTIMCO owns certain of our assets.

Business Combination

On June 15, 2007, we purchased a healthcare loan origination platform, located in Birmingham, Alabama. We paid a $2.6 million initial purchase price ($1.9 million in cash and $707,000 in common stock), and we have a contingent obligation to pay up to an additional $1.8 million ($1.1 million in cash and $700,000 in common stock) on March 15, 2009, if the acquired business meets certain performance criteria. We have recorded $2.1 million of goodwill associated with the initial purchase price.

Goodwill

Goodwill represents the excess of acquisition costs over the fair value of net assets of businesses acquired.  Goodwill is reviewed annually in the fourth quarter to determine if there is impairment at a reporting unit level or more frequently if an indication of impairment exists.  No impairment charges for goodwill were recorded during the six months ended June 30, 2008.

New Accounting Pronouncements

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements”, or FAS 157.  FAS 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. FAS 157 applies to reporting periods beginning after November 15, 2007. As discussed above, we report the changes in the value of effective cash flow hedges and our available for sale securities through accumulated other comprehensive income/(loss). We adopted FAS 157 as of January 1, 2008.  As a result of the adoption of FAS 157, the fair value of our interest rate hedge liabilities decreased by $1.5 million due to the valuation adjustment related to our credit.

- 9 - -

Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

The table below details the fair value measurements at June 30, 2008 (in millions):

				Fair Value Measurements at Reporting Date Using
				Quoted Prices in					Significant
				Active Markets for		Significant Other			Unobservable
	Fair Value at			Identical Assets		Observable Inputs			Inputs
Description	June 30, 2008			(Level 1)		(Level 2)			(Level 3)
Interest rate hedge liabilities	$	(17.0	)	$	—	$	(17.0	)	$	—
Total	$	(17.0	)	$	—	$	(17.0	)	$	—

In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities”, or FAS 159.  FAS 159 permits entities to choose to measure many financial instruments, and certain other items, at fair value. FAS 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities.  FAS 159 applies to reporting periods beginning after November 15, 2007. We adopted FAS 159 as of January 1, 2008.

In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161, “Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133”, or FAS 161.  The use and complexity of derivative instruments and hedging activities have increased significantly over the past several years. Constituents have expressed concerns that the existing disclosure requirements in FASB Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities”, do not provide adequate information about how derivative and hedging activities affect an entity’s financial position, financial performance, and cash flows. Accordingly, FAS 161 requires enhanced disclosures about an entity’s derivative and hedging activities and thereby improves the transparency of financial reporting. FAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. FAS 161 encourages, but does not require, comparative disclosures for earlier periods at initial adoption.  We are currently evaluating the potential effect of the adoption of FAS 161 on our consolidated financial statements.

- 10 - -

Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

3.  Commercial Mortgage Backed Securities

Activity relating to our CMBS investments for the six months ended June 30, 2008 was as follows ($ values in thousands):

										Weighted Average
Asset Type	Face Value		Book Value			Number of Securities		Number of Issues		Rating (1)	Coupon(2)			Yield(2)			Maturity (Years)(3)
December 31, 2007
Floating Rate	$	171,620	$	170,543			14		11	BB		8.16	%		8.19	%		2.6
Fixed Rate		744,790		706,321			65		47	BB+		6.69	%		7.14	%		7.5
Total/Average		916,410		876,864			79		58	BB+		6.97	%		7.35	%		6.5
Originations
Floating Rate		3,300		660			1		—	BB+		7.78	%		38.69	%		9.0
Fixed Rate		—		—			—		—	—		—			—			—
Total/Average		3,300		660			1		—	BB+		7.78	%		38.69	%		9.0
Repayments & Other (4)
Floating Rate		46		(217	)		—		—	N/A	N/A			N/A			N/A
Fixed Rate		20,007		15,949			1		—	N/A	N/A			N/A			N/A
Total/Average		20,053		15,732			1		—	N/A	N/A			N/A			N/A
June 30, 2008
Floating Rate		174,874		171,420			15		11	BB		6.07	%		6.17	%		2.3
Fixed Rate		724,783		690,372			64		47	BB		6.68	%		7.09	%		7.1
Total/Average	$	899,657	$	861,792			79		58	BB		6.56	%		6.91	%		6.1

(1)	Weighted average ratings are based on the lowest rating published by Fitch Ratings, Standard & Poor’s or Moody’s Investors Service for each security and exclude $37.9 million face value ($37.3 million book value) of unrated equity investments in collateralized debt obligations.
(2)	Calculations based on LIBOR of 2.46% as of June 30, 2008 and LIBOR of 4.60% as of December 31, 2007.
(3)	Represents the maturity of the investment assuming all extension options are executed.
(4)	Includes full repayments, sales, partial repayments, mark-to-market adjustments on available for sale securities, and the impact of premium and discount amortization and losses, if any.  The figures shown in “Number of Securities” and “Number of Issues” represent only the full repayments/sales, if any.

- 11 - -

Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

The tables below detail the ratings, vintage, property type and geographic distribution of the collateral securing our CMBS at June 30, 2008 (in thousands):

Ratings	Book Value		Percentage
AAA	$	114,932		13%
AA		27,760		3%
A		186,982		22%
BBB		265,327		31%
BB		114,516		13%
B		57,182		7%
CCC		5,005		1%
CC		5,320		1%
D		47,440		5%
NR		37,328		4%
Total	$	861,792		100%

Vintage	Book Value		Percentage
2007	$	110,283		13%
2006		48,815		6%
2005		61,714		7%
2004		91,334		11%
2003		29,497		3%
2002		19,659		2%
2001		18,976		2%
2000		41,489		5%
1999		30,201		4%
1998		311,650		36%
1997		72,540		8%
1996		25,634		3%
Total	$	861,792		100%

Property Type	Book Value		Percentage
Retail	$	283,906		33%
Office		180,135		21%
Hotel		156,119		18%
Multi-Family		94,200		11%
Other		74,036		8%
Healthcare		40,668		5%
Industrial		32,728		4%
Total	$	861,792		100%

Geographic Location	Book Value		Percentage
Southeast	$	240,156		28%
Northeast		215,452		25%
West		149,133		17%
Southwest		119,915		14%
Midwest		106,411		13%
Northwest		19,908		2%
Other		10,817		1%
Total	$	861,792		100%

As detailed in Note 2, on August 4, 2005, pursuant to the provisions of FAS 115, we made a decision to change the accounting classification of our then portfolio of CMBS investments from available-for-sale to held-to-maturity.

While we typically account for our CMBS investments on a held-to-maturity basis, under certain circumstances we will account for CMBS on an available-for-sale basis.  At December 31, 2007, we had one CMBS investment that we designated and accounted for on an available-for-sale basis with a face value of $7.7 million.  The security earned interest at a weighted average coupon of 8.34% December 31, 2007.  During the second quarter of 2008 we sold the security for a gain of $374,000.

- 12 - -

Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

Quarterly, we reevaluate our CMBS portfolio to determine if there has been an other-than-temporary impairment based upon our assessment of future cash flow receipts.  We believe that there has not been any adverse change in estimated cash flows in our CMBS portfolio and, therefore, did not recognize any other-than-temporary impairments.  Significant judgment of management is required in this analysis that includes, but is not limited to, making assumptions regarding the collectability of principal and interest, net of related expenses, on the underlying loans.

Certain of our CMBS investments are carried at values in excess of their market values.  This difference can be caused by, among other things, changes in interest rates, changes in credit spreads, realized/unrealized losses in the underlying securities and general market conditions.  At June 30, 2008, 71 CMBS investments with an aggregate carrying value of $752.8 million were carried at values in excess of their market values.  Market value for these CMBS investments was $631.7 million at June 30, 2008. In total, we had 79 CMBS investments with an aggregate carrying value of $861.8 million that have an estimated market value of $749.2 million (this valuation does not include the value of interest rate swaps entered into in conjunction with the purchase/financing of these investments). We regularly examine the CMBS portfolio and have determined that there have been no changes in our expectations of estimated cash flows from our CMBS portfolio since our last financial report.  Our estimation of cash flows expected to be generated by our CMBS portfolio is based upon an internal review of the underlying mortgage loans securing our investments both on an absolute basis and compared to our initial underwriting for each investment.  Our efforts are supplemented by third party research reports, third party market assessments and our dialogue with market participants.  Our assessment of cash flows combined with our ability and intent to hold our CMBS investments to maturity (at which point we expect to recover book value plus amortized discounts/premiums, which may be at maturity), is the basis for our conclusion that these investments are not impaired despite the differences between estimated fair value and book value.  We attribute the difference between book value and estimated fair value to the current market dislocation and a general negative bias for structured products such as CMBS and CDOs.

The following table shows the gross unrealized losses and fair value of our CMBS with unrealized losses as of June 30, 2008 that are not deemed to be other-than-temporarily impaired (in millions):

	Less Than 12 Months							Greater Than 12 Months							Total
	Book Value		Estimated Fair Value		Gross Unrealized Loss			Book Value		Estimated Fair Value		Gross Unrealized Loss			Book Value		Estimated Fair Value		Gross Unrealized Loss
Floating Rate	$	112.5	$	78.7	$	(33.8	)	$	58.2	$	48.4	$	(9.8	)	$	170.7	$	127.1	$	(43.6	)
Fixed Rate		159.8		150.6		(9.2	)		422.3		354.0		(68.3	)		582.1		504.6		(77.5	)
Total	$	272.3	$	229.3	$	(43.0	)	$	480.5	$	402.4	$	(78.1	)	$	752.8	$	631.7	$	(121.1	)

- 13 - -

Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

4. Loans Receivable

Activity relating to our loans receivable for the six months ended June 30, 2008 was as follows (in thousands):

								Weighted Average
Asset Type	Face Value		Book Value			Number of Investments		Coupon(1)			Yield(1)			Maturity (Years)(2)
December 31, 2007
Floating rate(3)
Mortgage loans	$	620,586	$	620,586			17		6.93	%		7.23	%		3.6
Subordinate mortgage interests		515,797		508,900			28		7.31	%		7.37	%		3.7
Mezzanine loans		939,038		937,209			26		8.19	%		8.22	%		3.5
Total/Average		2,075,421		2,066,695			71		7.59	%		7.71	%		3.6
Fixed rate
Mortgage loans		—		—			—		—			—			—
Subordinate mortgage interests		29,779		29,094			2		7.92	%		8.09	%		24.2
Mezzanine loans		160,984		161,774			8		8.85	%		8.84	%		4.2
Total/Average		190,763		190,868			10		8.70	%		8.73	%		7.3
Total/Average - December 31, 2007		2,266,184		2,257,563			81		7.69	%		7.80	%		3.9
Originations(4)
Floating rate
Mortgage loans		28,481		28,481			—		4.96	%		5.76	%		2.8
Subordinate mortgage interests		17,086		17,085			—		7.55	%		8.09	%		1.8
Mezzanine loans		27,445		24,685			2		3.29	%		3.64	%		3.4
Total/Average		73,012		70,251			2		4.94	%		5.58	%		2.8
Fixed rate
Mortgage loans		—		—			—		—			—			—
Subordinate mortgage interests		—		—			—		—			—			—
Mezzanine loans		27,657		25,891			1		6.42	%		6.85	%		7.9
Total/Average		27,657		25,891			1		6.42	%		6.85	%		7.9
Total/Average		100,669		96,142			3		5.35	%		5.92	%		4.2
Repayments & Other(5)
Floating rate
Mortgage loans		88,727		88,727			1		N/A			N/A			N/A
Subordinate mortgage interests		3,749		2,735			1		N/A			N/A			N/A
Mezzanine loans		42,283		87,515			1		N/A			N/A			N/A
Total/Average		134,759		178,977			3		N/A			N/A			N/A
Fixed rate
Mortgage loans		—		—			—		N/A			N/A			N/A
Subordinate mortgage interests		41		(6	)		—		N/A			N/A			N/A
Mezzanine loans		47,699		47,769			1		N/A			N/A			N/A
Total/Average		47,740		47,763			1		N/A			N/A			N/A
Total/Average		182,499		226,740			4		N/A			N/A			N/A
June 30, 2008
Floating rate
Mortgage loans		560,340		560,340			16		4.77	%		5.11	%		3.2
Subordinate mortgage interests		529,134		523,250			27		5.25	%		5.29	%		3.1
Mezzanine loans		924,200		874,379			27		5.94	%		5.93	%		3.3
Total/Average		2,013,674		1,957,969			70		5.43	%		5.52	%		3.2
Fixed rate
Mortgage loans		—		—			—		—			—			—
Subordinate mortgage interests		29,738		29,100			2		7.91	%		8.07	%		23.9
Mezzanine loans		140,942		139,896			8		7.43	%		7.48	%		5.4
Total/Average		170,680		168,996			10		7.51	%		7.58	%		8.6
Total/Average - June 30, 2008	$	2,184,354	$	2,126,965			80		5.60	%		5.69	%		3.7

(1)	Calculations based on LIBOR of 2.46% as of June 30, 2008 and LIBOR of 4.60% as of December 31, 2007.
(2)	Represents the maturity of the investment assuming all extension options are executed.
(3)	During the first quarter of 2008, one subordinate mortgage interest with a book value of $12.4 million switched from a fixed rate loan to a floating rate.
(4)	Includes additional fundings on prior period originations.  The figures shown in “Number of Investments” represent the actual number of originations during the period.
(5)	Includes full repayments, sales, partial repayments and the impact of premium and discount amortization and reserves/losses, if any.  The figures shown in “Number of Investments” represent only the full repayments/sales, if any.

- 14 - -

Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

The tables below detail the property type and geographic distribution of the properties securing our loans receivable at June 30, 2008 (in thousands).

Property Type	Book Value		Percentage
Office	$	827,161	39%
Hotel		687,963	31%
Healthcare		147,883	7%
Multi-Family		129,732	6%
Condominium		126,824	6%
Retail		69,734	3%
Mixed Use		12,450	1%
Industrial		6,490	1%
Other		118,728	6%
Total	$	2,126,965	100%

Geographic Location	Book Value		Percentage
Various	$	749,804	35%
North East		667,287	31%
West		211,496	10%
South East		186,105	9%
South West		181,193	8%
North West		70,058	3%
Mid West		6,095	1%
Other		54,927	3%
Total	$	2,126,965	100%

Quarterly, management reevaluates the reserve for possible credit losses based upon our current portfolio of loans. Each loan in our portfolio is evaluated using our loan risk rating system which considers loan-to-value, debt yield, cash flow stability, exit plan, loan sponsorship, loan structure and other factors necessary to assess the likelihood of delinquency or default.  If we believe that there is a potential for delinquency or default, a downside analysis is prepared to estimate the value of the collateral underlying our loan, and this potential loss is multiplied by the default likelihood.

During the quarter, three loans experienced performance issues: (i) a $10 million second mortgage loan against which we had previously (during the fourth quarter of 2007) reserved $4 million, was deemed unrecoverable and we wrote off the entire $10 million (an additional $6 million charge).  Simultaneously, $6 million of financing on the asset was forgiven by our lender;  (ii) a $50 million mezzanine loan (recorded as a $123 million loan on our balance sheet with an offsetting $73 million participation sold) that had matured during the first quarter and was extended in order to allow for liquidation of the collateral was reserved against.  Management made the decision to record a $50 million reserve against the $123 million asset based upon conclusions reached subsequent to quarter end with respect to the probability of recovery on the loan; and (iii) a $12 million parri passu participation in a first mortgage did not make its contractual interest payment during the first quarter and we have commenced the foreclosure process on the collateral.  We have not recorded a reserve against this loan given our expectation for a full recovery of principal.  We did not accrue interest on any of these loans in the second quarter and reversed any pre-existing accrual on the $50 million mezzanine loan.

The following is a reconciliation of the provision for loan losses for the six months ended June 30, 2008 and 2007 (in thousands):

	2008			2007
Balance at December 31, 2007 and 2006	$	4,000		$	—
Provision for loan losses		56,000			—
Realized (losses) gains		(10,000	)		4,000
Balance at June 30, 2008 and 2007	$	50,000		$	4,000

- 15 - -

Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

In some cases our loan originations are not fully funded at closing, creating an obligation for us to make future fundings, which we refer to as Unfunded Loan Commitments.  Typically, Unfunded Loan Commitments are part of construction and transitional loans.  At June 30, 2008, our ten Unfunded Loan Commitments totaled $98.9 million and, net of in place financing commitments from our lenders, our net Unfunded Loan Commitments were $21.9 million.

In connection with the loan portfolio, at June 30, 2008, we have deferred origination fees, net of direct costs of $1.1 million which are being amortized into income over the life of the loans.

At June 30, 2008, we had $640,000 included in deposits and other receivables which represented a partial repayment that was paid prior to June 30, the proceeds of which had not been remitted to us by our servicers at quarter end.

5.  Total Return Swaps

Total return swaps are derivative contracts in which one party agrees to make payments that replicate the total return of a defined underlying asset, typically in return for another party agreeing to bear the risk of performance of the defined underlying asset.  Under total return swaps, we bear the risk of performance of the underlying asset and receive payments from our counterparty as compensation.  In effect, these total return swaps allow us to receive the leveraged economic benefits of asset ownership without our acquiring, or our counterparty selling, the actual underlying asset.  Our total return swaps reference commercial real estate loans and contain a put provision whereby our counterparty has the right to require us to buy the entire reference loan at its par value under certain reference loan performance scenarios.  The put obligation imbedded in these arrangements constitutes a recourse obligation for us to perform under the terms of the contract.

Activity relating to our total return swaps for the six months ended June 30, 2008 was as follows (in thousands):

							Weighted Average
	Fair Market Value (Book Value)		Cash Collateral		Reference/Loan Participation	Number of Investments	Yield	Maturity (Years)
December 31, 2007		—		—	$20,000	1	—	—
Originations- Six Months		—		—	—	—	—	—
Repayments- Six Months		—		—	20,000	1	—	—
June 30, 2008		$ —		$ —	$ —	—	—	—

The total return swaps are treated as non-hedge derivatives for accounting purposes and, as such, changes in their market value are recorded through the consolidated statements of income.  As of June 30, 2008, the reference/loan participation was satisfied.

6.  Equity Investment in Unconsolidated Subsidiaries

Our equity investments in unconsolidated subsidiaries consist primarily of our co-investments in investment management vehicles that we sponsor and manage.  At June 30, 2008, we had co-investments in two such vehicles, Fund III and CTOPI.  In addition to our co-investments, we record capitalized costs associated with these vehicles in equity investments in unconsolidated subsidiaries.

- 16 - -

Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

Activity relating to our equity investment in unconsolidated subsidiaries for the six months ended June 30, 2008 was as follows (in thousands):

	Fund III			CTOPI			Other and Capitalized Costs		Total
Equity Investment
Beginning balance	$	923		$	(60	)	$	35	$	898
Income from equity investments		60			14			2		76
Ending balance	$	983		$	(46	)	$	37	$	974
Capitalized Costs
Beginning balance	$	79		$	—		$	—	$	79
Amortization of capitalized costs		(79	)		—			—		(79	)
Ending balance	$	—		$	—		$	—	$	—
Total Balance	$	983		$	(46	)	$	37	$	974

In accordance with the management agreements with Fund III and CTOPI, CTIMCO may earn incentive compensation when certain returns are achieved for the shareholders/partners of Fund III and CTOPI, which will be accrued if and when earned.

7. Debt

At June 30, 2008 and December 31, 2007, we had $2.2 billion and $2.3 billion of total debt outstanding, respectively. The balances of each category of debt and their respective coupons and all in effective costs, including the amortization of fees and expenses were as follows (in thousands):

	June 30, 2008										December 31, 2007
	Face Value		Book Value		Coupon (1)			All-In Cost			Face Value		Book Value		Coupon (1)			All-In Cost
Repurchase Obligations	$	800,742	$	800,742		3.48	%		3.74	%	$	911,857	$	911,857		5.56	%		5.80	%
Collateralized debt obligations
CDO I (Floating)		252,778		252,778		3.08	%		3.54	%		252,778		252,778		5.22	%		5.67	%
CDO II (Floating)		298,913		298,913		2.95	%		3.19	%		298,913		298,913		5.09	%		5.32	%
CDO III (Fixed)		256,723		258,416		5.22	%		5.37	%		259,803		261,654		5.22	%		5.37	%
CDO IV (Floating)(2)		360,466		360,466		2.99	%		3.10	%		378,954		378,954		5.04	%		5.11	%
Total CDOs		1,168,880		1,170,573		3.49	%		3.72	%		1,190,448		1,192,299		5.12	%		5.34	%
Senior Unsecured Credit Facility		100,000		100,000		4.21	%		4.49	%		75,000		75,000		6.10	%		6.40	%
Junior Subordinated Debentures		128,875		128,875		7.20	%		7.30	%		128,875		128,875		7.20	%		7.30	%
Total	$	2,198,497	$	2,200,190		3.74	%		3.97	%	$	2,306,180	$	2,308,031		5.45	%		5.66	%

(1)	Calculations based on LIBOR of 2.46% as of June 30, 2008 and LIBOR of 4.60% as of December 31, 2007.
(2)	Comprised of $346.5 million of floating rate notes sold and $14.0 million of fixed rate notes sold.

- 17 - -

Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

Repurchase Obligations

At June 30, 2008, we were party to six master repurchase agreements with four counterparties with total facility amounts of $1.5 billion. At June 30, 2008, we borrowed $762.0 million under these agreements.  We were also a party to asset specific repurchase obligations and a secured loan agreement.  At June 30, 2008, these asset specific borrowings totaled $38.8 million.  Our total borrowings at June 30, 2008 under master repurchase agreements and asset specific arrangements were $800.7 million, and we had the ability to borrow an additional $122.5 million without pledging additional collateral.  Loans and CMBS with a carrying value of $1.3 billion are pledged as collateral for our repurchase agreements.

In March 2008, one of our repurchase agreement counterparties, Bear Stearns, experienced extreme liquidity pressure and responded by agreeing to combine with JP Morgan.  Bear Stearns was one of our largest counterparties on the balance sheet in addition to multiple relationships with our investment management vehicles.  The proposed merger with JP Morgan closed on May 30, 2008 and our relationships with the former Bear Stearns counterparties are being managed by JP Morgan.

In April 2008, we terminated the $6 million loan specific repurchase agreement with Lehman Brothers related to the SunCal loan eliminating our obligation thereunder. According to the termination agreement, Lehman Brothers retained possession of the loan and we extinguished the debt for no further consideration.

In May 2008, we entered into a new loan and security agreement with Lehman Brothers.  The agreement provides for an $18.0 million loan to us with a maturity date in June 2013.  The loan is designed to finance an individual asset on a recourse basis at a cash cost of LIBOR plus 1.50%.

In June 2008, we amended our master repurchase agreements with the former Bear Stearns entities by extending the termination date of each obligation to October 2008, making them concurrent with the existing termination date under our master repurchase agreement with JPMorgan.  Based on our conversations with JP Morgan, we anticipate that the legacy Bear Stearns credit relationship will be fully combined with and extended with the existing JPMorgan facility in October 2008.

In June 2008, we terminated our master repurchase agreement with Bank of America, which was originally designed to finance on a recourse basis assets designated for our second CDO.  We had no obligations outstanding under the agreement at the time of termination and the termination eliminated the payment of unused fees associated with the line.

Collateralized Debt Obligations

At June 30, 2008, we had CDOs outstanding from four separate issuances with a total face value of $1.2 billion.  Our CDOs are financing vehicles for our assets and, as such, are consolidated on our balance sheet representing the amortized sales price of the securities we sold to third parties.  In total, our two reinvesting CDOs provide us with $551.7 million of debt financing at a cash cost of LIBOR plus 0.55% (3.01% at June 30, 2008) and an all-in effective interest rate (including the amortization of issuance costs) of LIBOR plus 0.89% (3.35% at June 30, 2008).  Our two static CDOs provide us with $618.9 million of financing with a cash cost of 3.92% and an all-in effective interest rate of 4.05% at June 30, 2008.  On a combined basis, our CDOs provide us with $1.2 billion of non-recourse, non-mark-to-market, index matched financing at a weighted average cash cost of 0.53% over the applicable indices (3.49% at June 30, 2008) and a weighted average all in cost of 0.75% over the applicable indices (3.72% at June 30, 2008).

Senior Unsecured Credit Facility

In March 2007, we closed a $50.0 million senior unsecured revolving credit facility with WestLB AG, which we amended in June 2007, increasing the size to $100.0 million and adding new lenders to the syndicate.  In March 2008, we exercised our term-out option under the agreement, extending the maturity date of the $100 million principal balance outstanding to March 2009 as a non revolving term loan.  The loan bears interest at a cost of LIBOR plus 1.75% (LIBOR plus 2.03% on an all in basis).

Junior Subordinated Debentures

At June 30, 2008, we had a total of $128.9 million of junior subordinated debentures outstanding (securing $125 million of trust preferred securities sold to third parties).  Junior subordinated debentures are comprised of two issuances of debentures, $77 million of debentures (securing $75 million of trust preferred securities) issued in March 2007 and $52 million of debentures (securing $50 million of trust preferred securities) issued in 2006.  On a combined basis the securities provide us with $125 million of financing at a cash cost of 7.20% and an all-in effective rate of 7.30%.

- 18 - -

Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

Our interests in the two issuing entities, CT Preferred Trust I and CT Preferred Trust II, are accounted for using the equity method and the assets and liabilities are not consolidated into our financial statements due to our determination that CT Preferred Trust I and CT Preferred Trust II are variable interest entities under FIN 46R and that we are not the primary beneficiary of the entities.  Interest on the junior subordinated debentures is included in interest and related expenses on our consolidated statements of income while the junior subordinated debentures are presented as a separate item in our consolidated balance sheet.

8.  Participations Sold

Participations sold represent interests in loans that we originated and subsequently sold to CT Large Loan 2006, Inc. (a fund that we manage) and third parties.  We present these sold interests as both assets and liabilities (in equal amounts) in conformity with GAAP on the basis that these arrangements do not qualify as sales under FAS 140.  At June 30, 2008, we had seven such participations sold with a total book balance of $410.1 million at a weighted average coupon of LIBOR plus 3.38% (5.84% at June 30, 2008) and a weighted average yield of LIBOR plus 3.35% (5.81% at June 30, 2008).

The income earned on the loans is recorded as interest income and an identical amount is recorded as interest expense on the consolidated statements of income.

9.  Derivative Financial Instruments

To manage interest rate risk, we typically employ interest rate swaps or other arrangements, to convert a portion of our floating rate debt to fixed rate debt in order to index match our assets and liabilities.  The net payments due under these swap contracts are recognized as interest expense over the life of the contracts.

The following table summarizes the notional and fair values of our derivative financial instruments as of June 30, 2008. The notional value provides an indication of the extent of our involvement in the instruments at that time, but does not represent exposure to credit or interest rate risk (in thousands):

Hedge	Type	Notional Value		Interest Rate			Maturity	Fair Value
Swap	Cash Flow Hedge	$	301,561		5.10	%	2015	$	(11,237	)
Swap	Cash Flow Hedge		73,735		4.58	%	2014		(1,269	)
Swap	Cash Flow Hedge		18,578		3.95	%	2011		(118	)
Swap	Cash Flow Hedge		18,164		5.14	%	2014		(912	)
Swap	Cash Flow Hedge		18,013		4.48	%	2016		(229	)
Swap	Cash Flow Hedge		16,894		4.83	%	2014		(575	)
Swap	Cash Flow Hedge		16,377		5.52	%	2018		(1,301	)
Swap	Cash Flow Hedge		12,360		5.05	%	2016		(480	)
Swap	Cash Flow Hedge		12,310		5.02	%	2009		(273	)
Swap	Cash Flow Hedge		7,062		5.11	%	2016		(232	)
Swap	Cash Flow Hedge		5,104		4.12	%	2016		81
Swap	Cash Flow Hedge		3,312		5.45	%	2015		(232	)
Swap	Cash Flow Hedge		2,867		5.08	%	2011		(110	)
Swap	Cash Flow Hedge		780		5.31	%	2011		(34	)
Total/Weighted Average		$	507,117		4.95	%	2015	$	(16,921	)

As of June 30, 2008, the derivative financial instruments were reported at their fair value of $81,000 as interest rate hedge assets and $17.0 million as interest rate hedge liabilities. Income and expense associated with these instruments is recorded as interest expense on our consolidated statements of income. The amount of hedge ineffectiveness was not material during any of the periods presented.

- 19 - -

Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

10.  Earnings Per Share

The following table sets forth the calculation of Basic and Diluted EPS for the six months ended June 30, 2008 and 2007 (in thousands, except share and per share amounts):

	Six Months Ended June 30, 2008				Six Months Ended June 30, 2007
	Net Loss	Shares		Per Share Amount	Net Income		Shares		Per Share Amount
Basic EPS:
Net (loss) earnings allocable to common stock	$(20,045)		19,928,912	$(1.01)	$40,230			17,536,245	$2.29
Effect of Dilutive Securities:
Options outstanding for the purchase of common stock	—		—			—		179,565
Diluted EPS:
Net (loss) earnings per share of common stock and assumed conversions	$(20,045)		19,928,912	$(1.01)	$40,230			17,715,810	$2.27

The following table sets forth the calculation of Basic and Diluted EPS for the three months ended June 30, 2008 and 2007 (in thousands, except share and per share amounts):

	Three Months Ended June 30, 2008				Three Months Ended June 30, 2007
	Net Loss	Shares		Per Share Amount	Net Income		Shares		Per Share Amount
Basic EPS:
Net (loss) earnings allocable to common stock	$(34,818)		21,915,175	$(1.59)	$25,382			17,558,493	$1.45
Effect of Dilutive Securities:
Options outstanding for the purchase of common stock	—		—			—		169,687
Diluted EPS:
Net (loss) earnings per share of common stock and assumed conversions	$(34,818)		21,915,175	$(1.59)	$25,382			17,728,180	$1.43

11.  Income Taxes

We made an election to be taxed as a REIT under Section 856(c) of the Internal Revenue Code of 1986, as amended, commencing with the tax year ending December 31, 2003. As a REIT, we generally are not subject to federal, state, and local income taxes except for the operations of our taxable REIT subsidiary, CTIMCO and its subsidiaries. To maintain qualification as a REIT, we must distribute at least 90% of our REIT taxable income to our shareholders and meet certain other requirements. If we fail to qualify as a REIT in any taxable year, we may be subject to federal, state and local income taxes on our taxable income at regular corporate rates. At June 30, 2008, we were in compliance with all REIT requirements.

We did not pay any taxes at the REIT level during the periods ended June 30, 2008 or 2007. However, CTIMCO, our investment management subsidiary, is a taxable REIT subsidiary and subject to taxes on its earnings. During the period ended June 30, 2008, CTIMCO recorded operating income before income taxes of $398,000, which when combined with GAAP to tax differences and changes in valuation allowances, resulted in an income tax benefit of $501,000.

- 20 - -

Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

12.  Shareholders’ Equity

On January 15, 2008, we issued 53,192 shares of class A common stock under our dividend reinvestment plan. Net proceeds totaled approximately $1.5 million.

On March 4, 2008, we declared a dividend of $0.80 per share of class A common stock applicable to the three-month period ended March 31, 2008, which was paid on April 15, 2008 to shareholders of record on March 31, 2008.

On March 28, 2008, we closed a public offering of 4,000,000 shares of class A common stock. We received net proceeds of approximately $113.0 million. Morgan Stanley & Co. Incorporated acted as the sole underwriter of the offering.

On April 15, 2008, we issued 28,426 shares of class A common stock under our dividend reinvestment plan.  Net proceeds totaled approximately $799,000.

In June 2008, we issued 401,577 shares of class A common stock under our direct stock purchase plan.  Net proceeds totaled approximately $10.5 million.

On June 16, 2008, we declared a dividend of $0.80 per share of class A common stock applicable to the three-month period ended June 30, 2008, which was paid on July 16, 2008 to shareholders of record on June 30, 2008.

- 21 - -

Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

13.  Employee Benefit and Incentive Plans

We had four benefit plans in effect at June 30, 2008:  (1) the second amended and restated 1997 long-term incentive stock plan, or 1997 Employee Plan, (2) the amended and restated 1997 non-employee director stock plan, or 1997 Director Plan, (3) the amended and restated 2004 long-term incentive plan, or 2004 Plan, and (4) the 2007 long-term incentive plan, or 2007 Plan. The 1997 plans expired in 2007 and no new awards may be issued under them and no further grants will be made under the 2004 Plan.  Under the 2007 Plan, a maximum of 700,000 shares of class A common stock may be issued.  At June 30, 2008, there were 619,775 shares available under the 2007 Plan.

Activity under these four plans for the six months ended June 30, 2008 is summarized in the table below in share and share equivalents:

Benefit Type	1997 Employee Plan			1997 Director Plan			2004 Plan			2007 Plan		Total
Options(1)
Beginning Balance		223,811			16,667			—			—		240,478
Canceled		(20,000	)		(16,667	)		—			—		(36,667	)
Ending Balance		203,811			—			—			—		203,811
Restricted Stock(2)
Beginning Balance		—			—			423,931			—		423,931
Granted		—			—			—			44,550		44,550
Vested		—			—			(83,064	)		—		(83,064	)
Forfeited		—			—			(414	)		—		(414	)
Ending Balance		—			—			340,453			44,550		385,003
Stock Units(3)
Beginning Balance		—			80,017			—			14,570		94,587
Granted		—			—			—			41,377		41,377
Ending Balance		—			80,017			—			55,947		135,964
Total Outstanding Shares		203,811			80,017			340,453			100,497		724,778

(1)	All options are fully vested as of June 30, 2008.
(2)	Comprised of both performance based awards that vest upon the attainment of certain common equity return thresholds and time based awards that vest based upon an employee’s continued employment on vesting dates.
(3)	Stock units are granted to certain members of our board of directors in lieu of cash compensation for services and in lieu of dividends earned on previously granted stock units. Under the terms of certain deferral agreements, certain shares of restricted stock converted to deferred stock  units upon their initial vesting.

- 22 - -

Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

The following table summarizes the outstanding options as of June 30, 2008:

Exercise Price     per Share	Options Outstanding		Weighted Average Exercise Price per Share		Weighted Average Remaining Life
	1997 Employee Plan	1997 Director Plan	1997 Employee Plan	1997 Director Plan	1997 Employee Plan	1997 Director Plan
$10.00 - $15.00	43,530	—	$13.41	$     —	2.51	—
$15.00 - $20.00	126,947	—	16.38	—	3.02	—
$25.00 - $30.00	33,334	—	27.00	—	0.13	—
Total/W. Average	203,811	—	$17.48	$     —	2.44	—

In addition to the equity interests detailed above, we have granted percentage interests in the incentive compensation received by us from the private equity funds we manage. At June 30, 2008, we had granted, net of forfeitures, 43% of the Fund III incentive compensation received by us.

A summary of the unvested restricted shares as of and for the six month period ended June 30, 2008 was as follows:

	Restricted Shares
	Shares			Grant Date Fair Value
Unvested at January 1, 2008		423,931		$	30.96
Granted		44,550			27.44
Vested		(83,064	)		28.69
Forfeited		(414	)		51.25
Unvested at June 30, 2008		385,003		$	31.02

A summary of the unvested restricted shares as of and for the six month period ended June 30, 2007 was as follows:

	Restricted Shares
	Shares			Grant Date Fair Value
Unvested at January 1, 2007		480,967		$	29.56
Granted		23,015			51.25
Vested		(59,118	)		28.39
Forfeited		—			—
Unvested at June 30, 2007		444,864		$	30.84

The total fair value of restricted shares which vested during the six month periods ended June 30, 2008 and 2007 was $1.9 million and $2.5 million, respectively.

14.  Supplemental Disclosures for Consolidated Statements of Cash Flows

Interest paid on our outstanding debt during the six months ended June 30, 2008 and 2007 was $59.0 million and $64.2 million, respectively, which excludes non-cash items. Income taxes recovered by us during the six months ended June 30, 2008 and 2007 were $677,000 and $1.5 million, respectively.  Non-cash investing and financing activity during the six months ended June 30, 2008 resulted from our investments in loans where we sold participations.

At June 30, 2008, we had $1.3 million included in deposits and other receivables which represented loans and CMBS that had partial repayments on or prior to June 30, 2008, the proceeds of which had not been remitted to us by our servicers.  The reclassification from loans receivable and CMBS to deposits and other receivables resulted in a non-cash investing activity.

- 23 - -

Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

15.  Segment Reporting

We have two reportable segments.  We have an internal information system that produces performance and asset data for the two segments along service lines.

The “Balance Sheet Investment” segment includes all activities related to direct investment activities (including direct investments in Funds) and the financing thereof.

The “Investment Management” segment includes all activities related to investment management services provided to us and third party funds under management and includes our taxable REIT subsidiary, CTIMCO and its subsidiaries.

The following table details each segment's contribution to our overall profitability and the identified assets attributable to each such segment for the six months ended, and as of, June 30, 2008, respectively (in thousands):

	Balance Sheet			Investment			Inter-Segment
	Investment			Management			Activities			Total
Income from loans and other
investments:
Interest and related income	$	105,585		$	—		$	—		$	105,585
Less: Interest and related expenses		70,743			—			—			70,743
Income from loans and
other investments, net		34,842			—			—			34,842
Other revenues:
Management fees		—			9,834			(3,484	)		6,350
Servicing fees		—			222			—			222
Other interest income		887			15			(77	)		825
Total other revenues		887			10,071			(3,561	)		7,397
Other expenses
General and administrative		5,709			10,883			(3,484	)		13,108
Other interest expense		—			77			(77	)		—
Depreciation and amortization		—			127			—			127
Total other expenses		5,709			11,087			(3,561	)		13,235
Gain on extinguishment of debt		6,000			—			—			6,000
(Provision for)/recovery of losses on loan impairment		(56,000	)		—			—			(56,000	)
Gain on sale of investments		374			—			—			374
Income from equity investments		74			2			—			76
Income (loss) before income taxes		(19,532	)		(1,014	)		—			(20,546	)
Benefit for income taxes		—			(501	)		—			(501	)
Net income (loss) allocable to class A
common stock	$	(19,532	)	$	(513	)	$	—		$	(20,045	)
Total assets	$	3,136,727		$	7,569		$	(5,081	)	$	3,139,215

All revenues were generated from external sources within the United States.  The “Investment Management” segment earned fees of $3.5 million for management of the “Balance Sheet Investment” segment and was charged $77,000 for inter-segment interest for the six months ended June 30, 2008 which is reflected as offsetting adjustments to other interest income and other interest expense in the inter-segment activities column in the table above.

- 24 - -

Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

The following table details each segment's contribution to our overall profitability and the identified assets attributable to each such segment for the six months ended, and as of, June 30, 2007, respectively (in thousands):

	Balance Sheet			Investment			Inter-Segment
	Investment			Management			Activities			Total
Income from loans and other
investments:
Interest and related income	$	126,247		$	—		$	—		$	126,247
Less: Interest and related expenses		76,293			—			—			76,293
Income from loans and
other investments, net		49,954			—			—			49,954
Other revenues:
Management and advisory fees		—			9,124			(7,793	)		1,331
Incentive management fees		—			962			—			962
Special servicing fees		112			—			—			112
Other interest income		792			46			(256	)		582
Total other revenues		904			10,132			(8,049	)		2,987
Other expenses
General and administrative		10,193			12,244			(7,793	)		14,644
Other interest expense		—			256			(256	)		—
Depreciation and amortization		1,264			124			—			1,388
Total other expenses		11,457			12,624			(8,049	)		16,032
Recovery of/(provision for) losses on loan impairment		4,000			—			—			4,000
Loss from equity investments		(399	)		(534	)		—			(933	)
Income (loss) before income taxes		43,002			(3,026	)		—			39,976
Benefit for income taxes		(254	)		—			—			(254	)
Net income (loss) allocable to class A
common stock	$	43,256		$	(3,026	)	$	—		$	40,230
Total assets	$	3,161,614		$	37,748		$	(10,646	)	$	3,188,716

All revenues, except for $4.3 million included in interest and related income, were generated from external sources within the United States.  The “Investment Management” segment earned fees of $7.8 million for management of the “Balance Sheet Investment” segment and was charged $256,000 for inter-segment interest for the six months ended June 30, 2007 which is reflected as offsetting adjustments to other revenues and other expenses in the inter-segment activities column in the table above.

- 25 - -

Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

The following table details each segment's contribution to our overall profitability and the identified assets attributable to each such segment for the three months ended, and as of, June 30, 2008, respectively (in thousands):

	Balance Sheet			Investment		Inter-Segment
	Investment			Management		Activities			Total
Income from loans and other
investments:
Interest and related income	$	49,030		$	—	$	—		$	49,030
Less: Interest and related expenses		32,799			—		—			32,799
Income from loans and
other investments, net		16,231			—		—			16,231
Other revenues:
Management fees		—			5,369		(1,215	)		4,154
Incentive management fees		—			—		—			—
Servicing fees		—			44		—			44
Other interest income		660			7		(29	)		638
Total other revenues		660			5,420		(1,244	)		4,836
Other expenses
General and administrative		2,455			4,968		(1,215	)		6,208
Other interest expense		—			29		(29	)		—
Depreciation and amortization		—			22		—			22
Total other expenses		2,455			5,019		(1,244	)		6,230
Gain on extinguishment of debt		6,000			—		—			6,000
(Provision for)/recovery of losses on loan impairment		(56,000	)		—		—			(56,000	)
Gain on sale of investments		374			—		—			374
Income from equity investments		69			—		—			69
Income (loss) before income taxes		(35,121	)		401		—			(34,720	)
Provision for income taxes		—			98		—			98
Net income (loss) allocable to class A
common stock	$	(35,121	)	$	303	$	—		$	(34,818	)
Total assets	$	3,136,727		$	7,569	$	(5,081	)	$	3,139,215

All revenues were generated from external sources within the United States.  The “Investment Management” segment earned fees of $1.2 million for management of the “Balance Sheet Investment” segment and was charged $29,000 for inter-segment interest for the six months ended June 30, 2007 which is reflected as offsetting adjustments to other revenues and other expenses in the inter-segment activities column in the table above.

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Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

The following table details each segment's contribution to our overall profitability and the identified assets attributable to each such segment for the three months ended, and as of, June 30, 2007, respectively (in thousands):

	Balance Sheet			Investment			Inter-Segment
	Investment			Management			Activities			Total
Income from loans and other
investments:
Interest and related income	$	68,797		$	—		$	—		$	68,797
Less: Interest and related expenses		40,192			—			—			40,192
Income from loans and
other investments, net		28,605			—			—			28,605
Other revenues:
Management fees		—			5,793			(5,211	)		582
Incentive management fees		—			—			—			—
Servicing fees		45			—			—			45
Other interest income		396			23			(147	)		272
Total other revenues		441			5,816			(5,358	)		899
Other expenses
General and administrative		6,252			6,791			(5,211	)		7,832
Other interest expense		—			147			(147	)		—
Depreciation and amortization		—			60			—			60
Total other expenses		6,252			6,998			(5,358	)		7,892
Recovery of/(provision for) losses on loan impairment		4,000			—			—			4,000
Income from equity investments		(219	)		(11	)		—			(230	)
Income (loss) before income taxes		26,575			(1,193	)		—			25,382
Benefit for income taxes		—			—			—			—
Net income (loss) allocable to class A
common stock	$	26,575		$	(1,193	)	$	—		$	25,382
Total assets	$	3,161,614		$	37,748		$	(10,646	)	$	3,188,716

All revenues, except for $4.3 million included in interest and related income, were generated from external sources within the United States.  The “Investment Management” segment earned fees of $5.2 million for management of the “Balance Sheet Investment” segment and was charged $147,000 for inter-segment interest for the six months ended June 30, 2007, which is reflected as offsetting adjustments to other revenues and other expenses in the inter-segment activities column in the table above.

16.   Related Party Transactions

On November 9, 2006, we commenced our CT High Grade MezzanineSM investment management initiative and entered into three separate account agreements with affiliates of W. R. Berkley Corporation, or WRBC, for an aggregate of $250 million.  On July 25, 2007, we amended the agreements to increase the aggregate commitment of the WRBC affiliates to $350 million.  Pursuant to these agreements, we invest, on a discretionary basis, capital on behalf of WRBC in low risk commercial real estate mortgages, mezzanine loans and participations therein. The separate accounts are entirely funded with committed capital from WRBC and are managed by a subsidiary of CTIMCO.  Each separate account has a one-year investment period with extension provisions. CTIMCO earns a management fee equal to 0.25% per annum on invested assets.

On April 27, 2007, we purchased a $20 million subordinated interest in a mortgage from a dealer.  Proceeds from the mortgage financing provide for the construction and leasing of an office building in Washington, D.C. that is owned by a joint venture.  WRBC has a substantial economic interest in one of the joint venture partners.

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Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

WRBC beneficially owned approximately 17.4% of our outstanding class A common stock as of June 30, 2008, and a member of our board of directors is an employee of WRBC.

On March 28, 2008 we announced the closing of our public offering of 4,000,000 shares of our class A common stock. We received net proceeds of approximately $113 million. Morgan Stanley & Co. Incorporated acted as the sole underwriter of the offering. Affiliates of Samuel Zell, our chairman of the board, and WRBC purchased a number of shares in the offering sufficient to maintain their pro rata ownership interests in the company.

During the second quarter of 2008, CTOPI purchased $18.9 million face value of our CDO debt in the open market for $11.3 million.

Affiliates of Samuel Zell own interests in Fund III and CTOPI, two investment management vehicles that we manage and also within which we have ownership interests.

We believe that the terms of the foregoing transactions are no less favorable than could be obtained by us from unrelated parties on an arm’s length basis.

17.   Subsequent Events

On July 14, 2008, CTOPI held its final closing with $540 million of committed equity.

On July 24, 2008, we extended the availability period under our $250 million master repurchase agreement with Citigroup to July 28, 2009.  As part of the extension agreement, the repurchase dates for certain outstanding borrowings were extended to July 29, 2010 with the remainder retaining their October 11, 2011 final maturities.

On July 25, 2008, we extended the purchase period of our $300 million master repurchase agreement with Morgan Stanley to July 29, 2009.  We also terminated an un-utilized $50 million master repurchase facility with Morgan Stanley which was originally designed to warehouse finance CDO eligible assets.

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ITEM 2.                      Management's Discussion and Analysis of Financial Condition and Results of Operations

References herein to “we,” “us” or “our” refer to Capital Trust, Inc. and its subsidiaries unless the context specifically requires otherwise.

The following discussion should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere in this quarterly report on Form 10-Q. Historical results set forth are not necessarily indicative of our future financial position and results of operations.

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. Our accounting policies affect our more significant judgments and estimates used in the preparation of our financial statements. Actual results could differ from these estimates.  Other than the adoption of FAS 157 there have been no material changes to our Critical Accounting Policies described in our annual report on Form 10-K filed with the Securities and Exchange Commission on February 28, 2007.

Introduction

Our business model is designed to produce a mix of net interest margin from our balance sheet investments and fee income plus co-investment income from our investment management operations. In managing our operations, we focus on originating investments, managing our portfolios and capitalizing our businesses.

Current Market Conditions

During the first half of 2008, the global capital markets continued to experience tremendous volatility and a wide-ranging lack of liquidity. Notwithstanding continuing credit performance in the commercial real estate debt market, the impact of the global credit crisis on our sector has been acute. Transaction volume has declined significantly, credit spreads for all forms of mortgage debt have reached all-time highs and issuance levels of commercial mortgage backed securities, or CMBS, have ground to a virtual halt. Financial institutions still hold significant inventories of unsold loans and CMBS, creating a further overhang on the markets. We believe that the continuing dislocation in the debt capital markets, coupled with a slowdown in the U.S. economy, has already reduced property valuations and will ultimately impact real estate fundamentals. These developments can impact the performance of our existing portfolio of assets.

In response to these conditions, we have continued our cautious approach, choosing to maintain our liquidity and be patient until the markets have settled. We believe that ultimately this environment will create new opportunities in our markets for investors with credit and financial structuring expertise. We believe that our balance sheet and investment management businesses will benefit from a market environment where assets are priced and structured more conservatively and there is less competition among investors.

Originations

We allocate investment opportunities between our balance sheet and investment management vehicles based upon our assessment of risk and return profiles, the availability and cost of capital, and applicable regulatory restrictions associated with each opportunity. The combination of balance sheet and investment management capabilities allows us to maximize the scope of opportunities upon which we can capitalize. Notwithstanding the scope of the platform, we decided to continue a defensive posture in light of the continued volatility. The table below summarizes our gross originations and the allocation of opportunities between our balance sheet and the investment management business for the six month period ended June 30, 2008 and the year ended December 31, 2007.

Gross Originations(1) (2)
(in millions)	Six  months ended June 30, 2008	Year ended December 31, 2007
Balance sheet	$48	$1,454
Investment management	204	1,011
Total originations	$252	$2,465

(1)	Includes total commitments both funded and unfunded.
(2)	Includes $0 and $315 million of participations sold recorded on our balance sheet relating to participations that we sold to CT Large Loan, Inc. for the six months ended June 30, 2008 and the year ended December 31, 2007, respectively. We have included these originations in balance sheet originations and not in investment management originations in order to avoid double counting.

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Our balance sheet investments include commercial mortgage backed securities, or CMBS, and commercial real estate debt and related instruments, or Loans, which we collectively refer to as our Interest Earning Assets.  Originations of Interest Earning Assets for our balance sheet for the six months ended June 30, 2008 and the year ended December 31, 2007 are detailed in the table below:

Balance Sheet Originations
(in millions)	Six  months ended June 30, 2008			Year ended December 31, 2007
	Originations(1)	Yield(2)	LTV / Rating(3)	Originations(1)	Yield(2)	LTV / Rating(3)
CMBS	$1	38.69%	BB+	$111	8.92%	BB-
Loans(4)	47	10.14	56.1%	1,343	7.67	64.4%
Total / Weighted Average	$48	10.73%		$1,454	7.77%

(1)	Includes total commitments both funded and unfunded.
(2)	Yield on floating rate originations assumes LIBOR at June 30, 2008 and December 31, 2007, of 2.46% and 4.60%, respectively.
(3)	Weighted average ratings are based on the lowest rating published by Fitch Ratings, Standard & Poor’s or Moody’s Investors Service for each security and exclude $3.0 million face value ($1.0 million book value ) at June 30, 2008 and $36.4 million face value ($36.4 million book value) at December 31, 2007 of unrated equity investments in collateralized debt obligations. Loan to Value (LTV) is based on third party appraisals received by us when each loan is originated.
(4)	Includes $0 and $315 million of participations sold recorded on our balance sheet relating to participations that we sold to CT Large Loan, Inc. for the six months ended June 30, 2008 and the year ended December 31, 2007, respectively. We have included these originations in balance sheet originations and not in investment management originations in order to avoid double counting.

The table below shows our Interest Earning Assets at June 30, 2008 and December 31, 2007.  In any period, the ending balance of Interest Earning Assets will be impacted not only by new balance sheet originations, but also by repayments, advances, sales and losses, if any.

Interest Earning Assets
(in millions)	June 30, 2008			December 31, 2007
	Book Value	Yield(1)	LTV / Rating(2)	Book Value	Yield(1)	LTV / Rating(2)
CMBS	$862	6.91%	BB	$877	7.35%	BB+
Loans	2,127	5.69	66.5%	2,257	7.80	66.5%
Total / Weighted Average	$2,989	6.04%		$3,134	7.67%

(1)	Yield on floating rate Interest Earning Assets assumes LIBOR at June 30, 2008 and December 31, 2007, of 2.46% and 4.60%, respectively.
(2)	Weighted average ratings are based on the lowest rating published by Fitch Ratings, Standard & Poor’s or Moody’s Investors Service for each security and exclude $37.9 million face value ($37.3 million book value) of unrated equity investments in collateralized debt obligations. LTV is based on third party appraisals received by us when each loan is originated.

In some cases our loan originations are not fully funded at closing, creating an obligation for us to make future fundings, which we refer to as Unfunded Loan Commitments.  Typically, Unfunded Loan Commitments are part of construction and transitional loans.  At June 30, 2008, our ten Unfunded Loan Commitments were $99 million and, net of in place financing commitments from our lenders, our net Unfunded Loan Commitments were $22 million.

In addition to our investments in Interest Earning Assets, we have two equity investments in unconsolidated subsidiaries as of June 30, 2008. The first is an equity co-investment in a private equity fund that we manage, CT Mezzanine Partners III, Inc., or Fund III.  The second is an equity co-investment in a private equity fund, CT Opportunity Partners I, LP, or CTOPI, that we formed in 2007, which we also manage.

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The table below details the carrying value of those investments, as well as their capitalized costs.

Equity Investments
(in thousands)	June 30,			December 31,
	2008			2007
Fund III		$983			$923
CTOPI		(46	)		(60	)
Capitalized costs/other		37			114
Total		$974			$977

Asset Management

We actively manage our balance sheet portfolio and the assets held by our investment management vehicles.  While our investments are primarily in the form of debt, which generally means that we have limited influence over the operations of the collateral securing our portfolios, we are aggressive in exercising the rights afforded to us as a lender.  These rights can include collateral level budget approvals, lease approvals, loan covenant enforcement, escrow/reserve management/collection, collateral release approvals and other rights that we may negotiate.  The table below details balance sheet Interest Earning Assets loss experience for the six months ended June 30, 2008 and the twelve months ended December 31, 2007, and the percentage of non-performing and/or impaired investments at June 30, 2008 and December 31, 2007.

Portfolio Performance
(in millions)	June 30, 2008			December 31, 2007
Interest Earning Assets		$2,989			$3,134
Losses
$ Value		$10			$0
Percentage		0.3	%		0.0	%
Non-performing/impaired loans
$ Value		$62	(1)		$10	(2)
Percentage		2.0	%		0.3	%

(1)

At June 30, 2008, includes one first mortgage loan with a principal balance of $12 million against   which we have no reserve and a $123 million mezzanine loan where we have $50 million of economic exposure and against which we have reserved $50 million in the second quarter.  Amounts shown above do not include $73 million of the mezzanine loan that we sold to a participant at origination in 2007.

(2)

At December 31, 2007, includes one second mortgage loan with a principal balance of $10 million against which we had reserved $4 million.

During the quarter, three loans experienced performance issues: (i) a $10 million second mortgage loan against which we had previously (during the fourth quarter of 2007) reserved $4 million, was deemed unrecoverable and we wrote off the entire $10 million (an additional $6 million charge).  Simultaneously, $6 million of financing on the asset was forgiven by our lender;  (ii) a $50 million mezzanine loan (recorded as a $123 million loan on our balance sheet with an offsetting $73 million participation sold) that had matured during the first quarter and was extended in order to allow for liquidation of the collateral was reserved against.  Management made the decision to record a $50 million reserve against the $123 million asset based upon conclusions reached subsequent to quarter end with respect to the probability of recovery on the loan; and (iii) a $12 million parri passu participation in a first mortgage did not make its contractual interest payment during the first quarter and we have commenced the foreclosure process on the collateral.  We have not recorded a reserve against this loan given our expectation for a full recovery of principal.  We did not accrue interest on any of these loans in the second quarter and reversed any pre-existing accrual on the $50 million mezzanine loan. Based upon our review of the remainder of the portfolio, we concluded that no additional reserves for possible credit losses were warranted on any of our other loans for the six months ended June 30, 2008.

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 We actively manage our CMBS investments using a combination of quantitative tools and loan/property level analysis in order to monitor the performance of the securities and their collateral versus our original expectations.  Securities are analyzed on a monthly basis for delinquency, transfers to special servicing, and changes to the servicer’s watchlist population.  Realized loan losses are tracked on a monthly basis and compared to our original loss expectations.  On a periodic basis, individual loans of concern are also re-underwritten.  Updated collateral loss projections are then compared to our original loss expectations to determine how each investment is performing.  Based on our review of the portfolio, we concluded that no impairments were warranted in the six months ended June 30, 2008.  At quarter end, there were significant differences between the estimated fair value and the book value of some of our CMBS investments.  We believe these differences to be related to the disruption in the capital markets and the general negative bias toward structured financial products and not reflective of a change in cash flow expectations from these securities.

The ratings performance of our CMBS portfolio over the six months ended June 30, 2008 and the year ended December 31, 2007 is detailed below:

CMBS Rating Activity(1)
	Six  months ended June 30, 2008	Year ended December 31, 2007
Upgrades	2	24
Downgrades	6	3

(1) Represents activity from any of Fitch Ratings, Standard & Poor’s and/or Moody’s Investors Service.

Two trends in asset performance that we foresee in 2008 are (i) borrowers faced with maturities will have a more difficult time refinancing their properties in light of the volatility and lack of liquidity in the capital markets, and (ii) real estate fundamentals will deteriorate if the U.S. economy continues to slow.

Capitalization

Our balance sheet investment activities are capital intensive and the availability and cost of capital is a critical component of our business.  We capitalize our business with a combination of debt and equity.  Our debt sources, which we refer to as Interest Bearing Liabilities, currently include repurchase agreements, CDOs, a senior unsecured credit facility, and junior subordinated debentures (which we also refer to as trust preferred securities).  Our equity capital is currently comprised entirely of common equity.  The table below shows our capitalization mix as of June 30, 2008 and December 31, 2007:

Capital Structure(1)
(in millions)	June 30, 2008			December 31, 2007
Repurchase obligations		$801			$912
Collateralized debt obligations		1,170			1,192
Senior unsecured credit facility		100			75
Junior subordinated debentures		129			129
Total Interest Bearing Liabilities		$2,200			$2,308
All in cost of debt(2)		3.97	%		5.66	%
Shareholders’ Equity		$481			$408
Ratio of Interest Bearing Liabilities to Shareholders’ Equity	4.6:1			5.7:1

(1)	Excludes participations sold.
(2)	Floating rate liabilities assume LIBOR at June 30, 2008 and December 31, 2007, of 2.46% and 4.60%, respectively.

We use leverage to enhance our returns on equity by attempting to:  (i) maximize the differential between the yield of our Interest Earning Assets and the cost of our Interest Bearing Liabilities, and (ii) optimize the amount of leverage employed.  The use of leverage, however, adds risk to our business, magnifying our shareholders’ exposure to asset level risk by subordinating our equity interests to our debt capital providers.  The level of leverage we utilize is based upon the risk associated with our assets, as well as the structure of our liabilities.  In general, we will apply greater amounts of leverage to lower risk assets and vice versa.  In addition, structural features of our leverage, such as recourse, collateral mark-to-market provisions and duration, factor into the amounts of leverage we are comfortable applying to our Interest Earning Assets.  Our sources of recourse financing generally require financial covenants, including restrictions on corporate guarantees, the maintenance of certain financial ratios (such as specified debt-to-equity and debt service coverage ratios) as well as the maintenance of a minimum net worth.

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A summary of selected structural features of our debt as of June 30, 2008 and December 31, 2007 is detailed in the table below:

Interest Bearing Liabilities
	June 30, 2008	December 31, 2007
Weighted average maturity (1)	3.9 yrs.	4.1 yrs.
% Recourse	46.8%	48.1%
% Mark-to-market	36.4%	39.5%

(1) Based upon balances as of June 30, 2008 and December 31, 2007.

Over the past few years, we have used CDOs as one method to finance our business.  While we expect to continue to utilize CDOs and other structured products to finance both our balance sheet and our investment management businesses going forward, the current state of the debt capital markets makes it unlikely that, in the near term, we will be able to issue CDO liabilities similar to our existing CDOs. The lack of a CDO or similar structured product market makes us more reliant on other financing options such as our repurchase facilities.  Unlike our CDOs, our repurchase facilities are shorter term, mark-to-market, recourse liabilities.  Given the additional liquidity risks associated with a portfolio of assets financed with these types of liabilities, we believe that a higher degree of balance sheet liquidity is necessary to manage these liabilities.  

Our CDOs are non-recourse, non-mark-to-market, index matched financings that generally carry a lower cost of debt and allow for higher levels of leverage than our other financing sources.  During the first six months of 2008, we did not issue any new CDOs for our balance sheet, however, we continued contributing assets to our previously issued reinvesting CDOs, which have reinvestment periods extending through July 2008 for CDO I and April 2010 for CDO II.  Our CDO liabilities as of June 30, 2008 and December 31, 2007 are described below:

Collateralized Debt Obligations
(in millions)			June 30,					December 31,
			2008					2007
	Issuance Date	Type	Book Value		All in Cost(1)			Book Value		All in Cost(1)
CDO I(2)	7/20/04	Reinvesting		$253		3.54	%		$253		5.67	%
CDO II (2)	3/15/05	Reinvesting		299		3.19			299		5.32
CDO III	8/04/05	Static		258		5.37			261		5.37
CDO IV(2)	3/15/06	Static		361		3.10			379		5.11
Total				$1,171		3.72	%		$1,192		5.34	%

(1)	Includes amortization of premiums and issuance costs.
(2)	Floating rate CDO liabilities assume LIBOR at June 30, 2008 and December 31, 2007, of 2.46% and 4.60%, respectively.

Repurchase obligation financings provide us with an important revolving component to our liability structure.  Our repurchase agreements provide stand alone financing for certain assets and interim, or warehouse, financing for assets that we plan to contribute to our CDOs.  At any point in time, the amounts and the cost of our repurchase borrowings are based upon the assets being financed – higher risk assets will attract lower levels of leverage at higher costs and vice versa.  The table below summarizes our repurchase agreement liabilities as of June 30, 2008 and December 31, 2007:

Repurchase Agreements
($ in millions)	June 30, 2008	December 31, 2007
Repurchase facility amounts	$1,525	$1,600
Counterparties	4	5
Outstanding repurchase borrowings	$801	$912
All in cost	L + 1.28%	L + 1.20%

Our repurchase obligations generally include collateral mark-to-market features.  The mark-to-market provisions in our repurchase facilities are designed to keep our lenders’ credit exposure constant as a percentage of the market value of the assets pledged as security to them.  As market credit spreads have increased and asset values have declined in 2007 (and this trend has continued in 2008 to date), the gross amount of leverage available to us has been reduced as our assets have been marked-to-market.  The impact to date from these marks to market has been a reduction in our liquidity.  We believe that we maintain sufficient liquidity on our balance sheet in order to meet margin calls and defend our portfolios.  In addition, our repurchase agreements are not term matched financings and mature from time to time.  In 2008, we have experienced lower advance rates and higher pricing under these agreements as we negotiate renewals and extensions of these liabilities.

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At June 30, 2008, we were party to six master repurchase agreements with four counterparties with total facility amounts of $1.5 billion. At June 30, 2008, we borrowed $762.0 million under these agreements.  We were also a party to asset specific repurchase obligations and a secured loan agreement.  At June 30, 2008, these asset specific borrowings totaled $38.8 million.  Our total borrowings at June 30, 2008 under master repurchase agreements and asset specific arrangements were $800.7 million, and we had the ability to borrow an additional $122.5 million without pledging additional collateral.  Loans and CMBS with a carrying value of $1.3 billion are pledged as collateral for our repurchase agreements.

On July 24, 2008, we extended the availability period under our $250 million master repurchase agreement with Citigroup to July 28, 2009.  As part of the extension agreement, the repurchase dates for certain outstanding borrowings were extended to July 29, 2010 with the remainder retaining their October 11, 2011 final maturities.

On July 25, 2008, we extended the purchase period of our $300 million master repurchase agreement with Morgan Stanley to July 29, 2009.  We also terminated an un-utilized $50 million master repurchase facility with Morgan Stanley which was originally designed to warehouse finance CDO eligible assets.

In March 2007, we closed a $50.0 million senior unsecured revolving credit facility with WestLB AG, which we amended in June 2007, increasing the size to $100 million and adding new lenders to the syndicate.  In March 2008, we exercised our term-out option under the agreement, extending the maturity date of the $100 million principal balance outstanding to March 2009 as a non-revolving term loan.  The loan bears interest at a cost of LIBOR plus 1.75% (LIBOR plus 2.03% on an all in basis).

The most subordinated components of our debt capital structure are junior subordinated debentures that back trust preferred securities issued to third parties.  These securities represent long-term, subordinated, unsecured financing and generally carry limited operational covenants.  At June 30, 2008, we had issued $129 million of junior subordinated debentures that back $125 million of trust preferred securities sold to third parties in two separate issuances. On a combined basis, the junior subordinated debentures provide us with financing at a cash cost of 7.20% and an all-in effective rate of 7.30%.

Our capital raising activities included the issuance of common stock in the first quarter of 2008. On March 28, 2008, we issued 4,000,000 shares of class A common stock in a public offering underwritten by Morgan Stanley & Co. Inc. Gross proceeds were $28.75 per share and total net proceeds were $113 million. Changes in the number of shares also resulted from option exercises, restricted stock grants and vesting, stock unit grants, and the issuance of shares under our dividend reinvestment plan and direct stock purchase plan.

Shareholders’ Equity
	June 30, 2008	December 31, 2007
Book value (in millions)	$481	$408
Shares
Class A common stock	21,721,929	17,165,528
Restricted stock	385,003	423,931
Stock units	135,964	94,587
Options(1)	31,318	84,743
Total	22,274,214	17,768,789
Book value per share	$21.58	$22.97

(1) Dilutive shares issuable upon the exercise of outstanding options assuming a June 30, 2008 and December 31, 2007 stock price, respectively, and the treasury stock method.

At June 30, 2008, we had 22,106,932 of our class A common stock and restricted stock outstanding.

Other Balance Sheet Items

Participations sold represent participations in loans that we originated and sold to CT Large Loan 2006, Inc. and third parties. We present these sold interests as both assets and liabilities (in equal amounts) in conformity with GAAP on the basis that these arrangements do not qualify as sales under FAS 140. At June 30, 2008, we had seven such participations sold with a total book balance of $410 million at a weighted average yield of LIBOR plus 3.35% (5.81% at June 30, 2008). The income earned on the loans is recorded as interest income and an identical amount is recorded as interest expense on the consolidated statements of income.

Interest Rate Exposure

We endeavor to manage a book of assets and liabilities that are generally matched with respect to interest rates, typically financing floating rate assets with floating rate liabilities and fixed rate assets with fixed rate liabilities. In some cases, we finance fixed rate assets with floating rate liabilities and, in those cases, we may use interest rate derivatives, such as swaps, to effectively convert the floating rate debt to fixed rate debt. In such instances, the equity we have invested in fixed rate assets is not typically swapped, leaving a portion of our equity capital exposed to changes in value of the fixed rate assets due to interest rate fluctuations. The balance of our assets earn interest at floating rates and are financed with floating rate liabilities, leaving a portion of our equity capital exposed to cash flow variability from fluctuations in rates. Generally, these assets and liabilities earn interest at rates indexed to one month LIBOR.

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The table below details our interest rate exposure as of June 30, 2008 and December 31, 2007:

Interest Rate Exposure
(in millions)	June 30, 2008			December 31, 2007
Value Exposure to Interest Rates(1)
Fixed rate assets	$895			$948
Fixed rate liabilities		(400	)		(403	)
Interest rate swaps		(507	)		(513	)
Net fixed rate exposure	$(12		)	$32
Weighted average maturity (assets)		7.4	yrs		7.4	yrs
Weighted average coupon (assets)		6.84	%		7.10	%
Cash Flow Exposure to Interest Rates(1)
Floating rate assets	$2,127			$2,235
Floating rate debt less cash		(2,099	)		(2,280	)
Interest rate swaps		507			513
Net floating rate exposure	$535			$468
Net income impact from 100 bps change in LIBOR	$5.3			$4.7

(1) All values are in terms of face or notional amounts.

Investment Management Overview

In addition to our balance sheet investment activities, we act as an investment manager for third parties.  The purpose of our investment management business is to leverage our platform, generating fee revenue from investing third party capital and, in certain instances, co-investment income.  Our third party investment management mandates are designed to be complementary to our balance sheet programs and are built around opportunities that we do not pursue directly on balance sheet due to their scale/concentration, risk/return profile and/or regulatory constraints.  In some instances, we co-invest in our investment management vehicles (as described below).  Our active investment management mandates are described below:

· CTOPI is a multi-investor private equity fund designed to invest in commercial real estate debt and equity investments, specifically taking advantage of the current dislocation in the commercial real estate capital markets.  Total equity commitments as of June 30, 2008 were $515 million (all immediately available).  On July 14, 2008, CTOPI held its final closing with $540 million of equity commitments.  We have committed to invest $25 million in the vehicle and entities controlled by our chairman have committed to invest $20 million.  The fund’s investment period expires in December 2010, and we earn base management fees as the investment manager to CTOPI (1.59% of available equity commitments during the investment period and of invested capital thereafter).  In addition, we earn gross incentive management fees of 20% of profits after a 9% preferred return and a 100% return of capital.

· CT High Grade Partners II, LLC held its initial closing in June 2008 with $667 million of commitments from two institutional investors.  The fund targets senior debt opportunities in the commercial real estate debt space and does not employ leverage.  We earn a 0.40% management fee on invested capital.

· CT High Grade closed in November 2006, with a single, related party investor committing $250 million. This separate account targets low risk subordinate debt investments and does not utilize leverage and we earn management fees of 0.25% per annum of invested assets.  In July 2007, we upsized the account by $100 million to $350 million and extended the investment period to July 2008.

· CT Large Loan closed in May 2006 with total equity commitments of $325 million from eight third party investors. The fund employs leverage (not to exceed a two to one ratio of debt to equity), and we earn management fees of 0.75% per annum of invested assets (capped at 1.5% on invested equity).  In April 2007, we extended the investment period of the fund to May 2008.

· CTX Fund is a single investor fund designed to invest in collateralized debt obligations, or CDOs, sponsored, but not issued, by us.  We do not earn fees on the CTX Fund, however, we earn CDO management fees from the CDOs in which the CTX Fund invests.  We sponsored one such CDO in 2007, a $500 million CDO secured primarily by credit default swaps referencing CMBS.

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· Fund III is a co-sponsored vehicle with a joint venture partner that closed in August of 2003, invested from 2003 to 2005 and is currently liquidating in the ordinary course.  We have a co-investment in the fund, earn 100% of base management fees and we split incentive management fees with our partner – our partner receives 37.5% of Fund III incentive management fees.

At June 30, 2008, we managed five private equity funds and one separate account through our wholly-owned, taxable, investment management subsidiary, CT Investment Management Co., LLC, or CTIMCO.

Investment Management Mandates
					Incentive Management Fee
	Type	Total Equity Commitments ($ in millions)	Co-Investment%	Base Management Fee	Company %	Employee %
Investing:
CTOPI	Fund	$515	(1)	1.59% (Equity)	100%(2)(3)	0%(3)
CT High Grade II	Fund	667	0%	0.40% (Assets)	N/A	N/A
CT High Grade	Sep. Acct.	350	0%	0.25% (Assets)	N/A	N/A
Liquidating:
CT Large Loan	Fund	325	(4)	0.75% (Assets) (5)	N/A	N/A
CTX Fund	Fund	10(6)	(4)	(7)	100%(7)	0%(7)
Fund III	Fund	425	4.71%	1.42% (Equity)	57%(8)	43%(9)

(1)	We have committed to invest $25 million in CTOPI and, with the final closing held July 14, 2008, our investment represents 4.6% of total committed equity capital.
(2)	CTIMCO earns gross incentive management fees of 20% of profits after a 9% preferred return on capital and a 100% return of capital subject to a catch-up.
(3)	We have not allocated any of the CTOPI incentive management fee to employees as of June 30, 2008.
(4)	We co-invest on a pari passu, asset by asset basis with CT Large Loan and CTX Fund.
(5)	Capped at 1.5% of equity.
(6)	In 2008, we reduced the total capital commitment in the CTX Fund to $10 million.
(7)	CTIMCO serves as collateral manager of the CDOs in which the CTX Fund invests and CTIMCO earns base and incentive management fees as CDO collateral manager. At June 30, 2008 we manage one such $500 million CDO and earn base management fees of 0.15% of assets and have the potential to earn incentive management fees.
(8)	CTIMCO earns gross incentive management fees of 20% of profits after a 10% preferred return on capital and a 100% return of capital, subject to a catch up.
(9)	Portions of the Fund III incentive management fees received by us have been allocated to our employees as long term performance awards.

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The table below describes the status of our investment management vehicles as of June 30, 2008 and December 31, 2007.

Investment Management Snapshot
(in millions)	June 30, 2008	December 31, 2007
CTOPI
Assets	$217	$69
Equity commitments(1)	$515	$314
Incentive fees collected	$—	$—
Incentive fees  projected(2)	$—	$—
Status(3)	Investing	Investing
CT High Grade II
Assets	$40	$—
Equity commitments	$667	$—
Status	Investing	N/A
CT High Grade
Assets	$305	$305
Equity	$305	$305
Status(3)	Investing	Investing
CT Large Loan
Assets	$325	$323
Equity	$129	$130
Status(4)	Liquidating	Investing
CTX Fund
Assets(5)	$500	$500
Equity	$8	$7
Status(4)	Liquidating	Investing
Fund III
Assets	$49	$47
Equity	$16	$15
Incentive fees collected(6)	$5.6	$5.6
Incentive fees  projected(2)	$2.8	$2.6
Status(4)	Liquidating	Liquidating

(1)	Assumes all equity commitments are available.  At June 30, 2008, all of these commitments were immediately available.  On July 14, 2008, CTOPI held its final closing with $540 million of committed equity.
(2)	Assumes assets were sold and liabilities were settled on July 1, 2008 and January 1, 2008, respectively, at the recorded book value, and the fund’s equity and income was distributed for the respective period ends.
(3)	CTOPI, CT High Grade II, and CT High Grade investment periods expire in December 2010, June 2009 and July 2008, respectively.
(4)	Fund III’s investment period ended in June 2005. The CTX Fund’s investment period ended February 2008. CT Large Loan’s investment period expired May 2008.
(5)	Represents the total notional cash exposure to CTX CDO I collateral.
(6)	CTIMCO received $5.6 million of incentive fees from Fund III in 2007 of which $372,000 may have to be returned under certain circumstances. Accordingly, we only recorded $5.2 million as revenue for the year ended December 31, 2007.

We expect to continue to grow our investment management business, sponsoring additional investment management vehicles consistent with the strategy of developing mandates that are complementary to our balance sheet activities.

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Comparison of Results of Operations: Three Months Ended June 30, 2008 vs. June 30, 2007
(in thousands, except per share data)
	2008			2007			$ Change			% Change
Income from loans and other investments:
Interest and related income	$	49,030		$	68,797		$	(19,767	)		(28.7	%)
Interest and related expenses		32,799			40,192			(7,393	)		(18.4	%)
Income from loans and other investments, net		16,231			28,605			(12,374	)		(43.3	%)
Other revenues:
Management fees		4,154			582			3,572			613.7	%
Incentive management fees		—			—			—			N/A
Servicing fees		44			45			(1	)		(2.2	%)
Other		638			272			366			134.6	%
Total other revenues		4,836			899			3,937			437.9	%
Other expenses:
General and administrative		6,208			7,832			(1,624	)		(20.7	%)
Depreciation and amortization		22			60			(38	)		(63.3	%)
Total other expenses		6,230			7,892			(1,662	)		(21.1	%)
Gain on extinguishment of debt		6,000			—			6,000			N/A
(Provision for)/recovery of losses on loan impairment		(56,000	)		4,000			(60,000	)		(1,500.0	%)
Gain on sale of investments		374			—			374			N/A
Income/(loss) from equity investments		69			(230	)		299			(130.0	%)
(Benefit) provision for income taxes		98			—			98			N/A
Net income	$	(34,818	)	$	25,382		$	(60,200	)		(237.2	%)
Net income per share - diluted	$	(1.59	)	$	1.43		$	(3.02	)		(211.1	%)
Dividend per share	$	0.80		$	0.80		$	0.00			0.0	%
Average LIBOR		2.59	%		5.32	%		(2.73	%)		(51.3	%)

Income from loans and other investments

A decline in Interest Earning Assets ($100 million or 4% from June 30, 2007 to June 30, 2008), a 51% decrease in average LIBOR, a write off of $776,000 of accrued interest receivable in the second quarter of 2008, and a $4.3 million interest payment in the second quarter of 2007 from the successful resolution of a non performing loan, contributed to an $19.8 million (29%) decrease in interest income between the second quarter of 2007 and the second quarter of 2008. Lower LIBOR and lower levels of leverage resulted in a $7.4 million, or 18%, decrease in interest expense for the period. On a net basis, net interest income decreased by $12.4 million, or 43%.

Management fees

Base management fees from our investment management business increased $3.6 million (614%) during the second quarter of 2008 compared with the second quarter of 2007. The increase was attributed primarily to $3.1 million of new fee revenue earned from CTOPI.

Incentive management fees

We did not receive any incentive management fees during the second quarter of 2008 or 2007.

Servicing fees

Servicing fees remained flat from the second quarter of 2007 to 2008.

Other revenue

Other revenue increased by $366,000, or 135%, from the second quarter of 2007 to the second quarter of 2008 primarily from investing our higher levels of cash in interest bearing accounts.

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General and administrative expenses

General and administrative expenses include compensation and benefits for employees, operating expenses and professional fees. Total general and administrative expenses decreased 21% between the second quarter of 2007 and the second quarter of 2008. The decrease was a result of lower levels of employment costs.

Depreciation and amortization

Depreciation and amortization decreased by $38,000 or 63% between the second quarter of 2007 and the second quarter of 2008 due primarily to the capitalized costs associated with Fund III being fully amortized during the first quarter of 2008.

Gain on extinguishment of debt

$6.0 million of debt forgiveness by a creditor was recorded as a gain on extinguishment of debt. We recorded no such gains for the three months ended June 30, 2007.

(Provision for) recovery of losses

During the second quarter of 2008, we recorded a $50.0 million provision for loss against a loan that we classified as non performing.

During the second quarter of 2008, we also recorded an additional $6.0 million charge on a loan that was classified as non performing at March 31, 2008. The loan was subsequently written off during the second quarter and the $6.0 million liability collateralized by the loan was forgiven by the creditor as described above. The $4.0 million recovery recorded in the second quarter of 2007 related to the successful resolution of a non performing loan.

Gain on sale of investments

At December 31, 2007, we had one CMBS investment that we designated and accounted for on an available-for-sale basis with a face value of $7.7 million. During the second quarter of 2008, the security was sold for a gain of $374,000.

Income/(loss) from equity investments

The income from equity investments in the second quarter of 2008 resulted primarily from our share of operating income at Fund III and CTOPI. The loss from equity investments in the second quarter of 2007 resulted primarily from our portion of operating losses of $325,000 at Bracor offset by $106,000 of income from Fund III. We sold our investment in Bracor during the fourth quarter of 2007.

Income taxes

We did not pay any taxes at the REIT level in either the second quarter of 2007 or 2008. However, CTIMCO, our investment management subsidiary, is a taxable REIT subsidiary and subject to taxes on its earnings. In the second quarter of 2008, CTIMCO recorded operating income before income taxes of $1.1 million, which when combined with GAAP to tax differences and changes in valuation allowances resulted in a provision for income taxes of $98,000. In the second quarter of 2007, CTIMCO recorded an operating loss before income taxes of $1.5 million, resulting in an income tax benefit which was fully reserved.

Net income

Net income decreased by $60.2 million from the second quarter of 2007 to the second quarter of 2008. The decrease in net income was primarily attributed to a $60 million increase in provision for losses and a $12.4 million decrease in net interest income, partially offset by a $3.6 million increase in management fees and a $6.0 million gain on the forgiveness of debt. On a diluted per share basis, net (loss) income was ($1.59) and $1.43 in the second quarter of 2008 and 2007, respectively.

Dividends

Our dividend for the second quarter of 2008 was $0.80 per share, unchanged from the second quarter of 2007.

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Comparison of Results of Operations: Six Months Ended June 30, 2008 vs. June 30, 2007
(in thousands, except per share data)
	2008			2007			$ Change			% Change
Income from loans and other investments:
Interest and related income	$	105,585		$	126,247		$	(20,662	)		(16.4	%)
Interest and related expenses		70,743			76,293			(5,550	)		(7.3	%)
Income from loans and other investments, net		34,842			49,954			(15,112	)		(30.3	%)
Other revenues:
Management fees		6,350			1,331			5,019			377.1	%
Incentive management fees		—			962			(962	)		(100.0	%)
Servicing fees		222			112			110			98.2	%
Other		825			582			243			41.8	%
Total other revenues		7,397			2,987			4,410			147.6	%
Other expenses:
General and administrative		13,108			14,644			(1,536	)		(10.5	%)
Depreciation and amortization		127			1,388			(1,261	)		(90.9	%)
Total other expenses		13,235			16,032			(2,797	)		(17.4	%)
Gain on extinguishment of debt		6,000			—			6,000			N/A
(Provision for)/recovery of losses on loan impairment		(56,000	)		4,000			(60,000	)		(1,500.0	%)
Gain on sale of investments		374			—			374			N/A
Income/(loss) from equity investments		76			(933	)		1,009			(108.1	%)
(Benefit) provision for income taxes		(501	)		(254	)		(247	)		97.2	%
Net income	$	(20,045	)	$	40,230		$	(60,275	)		(149.8	%)
Net income per share - diluted		$(1.01	)		$2.27			$(3.28	)		(144.3	%)
Dividend per share		$1.60			$1.60			$0.00			0.0	%
Average LIBOR		2.95	%		5.32	%		(2.37	%)		(44.5	%)

Income from loans and other investments

Inter period changes in Interest Earning Assets, a 45% decrease in average LIBOR, a write off of $776,000 of accrued interest receivable in the second quarter of 2008, and a $4.3 million interest payment in the second quarter of 2007 from the successful resolution of a non performing loan, contributed to a $20.7 million (16%) decrease in interest income between the first six months of 2007 and the first six months of 2008. Lower LIBOR and lower levels of leverage resulted in a $5.6 million, or 7%, decrease in interest expense for the period. On a net basis, net interest income decreased by $15.1 million, or 30%.

Management fees

Base management fees from our investment management business increased $5.0 million (377%) during the first six months of 2008 compared with the first six months of 2007. The increase was attributed primarily to $4.3 million of new fee revenue earned from CTOPI.

Incentive management fees

Incentive management fees from the investment management business decreased by $962,000 as no incentive fee income was recorded in the first six months of 2008 and $962,000 of incentive management fees from CT Mezzanine Partners II LP, or Fund II, were recognized in the first six months of 2007.

Servicing fees

Servicing fee income during the first six months of 2008 was $222,000 compared with $112,000 in the first six months of 2007. The 98% increase in servicing fee revenue was a result of recognizing revenue relating to the servicing contracts acquired as part of our purchase of the healthcare origination platform in June 2007.

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Other revenue

Other revenue increased by $243,000, or 42%, from the second quarter of 2007 to the second quarter of 2008 primarily from investing our higher levels of cash in interest bearing accounts.

General and administrative expenses

General and administrative expenses include compensation and benefits for employees, operating expenses and professional fees. Total general and administrative expenses decreased 11% between the first six months of 2007 and the first six months of 2008. The decrease was a result of lower levels of base employment costs.

Depreciation and amortization

Depreciation and amortization decreased by $1.3 million or 91% between the first six months of 2007 and the first six months of 2008 due primarily to the write off of $1.3 million of capitalized costs related to the liquidation of Fund II in the first quarter of 2007.

Gain on extinguishment of debt

$6.0 million of debt forgiveness by a creditor was recorded as a gain on extinguishment of debt. We recorded no such gains for the six months ended June 30, 2007. We recorded no such gains for the six months ended June 30, 2007.

(Provision for) recovery of losses

During the second quarter of 2008, we recorded a $50.0 million provision for loss against a loan that we classified as non performing.

During the second quarter of 2008, we also recorded an additional $6.0 million charge on one loan that was classified as non performing at March 31, 2008. The loan was subsequently written off during the second quarter and the $6.0 million liability collateralized by the loan was forgiven by the creditor. The $4.0 million recovery recorded in the second quarter of 2007 related to the successful resolution of a non performing loan.

Gain on sale of investments

At December 31, 2007, we had one CMBS investment that we designated and account for on an available-for-sale basis with a face value of $7.7 million. The security earned interest at a weighted average coupon of 8.34% at December 31, 2007. During the second quarter of 2008 the security was sold for a gain of $374,000.

Income/(loss) from equity investments

The income from equity investments in the first six months of 2008 resulted primarily from our share of operating income at Fund III and CTOPI. The loss from equity investments in the first six months of 2007 resulted primarily from the amortization of $384,000 of capitalized costs passed through to us from the general partner of Fund II, our portion of operating losses at Fund II (as it paid incentive management fees during the period) and our portion of operating losses of $484,000 at Bracor. We sold our investment in Bracor during the fourth quarter of 2007.

Income taxes

We did not pay any taxes at the REIT level in either the first six months of 2007 or 2008. However, CTIMCO, our investment management subsidiary, is a taxable REIT subsidiary and subject to taxes on its earnings. In the six months ended June 30, 2008, CTIMCO recorded operating income before income taxes of $398,000, which when combined with GAAP to tax differences and changes in valuation allowances resulted in an income tax benefit of $501,000. In the six months ended June 30, 2007, CTIMCO recorded an operating loss before income taxes of $3.0 million, resulting in an income tax benefit which was fully reserved.

Net income

Net income decreased by $60.3 million from the six months ended June 30, 2007 to the six months ended June 30, 2008. The decrease in net income was primarily attributed to a $60 million increase in provision for losses and a $15.1 million decrease in net interest income, partially offset by a $5.0 million increase in management fees and a $6.0 million gain on the forgiveness of debt. On a diluted per share basis, net (loss) income was ($1.01) and $2.27 in the six months ended June 30, 2008 and 2007, respectively.

Dividends

Our dividends declared for the six months ended June 30, 2008 were $1.60 per share, unchanged from the six months ended June 30, 2007.

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Liquidity and Capital Resources

We expect to use a significant amount of our available capital resources to invest in new and existing loans and investments for our balance sheet.  We intend to continue to employ leverage on our balance sheet to enhance our return on equity. At June 30, 2008, our net liquidity was as follows:

Net Liquidity
(in millions)	June 30, 2008
Available cash	$110
Available borrowings		123
Total immediate liquidity		233
Net unfunded commitments(1)		(47	)
Net liquidity	$186

(1) Represents gross unfunded commitments of $99 million less respective in place financing commitments from our lenders of $77 million and our commitments ($25 million) to our active investment management funds.

At June 30, 2008, we had total immediate liquidity of $233 million comprised of $95 million in cash, $15 million in restricted cash and $123 million of immediately available liquidity from our repurchase agreements. Our primary sources of liquidity during the next 12 months are expected to be cash on hand, cash generated from operations, principal and interest payments received on loans and investments, additional borrowings under our repurchase agreements, stock offerings, proceeds from our direct stock purchase plan and dividend reinvestment plan, and other capital raising activities. We believe these sources of capital will be adequate to meet both short term and medium term cash requirements.

Cash Flows

We experienced a net increase in cash of $69 million for the six months ended June 30, 2008, compared to a net decrease of $1.7 million for the six months ended June 30, 2007.

Cash provided by operating activities during the six months ended June 30, 2008 was $27 million, compared to cash provided by operating activities of $48 million during the same period of 2007. The change was primarily due to a decrease in net income of $60 million and a decrease in accounts payable and accrued expenses of $8 million.

For the six months ended June 30, 2008, cash provided by investing activities was $84 million, compared to $648 million used in investing activities during the same period in 2007. The change was primarily due to a decrease in originations of $1 billion during the six months ended June 30, 2008 compared to the six months ended June 30, 2007, and a decrease in principal repayments of $285 million for the same periods.

For the six months ended June 30, 2008, cash used by financing activities was $42 million, compared to $598 million provided by financing activities during the same period in 2007. The change was primarily due to proceeds from repurchase obligations and the issuance of junior subordinated debentures and activity on other debt in the six months ended June 30, 2007.

Capitalization

Our authorized capital stock consists of 100,000,000 shares of $.01 par value class A common stock, of which 22,106,932 shares were issued and outstanding at June 30, 2008 and 100,000,000 shares of preferred stock, none of which were outstanding at June 30, 2008.

On January 15, 2008, we issued 53,192 shares of class A common stock under our dividend reinvestment plan. Net proceeds totaled approximately $1.5 million.

On March 4, 2008, we declared a dividend of $0.80 per share of class A common stock applicable to the three-month period ended March 31, 2008, which was paid on April 15, 2008 to shareholders of record on March 31, 2008.

On March 28, 2008, we closed a public offering of 4,000,000 shares of class A common stock. We received net proceeds of approximately $113.0 million. Morgan Stanley & Co. Incorporated acted as the sole underwriter of the offering.

On April 15, 2008, we issued 28,426 shares of class A common stock under our dividend reinvestment plan. Net proceeds totaled approximately $799,000.

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In June 2008, we issued 401,577 shares of class A common stock under our direct stock purchase plan. Net proceeds totaled approximately $10.5 million.

On June 16, 2008, we declared a dividend of $0.80 per share of class A common stock applicable to the three-month period ended June 30, 2008, which was paid on July 16, 2008 to shareholders of record on June 30, 2008.

Repurchase Obligations

At June 30, 2008, we were party to six master repurchase agreements with four counterparties with total facility amounts of $1.5 billion. At June 30, 2008, we borrowed $762 million under these agreements. We were also a party to asset specific repurchase obligations and a secured loan agreement. At June 30, 2008, these asset specific borrowings totaled $39 million. Our total borrowings at June 30, 2008 under master repurchase agreements and asset specific arrangements were $801 million, and we had the ability to borrow an additional $123 million without pledging additional collateral. Loans and CMBS with a carrying value of $1.3 billion are pledged as collateral for our repurchase agreements.

The terms of these agreements are described in Note 7 of the consolidated financial statements and in the capitalization discussion above in this Item 2.

Collateralized Debt Obligations

At June 30, 2008, we had CDOs outstanding from four separate issuances with a total face value of $1.2 billion. Our CDOs are financing vehicles for our assets and, as such, are consolidated on our balance sheet representing the amortized sales price of the securities we sold to third parties. In total, our two reinvesting CDOs provide us with $551.7 million of debt financing at a cash cost of LIBOR plus 0.55% (3.01% at June 30, 2008) and an all-in effective interest rate (including the amortization of issuance costs) of LIBOR plus 0.89% (3.35% at June 30, 2008). Our two static CDOs provide us with $618.9 million of financing with a cash cost of 3.92% and an all-in effective interest rate of 4.05% at June 30, 2008. On a combined basis, our CDOs provide us with $1.2 billion of non-recourse, non-mark-to-market, index matched financing at a weighted average cash cost of 0.53% over the applicable indices (3.49% at June 30, 2008) and a weighted average all in cost of 0.75% over the applicable indices (3.72% at June 30, 2008).Additional liquidity will be generated when assets that are currently pledged under repurchase obligations are contributed to our reinvesting CDOs as the difference between the repurchase price under our repurchase agreements is generally less than the leverage available to us in our CDOs. At June 30, 2008, we had additional liquidity of $15 million in our CDOs in the form of restricted cash.

Senior Unsecured Credit Facility

In March 2007, we closed a $50.0 million senior unsecured revolving credit facility with WestLB AG, which we amended in June 2007, increasing the size to $100.0 million and adding new lenders to the syndicate. In March 2008, we exercised our term-out option under the agreement, extending the maturity date of the $100 million principal balance outstanding to March 2009 as a non revolving term loan. The loan bears interest at a cost of LIBOR plus 1.75% (LIBOR plus 2.03% on an all in basis).

Junior Subordinated Debentures

At June 30, 2008, we had a total of $129 million of junior subordinated debentures outstanding (securing $125 million of trust preferred securities sold to third parties). Junior subordinated debentures are comprised of two issuances of debentures, $77 million of debentures (securing $75 million of trust preferred securities) issued in March 2007 and $52 million of debentures (securing $50 million of trust preferred securities) issued in 2006. On a combined basis the securities provide us with $125 million of financing at a cash cost of 7.20% and an all-in effective rate of 7.30%.

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The following table sets forth information about certain of our contractual obligations as of June 30, 2008:

Contractual Obligations
(in millions)
	Payments due by period
	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
Long-term debt obligations
Repurchase obligations	$	801	$	662	$	91	$	48	$	—
Collateralized debt obligations		1,169		—		—		—		1,169
Participations sold		410		73		—		337		—
Senior unsecured credit facility		100		100		—		—		—
Junior subordinated debentures		129		—		—		—		129
Total long-term debt obligations		2,609		835		91		385		1,298
Unfunded commitments
Loans		99		1		32		66		—
Equity investments		25		—		25		—		—
Total unfunded commitments		124		1		57		66		—
Operating lease obligations		15		1		3		3		8
Total	$	2,748	$	837	$	151	$	454	$	1,306

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements.

Impact of Inflation

Our operating results depend in part on the difference between the interest income earned on our interest-earning assets and the interest expense incurred in connection with our interest-bearing liabilities.  Changes in the general level of interest rates prevailing in the economy in response to changes in the rate of inflation or otherwise can affect our income by affecting the absolute yield on our assets, as well as potentially impacting the spread between our interest-earning assets and interest-bearing liabilities, as well as, among other things, the value of our interest-earning assets and the average life of our interest-earning assets.  Interest rates are highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations, and other factors beyond our control.  We employ a hedging strategy to limit the effects of changes in interest rates on our operations, including engaging in interest rate swaps in order to better match the cost of our liabilities with the yield of our assets.  There can be no assurance that we will be able to adequately protect against the foregoing risks or that we will ultimately realize an economic benefit from any hedging contract into which we enter.

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Note on Forward-Looking Statements

Except for historical information contained herein, this quarterly report on Form 10-Q contains forward-looking statements within the meaning of the Section 21E of the Securities and Exchange Act of 1934, as amended, which involve certain risks and uncertainties. Forward-looking statements are included with respect to, among other things, our current business plan, business and investment strategy and portfolio management. These forward-looking statements are identified by their use of such terms and phrases as "intends," "intend," "intended," "goal," "estimate," "estimates," "expects," "expect," "expected," "project," "projected," "projections," "plans," "anticipates," "anticipated," "should," "designed to," "foreseeable future," "believe," "believes" and "scheduled" and similar expressions. Our actual results or outcomes may differ materially from those anticipated. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date the statement was made. We assume no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Important factors that we believe might cause actual results to differ from any results expressed or implied by these forward-looking statements are discussed in the cautionary statements contained in Exhibit 99.1 to this Form 10-Q, which are incorporated herein by reference. In assessing forward-looking statements contained herein, readers are urged to read carefully all cautionary statements contained in this Form 10-Q.

- 45 - -

ITEM 3.                      Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk

The principal objective of our asset/liability management activities is to maximize net interest income, while managing levels of interest rate risk.  Net interest income and interest expense are subject to the risk of interest rate fluctuations.  In certain instances, to mitigate the impact of fluctuations in interest rates, we use interest rate swaps to effectively convert variable rate liabilities to fixed rate liabilities for proper matching with fixed rate assets.  The swap agreements are generally held-to-maturity, and we do not use interest rate derivative financial instruments for trading purposes.  The differential to be paid or received on these agreements is recognized as an adjustment to the interest expense related to debt and is recognized on the accrual basis.

As of June 30, 2008, a 100 basis point change in LIBOR would impact our net income by approximately $5.3 million.

Credit Risk

Our loans and investments, including our fund investments, are also subject to credit risk.  The ultimate performance and value of our loans and investments depends upon the owner’s ability to operate the properties that serve as our collateral so that they produce cash flows adequate to pay interest and principal due us.  To monitor this risk, our asset management team continuously reviews the investment portfolio and in certain instances is in constant contact with our borrowers, monitoring performance of the collateral and enforcing our rights as necessary.

The following table provides information about our financial instruments that are sensitive to changes in interest rates and credit spreads at June 30, 2008.  For financial assets and debt obligations, the table presents cash flows (in the cases of CMBS and Loans) to the expected maturity and weighted average interest rates. For interest rate swaps, the table presents notional amounts and weighted average fixed pay and variable receive interest rates by contractual maturity dates.  Notional amounts are used to calculate the contractual cash flows to be exchanged under the contract.  Weighted average variable rates are based on rates in effect as of the reporting date.

- 46 - -

	Expected Maturity Dates
	2008	2009	2010	2011	2012	Thereafter	Total	Fair Value
	(dollars in thousands)
Assets:
CMBS
Fixed Rate	$43,679	$5,842	$12,902	$71,035	$192,556	$395,930	$721,944	$621,299
Avg Int Rate	6.36%	7.61%	7.23%	7.62%	7.16%	6.28%	6.68%
Variable Rate	$3,116	$41,090	$83,164	$1,975	$5,840	$39,689	$174,874	$127,910
Avg Int Rate	3.62%	4.66%	5.80%	4.46%	6.01%	8.37%	6.07%
Loans
Fixed Rate	$875	$1,842	$1,997	$40,989	$2,124	$122,853	$170,680	$177,241
Avg Int Rate	8.26%	8.27%	8.23%	8.47%	7.76%	7.16%	7.51%
Variable Rate	$22,966	$105,605	$168,837	$824,084	$829,182	$13,000	$1,963,674	$1,888,115
Avg Int Rate	6.58%	6.26%	5.35%	5.18%	5.56%	4.42%	5.42%
Interest rate swaps
Notional Amounts	$23,225	$48,733	$13,383	$46,400	$81,887	$293,489	$507,117	$(16,921)
Avg Fixed Pay Rate	5.08%	4.77%	5.06%	4.65%	4.98%	5.01%	4.95%
Avg Variable Receive Rate	2.46%	2.46%	2.46%	2.46%	2.46%	2.46%	2.46%
Liabilities:
Repurchase obligations
Variable Rate	$559,209	$153,171	$40,448	$29,900	—	$18,014	$800,742	$800,742
Avg Int Rate	3.38%	3.66%	3.74%	3.74%	—	3.96%	3.48%
CDOs
Fixed Rate	$3,361	$3,042	$5,484	$41,593	$68,965	$148,272	$270,717	$213,575
Avg Int Rate	5.40%	6.22%	5.19%	5.10%	5.16%	5.42%	5.31%
Variable Rate	$19,281	$268,532	$49,443	$155,101	$196,410	$209,395	$898,162	$682,059
Avg Int Rate	2.82%	2.91%	3.63%	2.76%	2.84%	3.07%	2.94%
Senior unsecured credit facility
Fixed Rate	—	$100,000	—	—	—	—	$100,000	$95,972
Avg Int Rate	—	4.21%	—	—	—	—	4.21%
Junior subordinated debt
Fixed Rate	—	—	—	—	—	$128,875	$128,875	$83,092
Avg Int Rate	—	—	—	—	—	7.20%	7.20%
Participations sold
Variable Rate	—	$73,364	—	$91,465	$245,155	—	$409,984	$370,879
Avg Int Rate	—	6.21%	—	4.33%	6.29%	—	5.84%

- 47 - -

ITEM 4.                      Controls and Procedures

Evaluation of Disclosure Controls and Procedures

An evaluation of the effectiveness of the design and operation of our "disclosure controls and procedures" (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”), as of the end of the period covered by this quarterly report was made under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer.  Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures (a) are effective to ensure that information required to be disclosed by us in reports filed or submitted under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified by Securities and Exchange Commission rules and forms and (b) include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in reports filed or submitted under the Securities Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Controls

There have been no significant changes in our "internal control over financial reporting" (as defined in Rule 13a-15(f) of the Exchange Act) that occurred during the period covered by this quarterly report that have materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

- 48 - -

PART II. OTHER INFORMATION

ITEM 1: Legal Proceedings

None

ITEM 1A: Risk Factors

In addition to the other information discussed in this quarterly report on Form 10-Q, please consider the risk factors provided in our updated risk factors attached as Exhibit 99.1, which could materially affect our business, financial condition or future results.

Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may adversely affect our business, financial condition or operating results.

ITEM 2: Unregistered Sales of Equity Securities and Use of Proceeds

None.

ITEM 3: Defaults Upon Senior Securities

None.

ITEM 4: Submission of Matters to a Vote of Security Holders

At the 2008 annual meeting of our shareholders held on June 5, 2008, shareholders considered and voted upon:

1. A proposal to elect nine directors (identified in the table below) to serve until the next annual meeting of shareholders and until such directors’ successors are duly elected and qualify (“Proposal 1”); and

2. A proposal to ratify the appointment of Ernst & Young LLP as our independent auditors for the fiscal year ending December 31, 2008 (“Proposal 2”).

The following table sets forth the number of votes in favor, the number of votes opposed, the number of abstentions (or votes withheld in the case of the election of directors) and broker non-votes with respect to each of the foregoing proposals.

Proposal	Votes in Favor	Votes Opposed	Abstentions (Withheld)	Broker Non-Votes
Proposal 1
Samuel Zell	16,535,964	–	136,911	–
Thomas E. Dobrowski	16,561,784	–	111,091	–
Martin L. Edelman	16,414,257	–	258,618	–
Craig M. Hatkoff	16,553,574	–	119,301	–
Edward S. Hyman	16,560,172	–	112,703	–
John R. Klopp	16,560,512	–	112,363	–
Henry N. Nassau	16,561,909	–	110,966	–
Joshua A. Polan	16,548,886	–	123,989	–
Lynne B. Sagalyn	16,605,600	–	67,275	–
Proposal 2	16,597,114	20,899	54,862

ITEM 5: Other Information

None.

- 49 - -

ITEM 6: Exhibits

·	10.1		Amendment No. 2, dated as of June 30, 2008, to Amended and Restated Master Repurchase Agreement, by and among Capital Trust, Inc., CT BSI Funding Corp. and Bear, Stearns International Limited.
·	10.2		Amendment No. 2, dated as of June 30, 2008, to Amended and Restated Master Repurchase Agreement, by and among Capital Trust, Inc., CT BSI Funding Corp. and Bear, Stearns Funding, Inc.
·	31.1		Certification of John R. Klopp, Chief Executive Officer, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
·	31.2		Certification of Geoffrey G. Jervis, Chief Financial Officer, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
·	32.1		Certification of John R. Klopp, Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
·	32.2		Certification of Geoffrey G. Jervis, Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
·	99.1		Updated Risk Factors from the Company’s Annual Report on Form 10-K for the year ended December 31, 2007, filed on March 4, 2008 with the Securities and Exchange Commission.
	·	Filed herewith

- 50 - -

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	CAPITAL TRUST, INC.
July 29, 2008	/s/ John R. Klopp
Date	John R. Klopp
	Chief Executive Officer
July 29, 2008	/s/ Geoffrey G. Jervis
Date	Geoffrey G. Jervis
	Chief Financial Officer

- 51 - -

EX-10.1

Exhibit 10.1

EXECUTION COPY

AMENDMENT NO. 2

TO

AMENDED AND RESTATED MASTER REPURCHASE AGREEMENT

THIS AMENDMENT NO. 2, made as of June 30, 2008 (“Amendment No. 2”), by and between BEAR, STEARNS INTERNATIONAL LIMITED (the “Buyer”) and CAPITAL TRUST, INC. and CT BSI FUNDING CORP. (each, a “Seller” and collectively the “Sellers”).

R E C I T A L S

WHEREAS, Buyer and Sellers have previously entered into an Amended and Restated Master Repurchase Agreement, dated as of February 15, 2006, as amended by Amendment No. 1 thereto dated as of February 7, 2007 (collectively, the “Agreement”); and

WHEREAS, Buyer and Sellers desire to further amend the Agreement as provided herein;

NOW, THEREFORE, in consideration of the mutual promises and covenants hereinafter set forth, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows:

Section 1. Definitions.

(a) Capitalized terms used herein and not otherwise defined shall have the meanings assigned in the Agreement.

(b) The definition of EBITDA set forth in the Agreement is hereby deleted in its entirety and the following is substituted therefor:

“EBITDA” shall mean earnings before interest, tax, depreciation and amortization (but excluding gains and losses from investments).

Section 2.Termination.  Section 2(f) of the Agreement is hereby deleted in its entirety and the following is substituted therefor:

(f) Each Transaction entered into between Buyer and Seller that is outstanding on the date of Amendment No. 2 shall remain outstanding until the earliest to occur of (i) the Repurchase Date specified in the related Confirmation, (ii) the Early Repurchase Date and (iii) October 29, 2008.  Any Transaction may be extended by mutual agreement of Buyer and the Sellers but no such party shall be obligated to agree to such an extension.

Section 3.All Transactions Discretionary.  Notwithstanding any provisions of this Amendment No. 2, the Agreement or the Custodial Agreement to the contrary, the initiation of each Transaction is subject to the approval of Buyer in its sole discretion.  Buyer may, in its sole discretion, reject any Eligible Asset from inclusion in a Transaction hereunder for any reason.

Section 4.References to Seller.  All references to Seller in the Agreement, as amended hereby, are intended to mean the Sellers, jointly and severally, unless the context clearly requires otherwise.

Section 5.Expenses.  Sellers shall pay on demand all actual, out-of-pocket and reasonable fees and expenses (including, without limitation, the reasonable fees and expenses for legal services) incurred by Buyer in connection with this Amendment No. 2.  The obligation of Sellers to pay such fees and expenses incurred prior to, or in connection with, the termination of the Agreement, as amended by this Amendment No. 2, shall survive such termination.

Section 6.Governing Law.  This Amendment No. 2 shall be governed and construed in accordance with the laws of the State of New York without giving effect to the conflict of laws principles thereof.

Section 7.Interpretation; Final Agreement.  The provisions of the Agreement shall be read so as to give effect to the provisions of this Amendment No. 2.  The Agreement as amended hereby, together with the Side Letter, contains a final and complete integration of all prior expressions by the parties with respect to the subject matter hereof and thereof and shall constitute the entire agreement among the parties with respect to such subject matter, superseding all prior oral or written understandings.

Section 8.Captions.  The captions and headings of this Amendment No. 2 are for convenience only and not to be used to interpret, define or limit the provisions hereof.

Section 9.Counterparts.  This Amendment No. 2 may be executed in any number of counterparts, each of which counterparts shall be deemed to be an original, and such counterparts shall constitute but one and the same instrument.

Section 10.Ratification and Confirmation.  As amended by this Amendment No. 2, the Agreement is hereby in all respects ratified and confirmed, and the Agreement, as amended by this Amendment No. 2, shall be read, taken and construed as one and the same instrument.

2

IN WITNESS WHEREOF, Buyer and Sellers have caused their names to be signed hereto by their respective officers thereunto duly authorized, all as of the date first above written.

BUYER:
BEAR, STEARNS INTERNATIONAL LIMITED
By:	/s/ David S. Marren
Name:	David S. Marren
Title:	Authorized Signatory

SELLER:
CAPITAL TRUST, INC.
(jointly and severally with the other Seller)
By:	/s/ Geoffrey G. Jervis
Name:	Geoffrey G. Jervis
Title:	Chief Financial Officer

SELLER:
CT BSI FUNDING CORP.
(jointly and severally with the other Seller)
By:	/s/ Geoffrey G. Jervis
Name:	Geoffrey G. Jervis
Title:	Chief Financial Officer

Signature Page to Amendment No. 2 to Amended and Restated Master Repurchase Agreement (BSIL/CT/CTBSI)

3

EX-10.2

Exhibit 10.2

EXECUTION COPY

AMENDMENT NO. 2

TO

AMENDED AND RESTATED MASTER REPURCHASE AGREEMENT

THIS AMENDMENT NO. 2, made as of June 30, 2008 (“Amendment No. 2”), by and between BEAR, STEARNS FUNDING, INC. (the “Buyer”) and CAPITAL TRUST, INC. and CT BSI FUNDING CORP. (each, a “Seller” and collectively the “Sellers”). 

R E C I T A L S

WHEREAS, Buyer and Sellers have previously entered into an Amended and Restated Master Repurchase Agreement, dated as of February 15, 2006, as amended by Amendment No. 1 thereto dated as of February 7, 2007 (collectively, the “Agreement”); and

WHEREAS, Buyer and Sellers desire to further amend the Agreement as provided herein;

NOW, THEREFORE, in consideration of the mutual promises and covenants hereinafter set forth, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows:

Section 1. Definitions.

(a) Capitalized terms used herein and not otherwise defined shall have the meanings assigned in the Agreement.

(b) The definition of EBITDA set forth in the Agreement is hereby deleted in its entirety and the following is substituted therefor:

“EBITDA” shall mean earnings before interest, tax, depreciation and amortization (but excluding gains and losses from investments).

Section 2.Termination.  Section 2(f) of the Agreement is hereby deleted in its entirety and the following is substituted therefor:

(f) Each Transaction entered into between Buyer and Seller that is outstanding on the date of Amendment No. 2 shall remain outstanding until the earliest to occur of (i) the Repurchase Date specified in the related Confirmation, (ii) the Early Repurchase Date and (iii) October 29, 2008.  Any Transaction may be extended by mutual agreement of Buyer and the Sellers but no such party shall be obligated to agree to such an extension.

Section 3.All Transactions Discretionary.  Notwithstanding any provisions of this Amendment No. 2, the Agreement or the Custodial Agreement to the contrary, the initiation of each Transaction is subject to the approval of Buyer in its sole discretion.  Buyer may, in its sole discretion, reject any Eligible Asset from inclusion in a Transaction hereunder for any reason.

Section 4.References to Seller.  All references to Seller in the Agreement, as amended hereby, are intended to mean the Sellers, jointly and severally, unless the context clearly requires otherwise.

Section 5.Expenses.  Sellers shall pay on demand all actual, out-of-pocket and reasonable fees and expenses (including, without limitation, the reasonable fees and expenses for legal services) incurred by Buyer in connection with this Amendment No. 2.  The obligation of Sellers to pay such fees and expenses incurred prior to, or in connection with, the termination of the Agreement, as amended by this Amendment No. 2, shall survive such termination.

Section 6.Governing Law.  This Amendment No. 2 shall be governed and construed in accordance with the laws of the State of New York without giving effect to the conflict of laws principles thereof.

Section 7.Interpretation; Final Agreement.  The provisions of the Agreement shall be read so as to give effect to the provisions of this Amendment No. 2.  The Agreement as amended hereby, together with the Side Letter, contains a final and complete integration of all prior expressions by the parties with respect to the subject matter hereof and thereof and shall constitute the entire agreement among the parties with respect to such subject matter, superseding all prior oral or written understandings.

Section 8.Captions.  The captions and headings of this Amendment No. 2 are for convenience only and not to be used to interpret, define or limit the provisions hereof.

Section 9.Counterparts.  This Amendment No. 2 may be executed in any number of counterparts, each of which counterparts shall be deemed to be an original, and such counterparts shall constitute but one and the same instrument.

Section 10.Ratification and Confirmation.  As amended by this Amendment No. 2, the Agreement is hereby in all respects ratified and confirmed, and the Agreement, as amended by this Amendment No. 2, shall be read, taken and construed as one and the same instrument.

2

IN WITNESS WHEREOF, Buyer and Sellers have caused their names to be signed hereto by their respective officers thereunto duly authorized, all as of the date first above written.

BUYER:
BEAR, STEARNS FUNDING, INC.
By:	/s/ David S. Marren
Name:	David S. Marren
Title:	Authorized Signatory

SELLER:
CAPITAL TRUST, INC.
(jointly and severally with the other Seller)
By:	/s/ Geoffrey G. Jervis
Name:	Geoffrey G. Jervis
Title:	Chief Financial Officer

SELLER:
CT BSI FUNDING CORP.
(jointly and severally with the other Seller)
By:	/s/ Geoffrey G. Jervis
Name:	Geoffrey G. Jervis
Title:	Chief Financial Officer

Signature Page to Amendment No. 2 to Amended and Restated Master Repurchase Agreement (BSIL/CT/CTBSI)

3

EX-31.1

Exhibit 31.1

CERTIFICATION

PURSUANT TO 17 CFR 240.13a-14

PROMULGATED UNDER

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, John R. Klopp, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Capital Trust, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:

(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: July 29, 2008

  /s/ John R. Klopp     

John R. Klopp

Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION

PURSUANT TO 17 CFR 240.13a-14

PROMULGATED UNDER

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Geoffrey G. Jervis, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Capital Trust, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:

(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: July 29, 2008

  /s/ Geoffrey G. Jervis     

Geoffrey G. Jervis

Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Capital Trust, Inc. (the "Company") on Form 10-Q for the period ended June 30, 2008 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, John R. Klopp, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

 /s/ John R. Klopp   

John R. Klopp

Chief Executive Officer

July 29, 2008

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Capital Trust, Inc. (the "Company") on Form 10-Q for the period ended June 30, 2008 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Geoffrey G. Jervis, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

  /s/ Geoffrey G. Jervis   

Geoffrey G. Jervis

Chief Financial Officer

July 29, 2008

EX-99.1

Exhibit 99.1

RISK FACTORS

Risks Related to Our Investment Program

Our existing loans and investments expose us to a high degree of risk associated with investing in real estate assets.

Real estate historically has experienced significant fluctuations and cycles in performance that may result in reductions in the value of our real estate related investments. The performance and value of our loans and investments once originated or acquired by us depends upon many factors beyond our control. The ultimate performance and value of our investments is subject to the varying degrees of risk generally incident to the ownership and operation of the properties which collateralize or support our investments. The ultimate performance and value of our loans and investments depends upon, in large part, the commercial property owner’s ability to operate the property so that it produces sufficient cash flows necessary either to pay the interest and principal due to us on our loans and investments or pay us as an equity advisor. Revenues and cash flows may be adversely affected by:

· changes in national economic conditions;

· changes in local real estate market conditions due to changes in national or local economic conditions or changes in local property market characteristics;

· the extent of the impact of the current turmoil in the sub-prime residential loan market on credit markets;

· the lack of demand for commercial real estate collateralized debt obligations, or CDOs, which has been halted as a result of the current turmoil in the credit markets;

· competition from other properties offering the same or similar services;

· changes in interest rates and in the state of the debt and equity capital markets;

· the ongoing need for capital improvements, particularly in older building structures;

· changes in real estate tax rates and other operating expenses;

· adverse changes in governmental rules and fiscal policies, civil unrest, acts of God, including earthquakes, hurricanes and other natural disasters, and acts of war or terrorism, which may decrease the availability of or increase the cost of insurance or result in uninsured losses;

· adverse changes in zoning laws;

· the impact of present or future environmental legislation and compliance with environmental laws;

· the impact of lawsuits which could cause us to incur significant legal expenses and divert management’s time and attention from our day-to-day operations; and

· other factors that are beyond our control and the control of the commercial property owners.

In the event that any of the properties underlying our loans or investments experiences any of the foregoing events or occurrences, the value of, and return on, such investments, our profitability and the market price of our class A common stock would be negatively impacted.

A prolonged economic slowdown, a lengthy or severe recession, or declining real estate values could harm our operations.

We believe the risks associated with our business are more severe during periods of economic slowdown or recession if these periods are accompanied by declining real estate values. Declining real estate values would likely reduce the level of new mortgage loan originations, since borrowers often use increases in the value of their existing properties to support the purchase of or investment in additional properties, which in turn could lead to fewer opportunities for our investment. Borrowers may also be less able to pay principal and interest on our loans if the real estate economy weakens. Further, declining real estate values significantly increase the likelihood that we will incur losses on our loans in the event of default because the value of our collateral may be insufficient to cover our basis in the loan. Any sustained period of increased payment delinquencies, foreclosures or losses could adversely affect both our net interest income from loans in our portfolio as well as our ability to operate our investment management business, which would significantly harm our revenues, results of operations, financial condition, liquidity, business prospects and our ability to make distributions to the stockholders.

We may change our investment strategy without shareholder consent, which may result in riskier investments than our current investments.

We may seek to expand our investment activities beyond real estate related investments. We may change our investment activities at any time without the consent of our shareholders, which could result in our making investments that are different from, and possibly riskier than, our current real estate investments. New investments we may make outside of our area of historical expertise may not perform as well as our current portfolio of real estate related investments.

We are exposed to the risks involved with making subordinated investments.

Our subordinated investments involve the risks attendant to investments consisting of subordinated loans and similar positions. In many cases, management of our investments and our remedies with respect thereto, including the ability to foreclose on or direct decisions with respect to the collateral securing such investments, is subject to the rights of senior lenders and the rights set forth in inter-creditor or servicing agreements. Our interests and those of the senior lenders and other interested parties may not be aligned.

We may not be able to obtain the level of leverage necessary to optimize our return on investment.

Our return on investment depends, in part, upon our ability to grow our balance sheet portfolio of invested assets and those of our investment management vehicles through the use of leverage at a cost of debt that is lower than the yield earned on our investments. We generally obtain leverage through the issuance of CDOs, repurchase agreements and other borrowings. Our ability to obtain the necessary leverage on beneficial terms ultimately depends upon the quality of the portfolio assets that collateralize our indebtedness. Our failure to obtain and/or maintain leverage at desired levels, or to obtain leverage on attractive terms, would have an adverse effect on our performance or that of our investment management vehicles. Moreover, we are dependent upon a limited universe of lenders to provide financing under repurchase agreements for our origination or acquisition of loans and investments, and there can be no assurance that these agreements will be renewed or extended at expiration. Our ability to obtain financing through CDOs is subject to conditions in the debt capital markets which are impacted by factors beyond our control that may at times be adverse and reduce the level of investor demand for such securities.

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We are subject to the risks of holding leveraged investments.

Leverage creates an opportunity for increased return on equity, but at the same time creates risk for us and our investment management vehicles. For example, leveraging magnifies changes in our net worth. We and our investment management vehicles will leverage assets only when there is an expectation that leverage will provide a benefit, such as enhancing returns, although we cannot assure you that the use of leverage will prove to be beneficial. Increases in credit spreads in the market generally may adversely affect the market value of our investments. Because borrowings under our repurchase agreements and some other agreements are secured by our investments, which are subject to being marked to market by our credit providers, the borrowings available to us may decline if the market value of our investments decline. Moreover, we cannot assure you that we will be able to meet mark-to-market capital calls or debt service obligations in general and, to the extent such obligations are not met, there is a risk of loss of some or all of our investments through foreclosure or a financial loss if we or they are required to liquidate assets, the impact of which could be magnified if such a liquidation is at a commercially inopportune time.

The leverage providers under our repurchase agreements may elect not to extend financing to us, which could quickly and seriously impair our liquidity.

We finance a meaningful portion of our investments with repurchase agreements, which are short-term financing arrangements. Under the terms of these agreements, we sell an investment to a counterparty for a specified price and concurrently agree to repurchase the same investment from our counterparty at a later date at the specified price. During the term of the repurchase agreement the counterparty makes funds available to us and holds the investment as collateral and we pay them interest on our borrowings. When the term of a repurchase agreement ends, we are required to repurchase the investment for the specified repurchase price. If we want to continue to finance the investment with a repurchase agreement, we ask the counterparty to extend or renew the repurchase agreement for another term. Our counterparties are not required to extend or renew our repurchase agreements upon the expiration of the stated terms, which subjects us to a number of risks. The renewed repurchase agreement could impose more onerous terms upon us, including higher interest rates and lower advance rates (a reduction in the amount of leverage available to us). More significantly, in the event that a counterparty elects not to extend or renew our repurchase financings with them, we would be required to pay the counterparty the full repurchase price on the maturity date and find an alternate source of financing. Alternate sources of financing may be more expensive, contain more onerous terms or simply may not be available. If we were unable to pay the repurchase price for any investment financed with a repurchase agreement, the counterparty has the right to sell the underlying investment being held as collateral and require us to compensate them for any shortfall between the value of our obligation to the counterparty and the amount for which the collateral was sold (which may be sold at a significantly discounted price).

We may guarantee some of our leverage and contingent obligations.

We guarantee the performance of some of our obligations, including, but not limited to, most of our repurchase agreements, derivative agreements, obligations to co-invest in our investment management vehicles and unsecured indebtedness. The non-performance of such obligations may cause losses to us in excess of the capital we initially may have invested or committed under such obligations and there is no assurance that we will have sufficient capital to cover any such losses.

Our secured and unsecured credit agreements may impose restrictions on our operation of the business.

Under our secured and unsecured credit agreements, such as our repurchase agreements and derivative agreements, we may make certain representations, warranties and affirmative and negative covenants that may restrict our ability to operate while still utilizing those sources of credit. Such representations, warranties and covenants may include, but are not limited to, restrictions on corporate guarantees, the maintenance of certain financial ratios, including our ratio of debt to equity capital and our debt service coverage ratio, as well as the maintenance of a minimum net worth, restrictions against a change of control of our company and limitations on alternative sources of capital. In addition, we are subject to potential margin calls under the terms of our repurchase facilities should the value of our investments decline. If margin calls are not met, we would be forced to sell investments, which could lead to losses.

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Our success depends on the availability of attractive investments and our ability to identify, structure, consummate, leverage, manage and realize returns on attractive investments.

Our operating results are dependent upon the availability of, as well as our ability to identify, structure, consummate, leverage, manage and realize returns on credit sensitive investment opportunities. In general, the availability of desirable credit sensitive investment opportunities and, consequently, our balance sheet returns and our investment management vehicles’ returns, will be affected by the level and volatility of interest rates, conditions in the financial markets, general economic conditions, the demand for credit sensitive investment opportunities and the supply of capital for such investment opportunities. We cannot make any assurances that we will be successful in identifying and consummating investments which satisfy our rate of return objectives or that such investments, once consummated, will perform as anticipated. In addition, if we are not successful in investing for our investment management vehicles, the potential revenues we earn from management fees and co-investment returns will be reduced. We may expend significant time and resources in identifying and pursuing targeted investments, some of which may not be consummated.

The real estate investment business is highly competitive. Our success depends on our ability to compete with other providers of capital for real estate investments.

Our business is highly competitive. Competition may cause us to accept economic or structural features in our investments that we would not have otherwise accepted and it may cause us to search for investments in markets outside of our traditional product expertise. We compete for attractive investments with traditional lending sources, such as insurance companies and banks, as well as other REITs, specialty finance companies and private equity vehicles with similar investment objectives, which may make it more difficult for us to consummate our target investments. Many of our competitors have greater financial resources and lower costs of capital than we do, which provides them with greater operating flexibility and a competitive advantage relative to us.

Our loans and investments may be subject to fluctuations in interest rates which may not be adequately protected, or protected at all, by our hedging strategies.

Our current balance sheet investment program emphasizes loans with both floating interest rates and fixed interest rates. Floating rate investments earn interest at rates that adjust from time to time (typically monthly) based upon an index (typically one month LIBOR). These floating rate loans are insulated from changes in value specifically due to changes in interest rates, however, the coupons they earn fluctuate based upon interest rates (again, typically one month LIBOR) and, in a declining and/or low interest rate environment, these loans will earn lower rates of interest and this will impact our operating performance and our dividend. Fixed interest rate investments, however, do not have adjusting interest rates and, as prevailing interest rates change, the relative value of the fixed cash flows from these investments will cause potentially significant changes in value. Depending on market conditions, fixed rate assets may become a greater portion of our new loan originations. We may employ various hedging strategies to limit the effects of changes in interest rates (and in some cases credit spreads), including engaging in interest rate swaps, caps, floors and other interest rate derivative products. We believe that no strategy can completely insulate us or our investment management vehicles from the risks associated with interest rate changes and there is a risk that they may provide no protection at all and potentially compound the impact of changes in interest rates. Hedging transactions involve certain additional risks such as counterparty risk, the legal enforceability of hedging contracts, the early repayment of hedged transactions and the risk that unanticipated and significant changes in interest rates may cause a significant loss of basis in the contract and a change in current period expense. We cannot make assurances that we will be able to enter into hedging transactions or that such hedging transactions will adequately protect us or our investment management vehicles against the foregoing risks.

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Accounting for derivatives under GAAP is extremely complicated. Any failure by us to account for our derivatives properly in accordance with GAAP in our financial statements could adversely affect our earnings. In particular, cash flow hedges which are not perfectly correlated (and appropriately designated and/or documented as such) with a variable rate financing will impact our reported income as gains, and losses on the ineffective portion of such hedges.

Our use of leverage may create a mismatch with the duration and index of the investments that we are financing.

We attempt to structure our leverage to minimize the difference between the term of our investments and the leverage we use to finance such an investment. In the event that our leverage is shorter term than the financed investment, we may not be able to extend or find appropriate replacement leverage and that would have an adverse impact on our liquidity and our returns. In the event that our leverage is longer term than the financed investment, we may not be able to repay such leverage or replace the financed investment with an optimal substitute or at all, which will negatively impact our desired leveraged returns.

We attempt to structure our leverage such that we minimize the difference between the index of our investments and the index of our leverage—financing floating rate investments with floating rate leverage and fixed rate investments with fixed rate leverage. If such a product is not available to us from our lenders on reasonable terms, we may use hedging instruments to effectively create such a match. For example, in the case of fixed rate investments, we may finance such an investment with floating rate leverage, but effectively convert all or a portion of the attendant leverage to fixed rate using hedging strategies.

Our attempts to mitigate such risk are subject to factors outside of our control, such as the availability to us of favorable financing and hedging options, which is subject to a variety of factors, of which duration and term matching are only two such factors.

Our loans and investments may be illiquid which will constrain our ability to vary our portfolio of investments.

Our real estate investments and structured financial product investments are relatively illiquid and some are highly illiquid. Such illiquidity may limit our ability to vary our portfolio or our investment management vehicles’ portfolios of investments in response to changes in economic and other conditions. Illiquidity may result from the absence of an established market for investments as well as the legal or contractual restrictions on their resale. In addition, illiquidity may result from the decline in value of a property securing these investments. We cannot make assurances that the fair market value of any of the real property serving as security will not decrease in the future, leaving our or our investment management vehicles’ investments under-collateralized or not collateralized at all, which could impair the liquidity and value, as well as our return on such investments.

We may not have control over certain of our loans and investments.

Our ability to manage our portfolio of loans and investments may be limited by the form in which they are made. In certain situations, we or our investment management vehicles may:

· acquire investments subject to rights of senior classes and servicers under inter-creditor or servicing agreements;

· acquire only a participation in an underlying investment;

· co-invest with third parties through partnerships, joint ventures or other entities, thereby acquiring non-controlling interests; or

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· rely on independent third party management or strategic partners with respect to the management of an asset.

Therefore, we may not be able to exercise control over the loan or investment. Such financial assets may involve risks not present in investments where senior creditors, servicers or third party controlling investors are not involved. Our rights to control the process following a borrower default may be subject to the rights of senior creditors or servicers whose interests may not be aligned with ours. A third party partner or co-venturer may have financial difficulties resulting in a negative impact on such asset, may have economic or business interests or goals which are inconsistent with ours and those of our investment management vehicles, or may be in a position to take action contrary to our or our investment management vehicles’ investment objectives. In addition, we and our investment management vehicles may, in certain circumstances, be liable for the actions of our third party partners or co-venturers.

We may not achieve our targeted rate of return on our investments.

We originate or acquire investments based on our estimates or projections of overall rates of return on such investments, which in turn are based upon, among other considerations, assumptions regarding the performance of assets, the amount and terms of available financing to obtain desired leverage and the manner and timing of dispositions, including possible asset recovery and remediation strategies, all of which are subject to significant uncertainty. In addition, events or conditions that we have not anticipated may occur and may have a significant effect on the actual rate of return received on an investment.

As we acquire or originate investments for our balance sheet portfolio, whether as new additions or as replacements for maturing investments, there can be no assurance that we will be able to originate or acquire investments that produce rates of return comparable to rates on our existing investments.

Investor demand for commercial real estate CDOs has been substantially curtailed.

The recent turmoil in the structured finance markets, in particular the sub-prime residential loan market, has negatively impacted the credit markets generally, and, as a result, investor demand for commercial real estate CDOs has been substantially curtailed. In recent years, we have relied to a substantial extent on CDO financings to obtain match funded financing for our investments. Until the market for commercial real estate CDOs recovers, we may be unable to utilize CDOs to finance our investments and we may need to utilize less favorable sources of financing to finance our investments on a long-term basis. There can be no assurance as to when demand for commercial real estate CDOs will return or the terms of such securities investors will demand or whether we will be able to issue CDOs to finance our investments on terms beneficial to us.

We may not be able to acquire suitable investments for a CDO issuance, or we may not be able to issue CDOs on attractive terms, which may require us to utilize more costly financing for our investments.

We intend to capitalize on opportunities to finance certain of our investments through the issuance of CDOs. During the period that we are acquiring these investments, we intend to finance our purchases through repurchase agreements. We use these repurchase agreements to finance our acquisition of investments until we have accumulated a sufficient quantity of investments, at which time we may refinance them through a securitization, such as a CDO issuance. As a result, we are subject to the risk that we will not be able to acquire a sufficient amount of eligible investments to maximize the efficiency of a CDO issuance. In addition, conditions in the debt capital markets may make the issuance of CDOs less attractive to us even when we do have a sufficient pool of collateral. If we are unable to issue a CDO to finance these investments, we may be required to utilize other forms of potentially less attractive financing, which may require a larger portion of our cash flows and thereby reduce the amount of cash available for distribution to our stockholders and funds available for operations and investments, and which may also require us to assume higher levels of risk when financing our investments.

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We may not be able to find suitable replacement investments for CDOs with reinvestment periods.

Some of our CDOs have periods where principal proceeds received from assets securing the CDO can be reinvested only for a defined period of time, commonly referred to as a reinvestment period. Our ability to find suitable investments during the reinvestment period that meet the criteria set forth in the CDO documentation and by rating agencies may determine the success of our CDO investments. Our potential inability to find suitable investments may cause, among other things, lower returns, interest deficiencies, hyper-amortization of the senior CDO liabilities and may cause us to reduce the life of our CDOs and accelerate the amortization of certain fees and expenses.

The use of CDO financings with over-collateralization and interest coverage requirements may have a negative impact on our cash flow.

The terms of CDOs will generally provide that the principal amount of investments must exceed the principal balance of the related bonds by a certain amount and that interest income exceeds interest expense by a certain amount. Generally, CDO terms provide that, if certain delinquencies, losses, and/or or other factors cause a decline in collateral or cash flow levels, the cash flow otherwise payable on our retained subordinated classes may be redirected to repay classes of CDOs senior to ours until the issuer or the collateral is in compliance with the terms of the governing documents. Other tests (based on delinquency levels or other criteria) may restrict our ability to receive net income from assets pledged to secure CDOs. We cannot assure you that the performance tests will be satisfied. With respect to future CDOs we may issue, we cannot assure you, in advance of completing negotiations with the rating agencies or other key transaction parties as to the actual terms of the delinquency tests, over-collateralization and interest coverage terms, cash flow release mechanisms or other significant factors upon which net income to us will be calculated. Failure to obtain favorable terms with regard to these matters may adversely affect the availability of net income to us. If our investments fail to perform as anticipated, our over-collateralization, interest coverage or other credit enhancement expense associated with our CDO financings will increase.

We may be required to repurchase loans that we have sold or to indemnify holders of our CDOs.

If any of the loans we originate or acquire and sell or securitize through CDOs do not comply with representations and warranties that we make about certain characteristics of the loans, the borrowers and the underlying properties, we may be required to repurchase those loans or replace them with substitute loans. In addition, in the case of loans that we have sold instead of retained, we may be required to indemnify persons for losses or expenses incurred as a result of a breach of a representation or warranty. Repurchased loans typically require a significant allocation of working capital to carry on our books, and our ability to borrow against such assets is limited. Any significant repurchases or indemnification payments could adversely affect our financial condition and operating results.

The commercial mortgage and mezzanine loans we originate or acquire and the commercial mortgage loans underlying the commercial mortgage backed securities in which we invest are subject to delinquency, foreclosure and loss, which could result in losses to us.

Our commercial mortgage and mezzanine loans are secured by commercial property and are subject to risks of delinquency and foreclosure, and risks of loss that are greater than similar risks associated with loans made on the security of single-family residential property. The ability of a borrower to repay a loan secured by an income-producing property typically is dependent primarily upon the successful operation of the property rather than upon the existence of independent income or assets of the borrower. If the net operating income of the property is reduced, the borrower’s ability to repay the loan may be impaired. Net operating income of an income-producing property can be affected by, among other things, tenant mix, success of tenant businesses, property management decisions, property location and condition, competition from comparable types of properties, changes in laws that increase operating expenses or limit rents that may be charged, any need to address environmental contamination at the property, changes in national, regional or local economic conditions and/or specific industry segments, declines in regional or local real estate values, declines in regional or local rental or occupancy rates, increases in interest rates, real estate tax rates and other operating expenses, and changes in governmental rules, regulations and fiscal policies, including environmental legislation, acts of God, terrorism, social unrest and civil disturbances.

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Our investments in subordinated commercial mortgage backed securities and similar investments are subject to losses.

In general, losses on an asset securing a mortgage loan included in a securitization will be borne first by the equity holder of the property and then by the most junior security holder, referred to as the “first loss” position. In the event of default and the exhaustion of any equity support and any classes of securities junior to those in which we invest (and in some cases we may be invested in the junior most classes of securitizations), we may not be able to recover all of our investment in the securities we purchase. In addition, if the underlying mortgage portfolio has been overvalued by the originator, or if the values subsequently decline and, as a result, less collateral is available to satisfy interest and principal payments due on the related mortgage backed securities, the securities in which we invest may incur significant losses. Subordinate interests generally are not actively traded and are relatively illiquid investments and recent volatility in CMBS trading markets has caused the value of these investments to decline.

The prices of lower credit quality commercial mortgage backed securities, or CMBS, are generally less sensitive to interest rate changes than more highly rated investments, but more sensitive to adverse economic downturns and underlying borrower developments. A projection of an economic downturn, for example, could cause a decline in the price of lower credit quality CMBS because the ability of borrowers to make principal and interest payments on the mortgages underlying the mortgage backed securities may be impaired. In such event, existing credit support in the securitization structure may be insufficient to protect us against the loss of our principal on these securities.

We may invest in non-performing assets that are subject to a higher degree of financial risk.

We will make investments in non-performing or other troubled assets that involve a high degree of financial risk and there can be no assurance that our investment objectives will be realized or that there will be any return on our investment. Furthermore, investments in properties operating in workout modes or under bankruptcy protection laws may, in certain circumstances, be subject to additional potential liabilities that could exceed the value of our original investment.

The impact of the events of September 11, 2001 and the effect thereon on terrorism insurance expose us to certain risks.

The terrorist attacks on September 11, 2001 disrupted the U.S. financial markets, including the real estate capital markets, and negatively impacted the U.S. economy in general. Any future terrorist attacks, the anticipation of any such attacks, and the consequences of any military or other response by the U.S. and its allies may have a further adverse impact on the U.S. financial markets and the economy generally. We cannot predict the severity of the effect that such future events would have on the U.S. financial markets, the economy or our business.

In addition, the events of September 11, 2001 created significant uncertainty regarding the ability of real estate owners of high profile assets to obtain insurance coverage protecting against terrorist attacks at commercially reasonable rates, if at all. The Terrorism Risk Insurance Act of 2002, or TRIA, was extended in December 2007. Coverage under the new law, the Terrorism Risk Insurance Program Reauthorization Act, or TRIPRA, now expires in 2014. There is no assurance that TRIPRA will be extended beyond 2014. The absence of affordable insurance coverage may adversely affect the general real estate lending market, lending volume and the market’s overall liquidity and may reduce the number of suitable investment opportunities available to us and the pace at which we are able to make investments. If the properties that we invest in are unable to obtain affordable insurance coverage, the value of those investments could decline and in the event of an uninsured loss, we could lose all or a portion of our investment.

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The economic impact of any future terrorist attacks could also adversely affect the credit quality of some of our loans and investments. Some of our loans and investments will be more susceptible to such adverse effects than others. We may suffer losses as a result of the adverse impact of any future attacks and these losses may adversely impact our results of operations.

Our non-U.S. investments will expose us to certain risks.

We make investments in foreign countries. Investing in foreign countries involves certain additional risks that may not exist when investing in the United States. The risks involved in foreign investments include:

· exposure to local economic conditions, local interest rates, foreign exchange restrictions and restrictions on the withdrawal of foreign investment and earnings, investment restrictions or requirements, expropriations of property and changes in foreign taxation structures;

· potential adverse changes in the diplomatic relations of foreign countries with the United States and government policies against investments by foreigners;

· changes in foreign regulations;

· hostility from local populations, potential instability of foreign governments and risks of insurrections, terrorist attacks, war or other military action;

· fluctuations in foreign currency exchange rates;

· changes in social, political, legal, taxation and other conditions affecting our international investment;

· logistical barriers to our timely receiving the financial information relating to our international investments that may need to be included in our periodic reporting obligations as a public company; and

· lack of uniform accounting standards (including availability of information in accordance with U.S. generally accepted accounting principles).

Unfavorable legal, regulatory, economic or political changes such as those described above could adversely affect our financial condition and results of operations.

We may from time to time invest a portion of our assets in non-U.S. investments or in instruments denominated in non-U.S. currencies, the prices of which will be determined with reference to currencies other than the U.S. dollar. We may hedge our foreign currency exposure. To the extent unhedged, the value of our non-U.S. assets will fluctuate with U.S. dollar exchange rates as well as the price changes of our investments in the various local markets and currencies. Among the factors that may affect currency values are trade balances, the level of short-term interest rates, differences in relative values of similar assets in different currencies, long-term opportunities for investment and capital appreciation and political developments. An increase in the value of the U.S. dollar compared to the other currencies in which we make our investments will reduce the effect of increases and magnify the effect of decreases in the prices of our securities in their local markets. We could realize a net loss on an investment, even if there were a gain on the underlying investment before currency losses were taken into account. We may seek to hedge currency risks by investing in currencies, currency futures contracts and options on currency futures contracts, forward currency exchange contracts, swaps, options or any combination thereof (whether or not exchange traded), but there can be no assurance that these strategies will be effective, and such techniques entail costs and additional risks.

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There are increased risks involved with construction lending activities.

We originate loans for the construction of commercial and residential use properties. Construction lending generally is considered to involve a higher degree of risk than other types of lending due to a variety of factors, including generally larger loan balances, the dependency on successful completion of a project, the dependency upon the successful operation of the project (such as achieving satisfactory occupancy and rental rates) for repayment, the difficulties in estimating construction costs and loan terms which often do not require full amortization of the loan over its term and, instead, provide for a balloon payment at stated maturity.

Some of our investments and investment opportunities may be in synthetic form.

Synthetic investments are contracts between parties whereby payments are exchanged based upon the performance of an underlying obligation. In addition to the risks associated with the performance of the obligation, these synthetic interests carry the risk of the counterparty not performing its contractual obligations. Market standards, GAAP accounting methodology and tax regulations related to these investments are evolving, and we cannot be certain that their evolution will not adversely impact the value or sustainability of these investments. Furthermore, our ability to invest in synthetic investments, other than through a taxable REIT subsidiaries, may be severely limited by the REIT qualification requirements because synthetic investment contracts generally are not qualifying assets and do not produce qualifying income for purposes of the REIT asset and income tests.

Risks Related to Our Investment Management Business

We are subject to risks and uncertainties associated with operating our investment management business, and we may not achieve from this business the investment returns that we expect.

We will encounter risks and difficulties as we operate our investment management business. In order to achieve our goals as an investment manager, we must:

· manage our investment management vehicles successfully by investing their capital in suitable investments that meet their respective investment criteria;

· actively manage the assets in our portfolios in order to realize targeted performance;

· create incentives for our management and professional staff to the task of developing and operating the investment management business; and

· structure, sponsor and capitalize future investment management vehicles that provide investors with attractive investment opportunities.

If we do not successfully operate our investment management business to achieve the investment returns that we or the market anticipates, our results of operations may be adversely impacted.

We may expand our investment management business to involve other investment classes where we do not have prior investment experience. We may find it difficult to attract third party investors without a performance track record involving such investments. Even if we attract third party capital, there can be no assurance that we will be successful in deploying the capital to achieve targeted returns on the investments.

We face substantial competition from established participants in the private equity market as we offer mezzanine and other investment management vehicles to third party investors.

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We face significant competition from large financial and other institutions that have proven track records in marketing and managing investment management vehicles and otherwise have a competitive advantage over us because they have access to pre-existing third party investor networks into which they can channel competing investment opportunities. If our competitors offer investment products that are competitive with products offered by us, we will find it more difficult to attract investors and to capitalize our investment management vehicles.

Our investment management vehicles are subject to the risk of defaults by third party investors on their capital commitments.

The capital commitments made by third party investors to our investment management vehicles represent unsecured promises by those investors to contribute cash to the investment management vehicles from time to time as investments are made by the investment management vehicles. Accordingly, we are subject to general credit risks that the investors may default on their capital commitments. If defaults occur, we may not be able to close loans and investments we have identified and negotiated which could materially and adversely affect the investment management vehicles’ investment program or make us liable for breach of contract, in either case to the detriment of our franchise in the private equity market.

Risks Related to Our Company

We are dependent upon our senior management team to develop and operate our business.

Our ability to develop and operate our business depends to a substantial extent upon the experience, relationships and expertise of our senior management and key employees. We cannot assure you that these individuals will remain in our employ. The employment agreements with (i) our chief executive officer, John R. Klopp, expires on December 31, 2008, unless further extended, (ii) our chief operating officer, Stephen D. Plavin, expires on December 28, 2008 (subject to our option to extend for an additional twelve months), unless further extended, (iii) our chief financial officer, Geoffrey G. Jervis, expires on December 31, 2009 (subject to our option to extend for an additional twelve months), unless further extended, and (iv) our chief credit officer, Thomas C. Ruffing, expires on December 31, 2008, unless further extended. The loss of the services of our senior management and key employees could have a material adverse effect on our operations.

There may be conflicts between the interests of our investment management vehicles and us.

We are subject to a number of potential conflicts between our interests and the interests of our investment management vehicles. We are subject to potential conflicts of interest in the allocation of investment opportunities between our balance sheet and our investment management vehicles. In addition, we may make investments that are senior or junior to, participations in, or have rights and interests different from or adverse to, the investments made by our investment management vehicles. Our interests in such investments may conflict with the interests of our investment management vehicles in related investments at the time of origination or in the event of a default or restructuring of the investment. Finally, our officers and employees may have conflicts in allocating their time and services among us and our investment management vehicles.

We must manage our portfolio in a manner that allows us to rely on an exclusion from registration under the Investment Company Act of 1940 in order to avoid the consequences of regulation under that Act.

We rely on an exclusion from registration as an investment company afforded by Section 3(c)(5)(C) of the Investment Company Act of 1940. Under this exclusion, we are required to maintain, on the basis of positions taken by the SEC staff in interpretive and no-action letters, a minimum of 55% of the value of the total assets of our portfolio in “mortgages and other liens on and interests in real estate,” which we refer to as “Qualifying Interests,” and a minimum of 80% in Qualifying Interests and real estate related assets. Because registration as an investment company would significantly affect our ability to engage in certain transactions or to organize ourselves in the manner we are currently organized, we intend to maintain our qualification for this exclusion from registration. In the past, when required due to the mix of assets in our balance sheet portfolio, we have purchased all of the outstanding interests in pools of whole residential mortgage loans, which we treat as Qualifying Interests based on SEC staff positions. Investments in such pools of whole residential mortgage loans may not represent an optimum use of our investable capital when compared to the available investments we target pursuant to our investment strategy. These investments present additional risks to us, and these risks are compounded by our inexperience with such investments. We continue to analyze our investments and may acquire other pools of whole loan residential mortgage backed securities when and if required for compliance purposes.

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We treat our investments in CMBS, B Notes and mezzanine loans as Qualifying Interests for purposes of determining our eligibility for the exclusion provided by Section 3(c)(5)(C) to the extent such treatment is consistent with guidance provided by the SEC or its staff. In the absence of such guidance that otherwise supports the treatment of these investments as Qualifying Interests, we will treat them, for purposes of determining our eligibility for the exclusion provided by Section 3(c)(5)(C), as real estate related assets or miscellaneous assets, as appropriate.

If our portfolio does not comply with the requirements of the exclusion we rely upon, we could be forced to alter our portfolio by selling or otherwise disposing of a substantial portion of the assets that are not Qualifying Interests or by acquiring a significant position in assets that are Qualifying Interests. Altering our portfolio in this manner may have an adverse effect on our investments if we are forced to dispose of or acquire assets in an unfavorable market and may adversely affect our stock price.

If it were established that we were an unregistered investment company, there would be a risk that we would be subject to monetary penalties and injunctive relief in an action brought by the SEC, that we would be unable to enforce contracts with third parties and that third parties could seek to obtain rescission of transactions undertaken during the period it was established that we were an unregistered investment company and limitations on corporate leverage that would have an adverse impact on our investment returns.

We may expand our franchise through business acquisitions and the recruitment of financial professionals, which may present additional costs and other challenges and may not prove successful.

Our business plan contemplates expansion of our franchise into complementary investment strategies involving other credit-sensitive structured financial products. We may undertake such expansion through business acquisitions or the recruitment of financial professionals with experience in other products. We may also expend a substantial amount of time and capital pursuing opportunities to expand into complementary investment strategies that we do not consummate. The expansion of our operations could place a significant strain on our management, financial and other resources. Our ability to manage future expansion will depend upon our ability to monitor operations, maintain effective quality controls and significantly expand our internal management and technical and accounting systems, all of which could result in higher operating expenses and could adversely affect our current business, financial condition and results of operations.

We cannot assure you that we will be able to identify and integrate businesses or professional teams we acquire to pursue complementary investment strategies and expand our business. Moreover, any decision to pursue expansion into businesses with complementary investment strategies will be in the discretion of our management and may be consummated without prior notice or shareholder approval. In such instances, shareholders will be relying on our management to assess the relative benefits and risks associated with any such expansion.

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Risks Relating to Our Class A Common Stock

Because a limited number of shareholders, including members of our management team, own a substantial number of our shares, they may make decisions or take actions that may be detrimental to your interests.

Our executive officers and directors, along with vehicles for the benefit of their families, collectively own and control 2,840,410 shares of our class A common stock representing approximately 12.9% of our outstanding class A common stock as of July 29, 2008. W. R. Berkley Corporation, or WRBC, which employs one of our directors, owns 3,843,413 shares of our class A common stock, which represents 17.4% of our outstanding class A common stock as of July 29, 2008. By virtue of their voting power, these shareholders have the power to significantly influence our affairs and are able to influence the outcome of matters required to be submitted to shareholders for approval, including the election of our directors, amendments to our charter, mergers, sales of assets and other acquisitions or sales. The influence exerted by these shareholders over our affairs might not be consistent with the interests of some or all of our other shareholders.  In addition, the concentration of ownership in our officers or directors or shareholders associated with them may have the effect of delaying or preventing a change in control of our company, including transactions in which you might otherwise receive a premium for your class A common stock, and might negatively affect the market price of our class A common stock.

Some provisions of our charter and bylaws and Maryland law may deter takeover attempts, which may limit the opportunity of our shareholders to sell their shares at a favorable price.

Some of the provisions of our charter and bylaws and Maryland law discussed below could make it more difficult for a third party to acquire us, even if doing so might be beneficial to our shareholders by providing them with the opportunity to sell their shares at a premium to the then current market price.

Issuance of Preferred Stock Without Shareholder Approval.  Our charter authorizes our board of directors to authorize the issuance of up to 100,000,000 shares of preferred stock and up to 100,000,000 shares of class A common stock. Our charter also authorizes our board of directors, without shareholder approval, to classify or reclassify any unissued shares of our class A common stock and preferred stock into other classes or series of stock and to amend our charter to increase or decrease the aggregate number of shares of stock of any class or series that may be issued. Our board of directors, therefore, can exercise its power to reclassify our stock to increase the number of shares of preferred stock we may issue without shareholder approval. Preferred stock may be issued in one or more series, the terms of which may be determined without further action by shareholders. These terms may include preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications or terms or conditions of redemption. The issuance of any preferred stock, however, could materially adversely affect the rights of holders of our class A common stock and, therefore, could reduce the value of the class A common stock. In addition, specific rights granted to future holders of our preferred stock could be used to restrict our ability to merge with, or sell assets to, a third party. The power of our board of directors to issue preferred stock could make it more difficult, delay, discourage, prevent or make it more costly to acquire or effect a change in control, thereby preserving the current shareholders’ control.

Advance Notice Bylaw.  Our bylaws contain advance notice procedures for the introduction of business and the nomination of directors. These provisions could discourage proxy contests and make it more difficult for you and other shareholders to elect shareholder-nominated directors and to propose and approve shareholder proposals opposed by management.

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Maryland Takeover Statutes.  We are subject to the Maryland Business Combination Act which could delay or prevent an unsolicited takeover of us. The statute substantially restricts the ability of third parties who acquire, or seek to acquire, control of us to complete mergers and other business combinations without the approval of our board of directors even if such transaction would be beneficial to shareholders. “Business combinations” between such a third party acquiror or its affiliate and us are prohibited for five years after the most recent date on which the acquiror or its affiliate becomes an “interested shareholder.” An “interested shareholder” is defined as any person who beneficially owns 10 percent or more of our shareholder voting power or an affiliate or associate of ours who, at any time within the two-year period prior to the date interested shareholder status is determined, was the beneficial owner of 10 percent or more of our shareholder voting power. If our board of directors approved in advance the transaction that would otherwise give rise to the acquiror or its affiliate attaining such status, such as the issuance of shares of our class A common stock to WRBC, the acquiror or its affiliate would not become an interested shareholder and, as a result, it could enter into a business combination with us. Our board of directors could choose not to negotiate with an acquirer if the board determined in its business judgment that considering such an acquisition was not in our strategic interests. Even after the lapse of the five-year prohibition period, any business combination with an interested shareholder must be recommended by our board of directors and approved by the affirmative vote of at least:

· 80% of the votes entitled to be cast by shareholders; and

· two-thirds of the votes entitled to be cast by shareholders other than the interested shareholder and affiliates and associates thereof.

The super-majority vote requirements do not apply if the transaction complies with a minimum price requirement prescribed by the statute.

The statute permits various exemptions from its provisions, including business combinations that are exempted by the board of directors prior to the time that an interested shareholder becomes an interested shareholder. Our board of directors has exempted any business combination involving family partnerships controlled separately by John R. Klopp and Craig M. Hatkoff, and a limited liability company indirectly controlled by a trust for the benefit of Samuel Zell and his family. As a result, these persons and WRBC may enter into business combinations with us without compliance with the super-majority vote requirements and the other provisions of the statute.

We are subject to the Maryland Control Share Acquisition Act. With certain exceptions, the Maryland General Corporation Law provides that “control shares” of a Maryland corporation acquired in a control share acquisition have no voting rights except to the extent approved by a vote of two-thirds of the votes entitled to be cast on the matter, excluding shares owned by the acquiring person or by our officers or by our directors who are our employees, and may be redeemed by us. “Control shares” are voting shares which, if aggregated with all other shares owned or voted by the acquiror, would entitle the acquiror to exercise voting power in electing directors within one of the specified ranges of voting power. A person who has made or proposes to make a control share acquisition, upon satisfaction of certain conditions, including an undertaking to pay expenses, may compel our board to call a special meeting of shareholders to be held within 50 days of demand to consider the voting rights of the “control shares” in question. If no request for a meeting is made, we may present the question at any shareholders’ meeting.

If voting rights are not approved at the shareholders’ meeting or if the acquiring person does not deliver the statement required by Maryland law, then, subject to certain conditions and limitations, we may redeem for fair value any or all of the control shares, except those for which voting rights have previously been approved. If voting rights for control shares are approved at a shareholders’ meeting and the acquiror may then vote a majority of the shares entitled to vote, then all other shareholders may exercise appraisal rights. The fair value of the shares for purposes of these appraisal rights may not be less than the highest price per share paid by the acquiror in the control share acquisition. The control share acquisition statute does not apply to shares acquired in a merger, consolidation or share exchange if we are not a party to the transaction, nor does it apply to acquisitions approved or exempted by our charter or bylaws. Our bylaws contain a provision exempting certain holders identified in our bylaws from this statute, including WRBC, family partnerships controlled separately by John R. Klopp and Craig M. Hatkoff, and a limited liability company indirectly controlled by a trust for the benefit of Samuel Zell and his family.

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We are also subject to the Maryland Unsolicited Takeovers Act which permits our board of directors, among other things and notwithstanding any provision in our charter or bylaws, to elect on our behalf to stagger the terms of directors and to increase the shareholder vote required to remove a director. Such an election would significantly restrict the ability of third parties to wage a proxy fight for control of our board of directors as a means of advancing a takeover offer. If an acquiror was discouraged from offering to acquire us, or prevented from successfully completing a hostile acquisition, you could lose the opportunity to sell your shares at a favorable price.

The market value of our class A common stock may be adversely affected by many factors.

As with any public company, a number of factors may adversely influence the price of our class A common stock, many of which are beyond our control. These factors include, in addition to other risk factors mentioned in this section:

· the level of institutional interest in us;

· the perception of REITs generally and REITs with portfolios similar to ours, in particular, by market professionals;

· the attractiveness of securities of REITs in comparison to other companies; and

· the market’s perception of our growth potential and potential future cash dividends.

An increase in market interest rates may lead prospective purchasers of our class A common stock to expect a higher dividend yield, which would adversely affect the market price of our class A common stock.

One of the factors that will influence the price of our class A common stock will be the dividend yield on our stock (distributions as a percentage of the price of our stock) relative to market interest rates. An increase in market interest rates may lead prospective purchasers of our class A common stock to expect a higher dividend yield, which could adversely affect the market price of our class A common stock.

Your ability to sell a substantial number of shares of our class A common stock may be restricted by the low trading volume historically experienced by our class A common stock.

Although our class A common stock is listed on the New York Stock Exchange, the daily trading volume of our shares of class A common stock has historically been lower than the trading volume for certain other companies. As a result, the ability of a holder to sell a substantial number of shares of our class A common stock in a timely manner without causing a substantial decline in the market value of the shares, especially by means of a large block trade, may be restricted by the limited trading volume of the shares of our class A common stock.

Risks Related to our REIT Status and Certain Other Tax Items

Our charter does not permit any individual to own more than 9.9% of our class A common stock, and attempts to acquire our class A common stock in excess of the 9.9% limit would be void without the prior approval of our board of directors.

For the purpose of preserving our qualification as a REIT for federal income tax purposes, our charter prohibits direct or constructive ownership by any individual of more than a certain percentage, currently 9.9%, of the lesser of the total number or value of the outstanding shares of our class A common stock as a means of preventing ownership of more than 50% of our class A common stock by five or fewer individuals. The charter’s constructive ownership rules are complex and may cause the outstanding class A common stock owned by a group of related individuals or entities to be deemed to be constructively owned by one individual. As a result, the acquisition of less than 9.9% of our outstanding class A common stock by an individual or entity could cause an individual to own constructively in excess of 9.9% of our outstanding class A common stock, and thus be subject to the charter’s ownership limit. There can be no assurance that our board of directors, as permitted in the charter, will increase, or will not decrease, this ownership limit in the future. Any attempt to own or transfer shares of our class A common stock in excess of the ownership limit without the consent of our board of directors will be void, and will result in the shares being transferred by operation of the charter to a charitable trust, and the person who acquired such excess shares will not be entitled to any distributions thereon or to vote such excess shares.

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The 9.9% ownership limit may have the effect of precluding a change in control of us by a third party without the consent of our board of directors, even if such change in control would be in the interest of our shareholders or would result in a premium to the price of our class A common stock (and even if such change in control would not reasonably jeopardize our REIT status). The ownership limit exemptions and the reset limits granted to date would limit our board of directors’ ability to reset limits in the future and at the same time maintain compliance with the REIT qualification requirement prohibiting ownership of more than 50% of our class A common stock by five or fewer individuals.

There are no assurances that we will be able to pay dividends in the future.

We intend to pay quarterly dividends and to make distributions to our shareholders in amounts so that all or substantially all of our taxable income in each year, subject to certain adjustments, is distributed. This, along with other factors, should enable us to qualify for the tax benefits accorded to a REIT under the Internal Revenue Code. All distributions will be made at the discretion of our board of directors and will depend on our earnings, our financial condition, maintenance of our REIT status and such other factors as our board of directors may deem relevant from time to time. There are no assurances that we will be able to pay dividends in the future. In addition, some of our distributions may include a return of capital, which would reduce the amount of capital available to operate our business.

We will be dependent on external sources of capital to finance our growth.

As with other REITs, but unlike corporations generally, our ability to finance our growth must largely be funded by external sources of capital because we generally will have to distribute to our shareholders 90% of our taxable income in order to qualify as a REIT, including taxable income where we do not receive corresponding cash. Our access to external capital will depend upon a number of factors, including general market conditions, the market’s perception of our growth potential, our current and potential future earnings, cash distributions and the market price of our class A common stock.

If we do not maintain our qualification as a REIT, we will be subject to tax as a regular corporation and face a substantial tax liability. Our taxable REIT subsidiaries will be subject to income tax.

We expect to continue to operate so as to qualify as a REIT under the Internal Revenue Code. However, qualification as a REIT involves the application of highly technical and complex Internal Revenue Code provisions for which only a limited number of judicial or administrative interpretations exist. Notwithstanding the availability of cure provisions in the tax code, various compliance requirements could be failed and could jeopardize our REIT status. Furthermore, new tax legislation, administrative guidance or court decisions, in each instance potentially with retroactive effect, could make it more difficult or impossible for us to qualify as a REIT. If we fail to qualify as a REIT in any tax year, then:

· we would be taxed as a regular domestic corporation, which under current laws, among other things, means being unable to deduct distributions to shareholders in computing taxable income and being subject to federal income tax on our taxable income at regular corporate rates;

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· any resulting tax liability could be substantial, could have a material adverse effect on our book value and would reduce the amount of cash available for distribution to shareholders; and

· unless we were entitled to relief under applicable statutory provisions, we would be required to pay taxes, and thus, our cash available for distribution to shareholders would be reduced for each of the years during which we did not qualify as a REIT.

Fee income from our investment management business is expected to be realized by one of our taxable REIT subsidiaries, and, accordingly, will be subject to income tax.

Complying with REIT requirements may cause us to forego otherwise attractive opportunities and limit our expansion opportunities.

In order to qualify as a REIT for federal income tax purposes, we must continually satisfy tests concerning, among other things, our sources of income, the nature of our investments in commercial real estate and related assets, the amounts we distribute to our shareholders and the ownership of our stock. We may also be required to make distributions to shareholders at disadvantageous times or when we do not have funds readily available for distribution. Thus, compliance with REIT requirements may hinder our ability to operate solely on the basis of maximizing profits.

Complying with REIT requirements may force us to liquidate or restructure otherwise attractive investments.

In order to qualify as a REIT, we must also ensure that at the end of each calendar quarter, at least 75% of the value of our assets consists of cash, cash items, government securities and qualified REIT real estate assets. The remainder of our investments in securities cannot include more than 10% of the outstanding voting securities of any one issuer or 10% of the total value of the outstanding securities of any one issuer unless we and such issuer jointly elect for such issuer to be treated as a “taxable REIT subsidiary” under the Internal Revenue Code. The total value of all of our investments in taxable REIT subsidiaries cannot exceed 20% of the value of our total assets. In addition, no more than 5% of the value of our assets can consist of the securities of any one issuer. If we fail to comply with these requirements, we must dispose of a portion of our assets within 30 days after the end of the calendar quarter in order to avoid losing our REIT status and suffering adverse tax consequences.

Complying with REIT requirements may force us to borrow to make distributions to shareholders.

From time to time, our taxable income may be greater than our cash flow available for distribution to shareholders. If we do not have other funds available in these situations, we may be unable to distribute substantially all of our taxable income as required by the REIT provisions of the Internal Revenue Code. Thus, we could be required to borrow funds, sell a portion of our assets at disadvantageous prices or find another alternative. These options could increase our costs or reduce our equity.

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