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 March 31, 2009

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes oNo o [This requirement is currently not applicable to the registrant.]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ¨	Accelerated filer ý
Non-accelerated filer ¨ (Do not check if a smaller reporting company)	Smaller reporting company ¨

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

The number of outstanding shares of the registrant's class A common stock, par value $0.01 per share, as of April 29, 2009 was 22,062,814.

CAPITAL TRUST, INC.
INDEX
Part I.	Financial Information
	Item 1:	Financial Statements	1
		Consolidated Balance Sheets – March 31, 2009 (unaudited) and December 31, 2008 (audited)	1
		Consolidated Statements of Operations – Three Months Ended March 31, 2009 (unaudited) and 2008 (unaudited)	2
		Consolidated Statements of Changes in Shareholders' Equity – Three Months Ended March 31, 2009 (unaudited) and 2008 (unaudited)	3
		Consolidated Statements of Cash Flows – Three Months Ended March 31, 2009 (unaudited) and 2008 (unaudited)	4
		Notes to Consolidated Financial Statements (unaudited)	5
	Item 2:	Management's Discussion and Analysis of Financial Condition and Results of Operations	33
	Item 3:	Quantitative and Qualitative Disclosures About Market Risk	49
	Item 4:	Controls and Procedures	51
Part II.	Other Information
	Item 1:	Legal Proceedings	52
	Item 1A:	Risk Factors	52
	Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds	52
	Item 3:	Defaults Upon Senior Securities	52
	Item 4:	Submission of Matters to a Vote of Security Holders	52
	Item 5:	Other Information	52
	Item 6:	Exhibits	53
	Signatures		54

Capital Trust, Inc. and Subsidiaries
Consolidated Balance Sheets
March 31, 2009 and December 31, 2008
(in thousands except per share data)
	March 31,			December 31,
Assets	2009			2008
	(unaudited)			(audited)
Cash and cash equivalents	$	18,268		$	45,382
Restricted cash		160			18,821
Securities		834,329			852,211
Loans receivable, net		1,688,528			1,791,332
Loans held-for-sale, net		30,014			92,175
Real estate held-for-sale		8,000			9,897
Equity investment in unconsolidated subsidiaries		2,931			2,383
Accrued interest receivable		4,907			6,351
Interest rate hedge assets		1,154			—
Deferred income taxes		1,706			1,706
Prepaid expenses and other assets		12,489			18,369
Total assets		2,602,486			2,838,627
Liabilities & Shareholders' Equity
Liabilities:
Accounts payable and accrued expenses	$	6,653		$	10,918
Repurchase obligations		560,854			699,054
Collateralized debt obligations		1,142,097			1,156,035
Senior unsecured credit facility		100,000			100,000
Junior subordinated notes		125,837			128,875
Participations sold		292,674			292,669
Interest rate hedge liabilities		45,509			47,974
Deferred origination fees and other revenue		1,521			1,658
Total liabilities		2,275,145			2,437,183
Shareholders' equity:
Class A common stock $0.01 par value 100,000 shares authorized, 21,749 and 21,740 shares issued and outstanding as of March 31, 2009 and December 31, 2008, respectively ("class A common stock")		217			217
Restricted class A common stock $0.01 par value, 314 and 331 shares issued and outstanding as of March 31, 2009 and December 31, 2008, respectively ("restricted class A common stock" and together with class A common stock, "common stock")		3			3
Additional paid-in capital		558,930			557,435
Accumulated other comprehensive loss		(45,704	)		(41,009	)
Accumulated deficit		(186,105	)		(115,202	)
Total shareholders' equity		327,341			401,444
Total liabilities and shareholders' equity	$	2,602,486		$	2,838,627

See accompanying notes to consolidated financial statements.

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Capital Trust, Inc. and Subsidiaries
Consolidated Statements of Operations
Three Months Ended March 31, 2009 and 2008
(in thousands, except share and per share data)
(unaudited)
	Three Months Ended
	March 31,
	2009			2008
Income from loans and other investments:
Interest and related income	$	33,239		$	56,554
Less: Interest and related expenses		21,268			37,944
Income from loans and other investments, net		11,971			18,610
Other revenues:
Management fees		2,879			2,197
Servicing fees		1,179			178
Other interest income		128			188
Total other revenues		4,186			2,563
Other expenses:
General and administrative		8,457			6,901
Depreciation and amortization		7			105
Total other expenses		8,464			7,006
Total other-than-temporary impairments on securities		(14,646	)		—
Portion of other-than-temporary impairments on securities
recognized in other comprehensive income		5,624			—
Impairments on real estate held-for-sale		(1,333	)		—
Net impairments recognized in earnings		(10,355	)		—
Provision for possible credit losses		(58,763	)		—
Valuation allowance on loans held-for-sale		(10,363	)		—
(Loss)/income from equity investments		(1,766	)		7
(Loss)/income before income taxes		(73,554	)		14,174
Income tax benefit		(408	)		(599	)
Net (loss)/income	$	(73,146	)	$	14,773
Per share information:
Net (loss)/earnings per share of common stock:
Basic	$	(3.28	)	$	0.82
Diluted	$	(3.28	)	$	0.82
Weighted average shares of common stock outstanding:
Basic		22,304,887			17,942,649
Diluted		22,304,887			18,017,413
Dividends declared per share of common stock	$	—		$	0.80

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 Three Months Ended March 31, 2009 and 2008
(in thousands)
(unaudited)
						Restricted				Accumulated
				Class A		Class A		Additional		Other
	Comprehensive			Common		Common		Paid-In		Comprehensive			Accumulated
	Income			Stock		Stock		Capital		Loss			Deficit			Total
Balance at January 1, 2008				$	172	$	4	$	426,113	$	(8,684	)	$	(9,368	)	$	408,237
Net income	$	14,773			—		—		—		—			14,773			14,773
Unrealized loss on derivative financial instruments		(16,961	)		—		—		—		(16,961	)		—			(16,961	)
Unrealized gain on available for sale security		277			—		—		—		277			—			277
Amortization of unrealized gain on securities		(437	)		—		—		—		(437	)		—			(437	)
Deferred loss on settlement of swap		(419	)		—		—		—		(419	)		—			(419	)
Amortization of deferred gains and losses on settlement of swaps		(55	)		—		—		—		(55	)		—			(55	)
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		—			—		—		1,541		—			—			1,541
Sale of shares of class A common stock under stock option agreement		—			—		—		180		—			—			180
Restricted class A common stock earned		—			1		—		1,004		—			—			1,005
Dividends declared on common stock		—			—		—		—		—			(17,356	)		(17,356	)
Balance at March 31, 2008	$	(2,822	)	$	213	$	4	$	541,405	$	(26,279	)	$	(11,951	)	$	503,392
Balance at January 1, 2009				$	217	$	3	$	557,435	$	(41,009	)	$	(115,202	)	$	401,444
Net Loss	$	(73,146	)		—		—		—		—			(73,146	)		(73,146	)
Cumulative effect of change in accounting principle		—			—		—		—		(2,243	)		2,243			—
Unrealized gain on derivative financial instruments		3,619			—		—		—		3,619			—			3,619
Amortization of unrealized gain on securities		(423	)		—		—		—		(423	)		—			(423	)
Amortization of deferred gains and losses on settlement of swaps		(24	)		—		—		—		(24	)		—			(24	)
Other-than-temporary impairments on securities		(5,624	)		—		—		—		(5,624	)		—			(5,624	)
Issuance of warrants in conjunction with debt restructuring		—			—		—		940		—			—			940
Restricted class A common stock earned		—			—		—		424		—			—			424
Deferred directors' compensation		—			—		—		131		—			—			131
Balance at March 31, 2009	$	(75,600	)	$	217	$	3	$	558,930	$	(45,704	)	$	(186,105	)	$	327,341

See accompanying notes to consolidated financial statements.

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Capital Trust, Inc. and Subsidiaries
Consolidated Statement of Cash Flows
For the Three Months Ended March 31, 2009 and 2008
(in thousands)
(unaudited)
	2009			2008
Cash flows from operating activities:
Net (loss)/income	$	(73,146	)	$	14,773
Adjustments to reconcile net (loss)/income to net cash provided by
operating activities:
Depreciation and amortization		7			105
Net impairments recognized in earnings		10,355			—
Provision for possible credit losses		58,763			—
Valuation allowance on loans held-for-sale		10,363			—
Deferred directors compensation		131			—
Loss/(income) from equity investments		1,766			(7	)
Employee stock-based compensation		424			1,004
Amortization of premiums and discounts on loans, securities,
and debt, net		(1,902	)		(1,698	)
Amortization of deferred gains on interest rate hedges		(24	)		(55	)
Amortization of deferred financing costs		1,142			1,370
Changes in assets and liabilities, net:
Deposits and other receivables		1,149			2,250
Accrued interest receivable		1,444			810
Deferred income taxes		—			(599	)
Prepaid expenses and other assets		602			428
Deferred origination fees and other revenue		(135	)		(650	)
Accounts payable and accrued expenses		(4,264	)		(5,931	)
Net cash provided by operating activities		6,675			11,800
Cash flows from investing activities:
Principal collections on and proceeds from securities		3,865			3,568
Origination/purchase of loans receivable and add-on fundings under existing loans		(6,149	)		(28,639	)
Principal collections on loans receivable		7,914			34,842
Proceeds from real estate held-for-sale		564			—
Contributions to unconsolidated subsidiaries		(2,314	)		—
Purchase of equipment and leasehold improvements		—			(10	)
Increase in restricted cash		—			(10,060	)
Net cash provided by/(used in) investing activities		3,880			(299	)
Cash flows from financing activities:
Decrease in restricted cash		18,661			—
Borrowings under repurchase obligations		—			101,393
Repayments under repurchase obligations		(42,467	)		(103,202	)
Borrowings under credit facilities		—			25,000
Repayment of collateralized debt obligations		(13,857	)		(4,317	)
Settlement of interest rate hedges		—			(419	)
Payment of deferred financing costs		(6	)		(94	)
Sale of class A common stock upon stock option exercise		—			180
Dividends paid on common stock		—			(47,492	)
Proceeds from sale of shares of class A common stock		—			112,608
Proceeds from dividend reinvestment plan and stock purchase plan		—			1,541
Net cash (used in)/provided by financing activities		(37,669	)		85,198
Net (decrease)/increase in cash and cash equivalents		(27,114	)		96,699
Cash and cash equivalents at beginning of period		45,382			25,829
Cash and cash equivalents at end of period	$	18,268		$	122,528

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

We are a fully integrated, self-managed, real estate finance and investment management company that specializes in credit sensitive 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 inception of our finance business in 1997 through March 31, 2009, we have completed over $11.0 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, or GAAP, 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 GAAP for complete financial statements. The accompanying unaudited consolidated interim financial statements should be read in conjunction with the consolidated 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, 2008. 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 three months ended March 31, 2009 are not necessarily indicative of results that may be expected for the entire year ending December 31, 2009.

Principles of Consolidation

The accompanying consolidated 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, prepared in accordance with GAAP. All significant intercompany balances and transactions have been eliminated in consolidation. Our interest in CT Preferred Trust II, the issuer of trust securities backed by our junior subordinated notes, is accounted for using the equity method and its assets and liabilities are not consolidated into our financial statements due to our determination that CT Preferred Trust II is a variable interest entity 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 46(R). We account for our co-investment interest in the private equity funds we manage, CT Mezzanine Partners III, Inc., or Fund III, and CT Opportunity Partners I, LP, or CTOPI, under the equity method of accounting. As such, we report a percentage of the earnings or losses of the companies in which we have such investments equal to our ownership percentage on a single line item in the consolidated statement of operations as income/(loss) from equity investments. CTOPI is an investment company (under the American Institute of Certified Public Accountants Audit and Accounting Guide for Investment Companies) and therefore it maintains its financial records at fair value. We have applied 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. For loans where we have unfunded commitments, we amortize these fees and other items on a straight line basis. Fees on commitments that expire unused are recognized at expiration. 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 this guidance, 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. The Company places its cash and cash equivalents with high credit quality institutions to minimize credit risk exposure. As of, and for the periods ended, March 31, 2009 and December 31, 2008, 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 as of March 31, 2009 was comprised of $160,000 held on deposit with the trustee for our collateralized debt obligations, or CDOs, and is expected to be used to pay contractual interest and principal. Restricted cash as of December 31, 2008 was $18.8 million.

Securities

We classify our securities 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 decided to change the accounting classification of certain of our securities 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, which are amortized through the consolidated statements of operations using the effective interest method. Other than in the instance of an other-than-temporary impairment (as discussed below), these held-to-maturity investments are shown in our consolidated financial statements at their adjusted values pursuant to the methodology described above.

We may also invest in 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.

We account for our securities under EITF 99-20, “Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets,” as amended by FASB Staff Position EITF 99-20-1, “Amendments to the Impairment Guidance of EITF Issue No. 99-20,” or EITF 99-20. Under EITF 99-20, income is recognized using a level yield with any purchase premium or discount accreted through income over the life of the security. This yield is calculated using cash flows expected to be collected which are based on a number of assumptions on the underlying loans. 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 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.

Further, under the guidance of EITF 99-20, when, based on current information and events, there has been an adverse change in cash flows expected to be collected from those originally estimated, an other-than-temporary impairment is deemed to have occurred. A change in expected cash flows is considered adverse under the guidance of EITF 99-20 if the present value of the revised cash flows (taking into consideration both the timing and amount of cash flows expected to be collected) discounted using the current yield is less than the present value of the originally estimated remaining cash flows, adjusted for cash receipts during the intervening period. Under the guidance of FSP FAS 115-2, as defined below, should an other-than-temporary impairment be deemed to have occurred, the security is written down to fair value. The total other-than-temporary impairment is bifurcated into (i) the amount related to credit losses, and (ii) the amount related to all other factors. The portion of the other-than-temporary impairment related to credit losses is calculated by comparing the amortized cost of the security to the present value of cash flows expected to be collected, discounted at the security’s current yield, and is recognized through earnings on the consolidated statement of operations. The portion of the other-than-temporary impairment related to all other factors is recognized as a component of other comprehensive income/(loss) on the consolidated balance sheet. Other-than-temporary impairments recognized through earnings are accreted back to the amortized cost basis of the security through interest income, while amounts recognized through other comprehensive loss are amortized over the life of the security with no impact on earnings.

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Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

From time to time we purchase securities 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 consolidated financial statements is governed in part by FIN 46(R), which could require that certain controlling class investments be presented on a consolidated basis. Based upon the specific circumstances of certain of our securities that are controlling class investments and our interpretation of FIN 46(R), specifically the exemption for qualifying special purpose entities as defined under FASB Statement 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. In 2008, the FASB issued Staff Position No. FAS 140-4 and FIN 46(R)-8, “Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities,” or FSP 140-4, which requires additional disclosures for certain of our investments effective as of December 15, 2008. These disclosures are included in Note 3 to the consolidated financial statements.

Loans Receivable, Provision for Possible Credit Losses, Loans Held-for-Sale and Related Allowance

We purchase and originate commercial real estate debt and related instruments, or Loans, generally 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 provision 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 provision, 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 there is a potential for delinquency or default, a downside analysis is prepared to estimate the value of the collateral underlying our Loan, and a provision is recorded taking into consideration both the likelihood of delinquency or default and the estimated value of the underlying collateral. Actual losses, if any, could ultimately differ from these estimates.

Loans held-for-sale are carried at the lower of our amortized cost basis and fair value. A reduction in fair value of loans held-for-sale is recorded as a charge to the Company’s consolidated statement of operations as a valuation allowance on loans held-for-sale.

Deferred Financing Costs

The deferred financing costs which are included in prepaid expenses and other assets on our consolidated balance sheets include issuance costs related to our debt obligations 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 recorded 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 operations. 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, our adoption of FSP 140-3 on January 1, 2009 did not have a material impact on our consolidated financial statements with respect to our existing transactions. New transactions entered into subsequently, which are subject to FSP 140-3, may be presented differently on our consolidated 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 consolidated 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 interest rate derivative financial instruments, we use a third party derivative specialist to assist us in periodically valuing 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, we 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 September 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.

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 / (Loss)

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 was ($75.6) million and ($2.8) million, for the three months ended March 31, 2009 and 2008, respectively. The primary components of comprehensive loss other than net income/(loss) are the unrealized gains/(losses) on derivative financial instruments and the component of other-than-temporary impairments on securities recognized in other comprehensive income/(loss). As of March 31, 2009, accumulated other comprehensive loss was ($45.7) million, comprised of net unrealized gains on securities previously classified as available-for-sale of $6.2 million, other-than-temporary impairments on securities of ($7.9) million, net unrealized losses on cash flow swaps of ($44.4) million, and $300,000 of net 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 Financial Accounting Standards No. 128, “Earnings per Share,” or FAS 128. Basic EPS is computed based on the net earnings allocable to common stock and stock units divided by the 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 the weighted average number of shares of common stock and stock units and potentially dilutive common stock options and warrants.

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Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

Use of Estimates

The preparation of financial statements in conformity with GAAP 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.

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 investment management 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.

Goodwill

Goodwill represents the excess of acquisition costs over the fair value of net assets of businesses acquired. Under the guidance of FASB Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets,” or FAS 142, goodwill is reviewed, at least annually, in the fourth quarter to determine if there is an impairment at a reporting unit level, or more frequently if an indication of impairment exists. No impairment charges for goodwill were recorded during the three months ended March 31, 2009 or the year ended December 31, 2008.

Fair Value of Financial Instruments

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. Specifically, FAS 157 defines fair value based on exit price, or the price that would be received to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date. Our assets and liabilities which are measured at fair value are indicated as such in the respective notes to the consolidated financial statements, and are discussed in Note 16 to the consolidated financial statements

Recent Accounting Pronouncements

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 disclosure requirements in FASB Statement of Financial Accounting Standards 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. FAS 161 encourages, but does not require, comparative disclosures for earlier periods at initial adoption. The adoption of FAS 161 on January 1, 2009, did not have a material impact on our consolidated financial statements. The required disclosures are included in Note 11 to the consolidated financial statements.

In June 2008, the FASB issued Staff Position EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities,” or FSP EITF 03-6-1. Under the guidance of FSP EITF 03-6-1, unvested share-based awards that contain non-forfeitable rights to dividends or dividend equivalents are considered participating securities and shall be included in the computation of earnings-per-share, or EPS, pursuant to the two-class method. FSP EITF 03-6-1 was effective for fiscal years and interim periods beginning after December 15, 2008, with the requirement that any prior-period EPS presented in future consolidated financial statements be adjusted retrospectively to conform to current guidance. We currently present and have historically presented EPS based on both restricted and unrestricted shares of our class A common stock. Accordingly, the adoption of FSP EITF 03-6-1 as of January 1, 2009 did not have a material impact on our consolidated financial statements.

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Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

In April 2009, the FASB issued three concurrent Staff Positions, which included: (i) Staff Position No. FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments,” or FSP FAS 115-2, (ii) Staff Position No. FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for an Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly,” or FSP FAS 157-4, and (iii) Staff Position No. FAS 107-1 and APB 28-1, “Interim Disclosures About Fair Value of Financial Instruments, or FSP FAS 107-1. All three of these FASB Staff Positions are effective for periods ending after June 15, 2009, with earlier adoption permitted for periods ending after March 15, 2009. The adoption of FSP FAS 115-2, FSP FAS 157-4 and FSP FAS 107-1 is required to occur concurrently. Accordingly, the Company adopted all three of these standards as of January 1, 2009.

As discussed above, FSP FAS 115-2 provides additional guidance for other-than-temporary impairments on debt securities. In addition to existing guidance, under FSP FAS 115-2, an other-than-temporary impairment is deemed to exist if an entity does not expect to recover the entire amortized cost basis of a security. As discussed above, FSP FAS 115-2 provides for the bifurcation of other-than-temporary impairments into (i) amounts related to credit losses which are recognized through earnings, and (ii) amounts related to all other factors which are recognized as a component of other comprehensive income. Further, FSP FAS 115-2 requires certain disclosures for securities, which are included in Note 3 to the consolidated financial statements. The adoption of FSP FAS 115-2 required a reassessment of all securities which were other-than-temporarily impaired as of January 1, 2009, the date of adoption, and resulted in a $2.2 million reclassification from the beginning balance of retained deficit to accumulated other comprehensive loss on the consolidated balance sheet.

FSP FAS 157-4 provides additional guidance for fair value measures under FAS 157 in determining if the market for an asset or liability is inactive and, accordingly, if quoted market prices may not be indicative of fair value. The adoption of FSP FAS 157-4 did not have a material impact on our consolidated financial statements.

FSP FAS 107-1 extends the existing disclosure requirements related to the fair value of financial instruments to interim periods in addition to annual financial statements. The adoption of FSP FAS 107-1 did not have a material impact on our consolidated financial statements. The disclosure requirements under FSP FAS 107-1 are included in Note 16 to the consolidated financial statements.

3.    Securities

Activity relating to our securities portfolio for the three months ended March 31, 2009 was as follows (in thousands):

				Other-Than-
	Gross Book			Temporary			Net Book
	Value			Impairment			Value
December 31, 2008		$854,454			($2,243	)		$852,211
Principal paydowns		(3,866	)		—			(3,866	)
Discount/premium amortization & other (1)		630			—			630
Other-than-temporary impairments		—			(14,646	)		(14,646	)
March 31, 2009		$851,218			($16,889	)		$834,329

(1) Includes mark-to-market adjustments on any available for sale securities, the impact of premium and discount amortization and losses, if any.

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Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

The following table details overall statistics for our securities portfolio as of March 31, 2009 and December 31, 2008:

	March 31, 2009	December 31, 2008
Number of securities	77	77
Number of issues	55	55
Rating (1)(2)	BB	BB
Coupon (1)(3)	6.23%	6.23%
Yield (1)(3)	6.75%	6.87%
Life (years) (1)(4)	4.3	4.6

(1)	Represents a weighted average as of March 31, 2009 and December 31, 2008, 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 ($33.7 million book value) of unrated equity investments in collateralized debt obligations.
(3)	Calculations based on LIBOR of 0.50% and 0.44% as of March 31, 2009 and December 31, 2008, respectively. For $37.9 million face value ($33.7 million book value) of securities, calculations use an effective rate based on cash received.
(4)	Weighted average life is based on the timing and amount of future expected principal payments through the maturity of each respective investment assuming all extension options are executed.

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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 underlying our securities as of March 31, 2009 and December 31, 2008 (in thousands):

	March 31, 2009					December 31, 2008
Ratings	Book Value		Percentage			Book Value		Percentage
AAA		$163,099		20	%		$163,263		19	%
AA		24,871		3			24,879		3
A		154,494		19			157,705		19
BBB		182,099		21			205,991		23
BB		123,093		15			142,033		17
B		37,836		5			62,860		7
CCC		70,908		8			4,488		1
CC		2,531		—			5,144		1
D		41,715		5			48,376		6
NR		33,683		4			37,472		4
Total		$834,329		100	%		$852,211		100	%
Vintage	Book Value		Percentage			Book Value		Percentage
2007		$104,721		13	%		$110,421		13	%
2006		48,921		6			48,897		6
2005		62,067		7			62,012		7
2004		85,152		10			88,159		10
2003		29,792		4			29,725		3
2002		20,097		2			19,954		2
2001		19,039		2			19,105		2
2000		38,410		5			40,602		5
1999		30,297		4			30,320		4
1998		303,318		36			303,875		36
1997		67,664		8			73,356		9
1996		24,851		3			25,785		3
Total		$834,329		100	%		$852,211		100	%
Property Type	Book Value		Percentage			Book Value		Percentage
Retail		$263,280		32	%		$271,067		32	%
Office		175,685		21			190,975		22
Hotel		151,292		18			137,062		16
Multifamily		95,349		11			95,448		11
Other		63,423		8			68,743		9
Healthcare		41,929		5			44,251		5
Industrial		43,371		5			44,665		5
Total		834,329		100	%		852,211		100	%
Geographic Location	Book Value		Percentage			Book Value		Percentage
Southeast		$214,507		26	%		$232,391		27	%
Northeast		211,349		25			195,674		23
West		149,817		18			145,043		17
Southwest		124,353		15			128,389		15
Midwest		102,363		12			115,845		14
Northwest		17,620		2			19,410		2
Other		14,320		2			15,459		2
Total		$834,329		100	%		$852,211		100	%

As detailed in Note 2, on August 4, 2005, pursuant to the provisions of FAS 115, we changed the accounting classification of our then portfolio of securities from available-for-sale to held-to-maturity. While we typically account for the securities in our portfolio on a held-to-maturity basis, under certain circumstances we will account for securities on an available-for-sale basis. As of both March 31, 2009 and December 31, 2008, we had no securities classified as available-for-sale. As defined in FSP FAS 115-2, the amortized cost basis of our securities excludes from book value (i) amounts related to mark-to-market adjustments on available-for-sale securities and (ii) the portion of other-than-temporary impairments not related to credit losses. The amortized cost basis of our securities portfolio was $836.0 million as of March 31, 2009.

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Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

Quarterly, we reevaluate our securities portfolio to determine if there has been an other-than-temporary impairment based upon expected future cash flows. As a result of this evaluation, under the guidance of EITF 99-20, we believe that there has been an adverse change in expected cash flows for six of the securities in our portfolio and, therefore, recognized an aggregate gross other-than-temporary impairment of $14.6 million as of March 31, 2009. Of this total other-than-temporary impairment, $9.0 million is related to credit losses, as defined under FSP FAS 115-2, and has been recorded through earnings, and $5.6 million is related to other factors and has been recorded as a component of other comprehensive income on our consolidated balance sheet with no impact on earnings.

To determine the component of the gross other-than-temporary impairment related to credit losses, we compared the amortized cost basis of each other-than-temporarily impaired security to the present value of its revised expected cash flows, discounted using its pre-impairment yield. Significant judgment of management is required in this analysis that includes, but is not limited to, assumptions regarding the collectability of principal and interest, net of related expenses, on the underlying loans. Other factors considered in determining the component of other-than-temporary impairments related to credit losses include current subordination levels at both the individual loans which serve as collateral under our securities and at the securities themselves, and the current unamortized discounts or premiums on our securities.

The following table summarizes activity related to the amount of other-than-temporary impairments related to credit losses during the three months ended March 31, 2009:

	Gross Other-Than-Temporary Impairments		Other-Than-Temporary Impairments Included in Other Comprehensive Income		Net Other-Than-Temporary Impairments Included in Earnings
December 31, 2008		$2,243		$—		$2,243
Impact of change in accounting principle (1)		—		2,243		(2,243	)
Additions due to change in expected cash flows		14,646		5,624		9,022
March 31, 2009		$16,889		$7,867		$9,022

(1)      Represents a reclassification to other comprehensive income of other-than-temporary impairments on securities which were previously recorded in earnings. As discussed in Note 2, upon adoption of FSP FAS 115-2 these impairments were reassessed and determined to be related to factors other than credit losses.

Certain of our securities 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. As of March 31, 2008, 67 securities with an aggregate carrying value of $783.4 million were carried at values in excess of their market values. Market value for these securities was $480.1 million as of March 31, 2009. In total, we had 77 investments in securities with an aggregate carrying value of $834.3 million that have an estimated market value of $538.4 million (this valuation does not include the value of interest rate swaps entered into in conjunction with the purchase/financing of these investments). We determine fair values using third party dealer assessments of value, supplemented in certain cases with our own internal estimations of fair value. We regularly examine our securities portfolio and have determined that, despite these changes in fair value, our expectations of future cash flows have only changed adversely for six securities in our portfolio since our last financial report. As noted above, we have therefore recognized an aggregate other-than-temporary impairment of $14.6 million for these assets.

Our estimation of cash flows expected to be generated by our securities 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 securities 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 against structured financial products such as CMBS and CDOs.

- 13 - -

Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

The following table shows the gross unrealized losses and fair value of our securities with unrealized losses as of March 31, 2009 that are not deemed to be other-than-temporarily impaired (in millions):

	Less Than 12 Months					Greater Than 12 Months					Total
	Estimated Fair Value		Gross Unrealized Loss			Estimated Fair Value		Gross Unrealized Loss			Estimated Fair Value		Gross Unrealized Loss			Book Value (1)
Floating Rate		$—		$—			$62.1		($103.9	)		$62.1		($103.9	)		$166.0
Fixed Rate		128.1		(11.4	)		289.9		(188.0	)		418.0		(199.4	)		617.4
Total		$128.1		($11.4	)		$352.0		($291.9	)		$480.1		($303.3	)		$783.4

(1)  Excludes $50.9 million of securities which were carried at or below fair value as of March 31, 2009.

Our securities portfolio includes investments in three entities that are, or could potentially be construed to be, variable interest entities, or VIEs, as defined in FIN 46(R). In each of these three cases, we own less than 50% of the variable interest, are not the primary beneficiary as defined in FIN 46(R) and, therefore, do not consolidate the operations of the entity in our consolidated financial statements. As of March 31, 2009, the aggregate carrying value of these three assets recorded as part of our securities portfolio on our balance sheet was $70.1 million. These entities have direct and synthetic exposure to real estate debt and securities in the aggregate amount of $1.7 billion that is financed by the issuance of CDOs to third parties. We have limited involvement in the operation of these entities and have not provided, nor are obligated to provide any financial support to any of these entities. One of the above mentioned three entities was sponsored by us.

4.    Loans Receivable, net

Activity relating to our loans receivable for the three months ended March 31, 2009 was as follows (in thousands):

	Gross Book Value			Provision for Possible Credit Losses			Net Book Value
December 31, 2008		$1,848,909			($57,577	)		$1,791,332
Additional fundings (1)		4,008			—			4,008
Satisfactions (2)		(2,370	)		—			(2,370	)
Principal paydowns		(5,757	)		—			(5,757	)
Discount/premium amortization & other (3)		440			—			440
Provision for possible credit losses		—			(58,763	)		(58,763	)
Reclassification to loans held-for-sale		(40,362	)		—			(40,362	)
March 31, 2009		$1,804,868			($116,340	)		$1,688,528

(1)	Additional fundings includes capitalized interest of $497,000 for the three months ended March 31, 2009.
(2)	Includes final maturities and full repayments.
(3)	Includes the impact of premium and discount amortization and losses, if any.

- 14 - -

Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

The following table details overall statistics for our loans receivable portfolio as of March 31, 2009 and December 31, 2008:

	March 31, 2009	December 31, 2008
Number of investments	69	73
Coupon (1)(2)	3.93%	3.90%
Yield (1)(2)	4.06%	4.09%
Maturity (years) (1)(3)	2.8	3.3

(1)	Represents a weighted average as of March 31, 2009 and December 31, 2008, respectively.
(2)	Calculations based on LIBOR of 0.50% as of March 31, 2009 and LIBOR of 0.44% as of December 31, 2008.
(3)	Represents the maturity of the investment assuming all extension options are executed.

The tables below detail the property type and geographic distribution of the properties securing our loans receivable as of March 31, 2009 and December 31, 2008 (in thousands):

	March 31, 2009					December 31, 2008
Property Type	Book Value		Percentage			Book Value		Percentage
Office		$610,625		36	%		$661,761		37	%
Hotel		682,471		40			688,332		38
Healthcare		147,404		10			147,397		8
Multifamily		109,135		6			123,492		7
Retail		39,981		2			42,385		4
Other		98,912		6			127,965		6
Total		$1,688,528		100	%		$1,791,332		100	%
Geographic Location	Book Value		Percentage			Book Value		Percentage
Northeast		$522,261		31	%		$560,071		31	%
Southeast		354,829		21			387,500		22
Southwest		284,370		17			295,490		16
West		218,387		13			235,386		13
Northwest		90,682		5			91,600		5
Midwest		28,310		2			28,408		2
International		122,392		7			122,387		7
Diversified		67,297		4			70,490		4
Total		$1,688,528		100	%		$1,791,332		100	%

Quarterly, management reevaluates the provision 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, among other things, 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 a provision is recorded taking into consideration both the likelihood of delinquency or default and the estimated value of the underlying collateral.

As of March 31, 2009, we had provisions for possible credit losses on 10 loans with an aggregate net book value of $46.8 million ($163.1 million principal balance, net of a $116.3 million provision). These include three loans with an aggregate principal balance of $57.3 million which are current in their interest payments, against which we have recorded a $31.7 million provision, as well as seven loans which are delinquent on contractual payments with an aggregate principal balance of $105.8 million, against which we have recorded an $84.6 million provision.

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. As of March 31, 2009, our eight Unfunded Loan Commitments totaled $19.7 million. Of the total Unfunded Loan Commitments, $12.8 million will only be funded when and/or if the borrower meets certain performance hurdles with respect to the underlying collateral. As of March 31, 2009, $5.6 million of the Unfunded Loan Commitments relates to a loan classified as held-for-sale, as described in Note 5.

- 15 - -

Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

5.    Loans Held-for-Sale, net

As of March 31, 2009, we had two loans with an aggregate gross carrying value of $40.4 million and a net carrying value of $30.0 million classified as held-for-sale. One of these loans is classified as held-for-sale as a result of our entering into a satisfaction, termination and release agreement with Lehman Brothers on April 6, 2009, as described in Note 20. We are currently in discussions with the borrower under the other loan to settle their obligation at a discount and, accordingly, that loan is classified as held-for-sale.

As of December 31, 2008, we had four loans with an aggregate gross carrying value of $140.4 million and a net carrying value of $92.2 million classified as held-for-sale. These loans served as collateral under our repurchase agreements with UBS and Goldman Sachs and were classified as held-for-sale at that time due to the termination of these agreements during the first quarter of 2009, as described in Note 9. Following the consummation of the transactions with UBS and Goldman Sachs, all of the loans previously classified as held-for-sale were transferred to the respective lender.

The following table details overall statistics for our loans held-for-sale as of March 31, 2009 and December 31, 2008:

	March 31, 2009	December 31, 2008
Number of investments	2	4
Coupon (1)(2)(3)	7.19%	2.54%
Yield (1)(2)(3)	8.75%	2.62%
Maturity (years) (1)(4)	5.7	3.2

(1)	Represents a weighted average as of March 31, 2009 and December 31, 2008 based on gross carrying value, before any valuation allowance.
(2)	Calculations based on LIBOR of 0.50% as of March 31, 2009 and LIBOR of 0.44% as of December 31, 2008.
(3)	Includes one loan which bears interest at a fixed rate of 8.4% per annum and one loan which bears interest at LIBOR + 4.5% per annum as of March 31, 2009.
(4)	Represents the maturity of the investment assuming all extension options are executed, and does not give effect to known sales or transfers subsequent to the balance sheet date.

Loans held-for-sale are carried at the lower of our amortized cost basis and fair value. As of March 31, 2009, we recorded a valuation allowance of $10.4 million against these loans. We determined the valuation allowance on loans held-for-sale based upon the transactions which have occurred subsequent to March 31, 2009, as described in Note 20, and those expected to occur in the near future.

6.    Real Estate Held-for-Sale

In 2008, the Company and its co-lender foreclosed on a loan secured by a multifamily property, and took title to the collateral securing the original loan. At the time the foreclosure occurred, the loan had a book balance of $11.9 million which was reclassified as Real estate held-for-sale (also referred to as Real Estate Owned) on our consolidated balance sheet as of December 31, 2008 to reflect our ownership interest in the property. Since that time, we have received $564,000 of accumulated cash from the property, which has been recorded as a reduction to our basis in the asset. We have recorded an aggregate $3.3 million impairment since the time of foreclosure to reflect the property at fair value as of March 31, 2009.

7.    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. As of March 31, 2009, we had co-investments in two such vehicles, Fund III, in which we have a 4.7% investment, and CTOPI, in which we have a 4.6% investment. 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 three months ended March 31, 2009 was as follows (in thousands):

	Fund III			CTOPI			Other		Total
December 31, 2008	$	597		$	1,782		$	4	$	2,383
Contributions		—			2,314			—		2,314
Loss from equity investments		(206	)		(1,560	)		—		(1,766	)
March 31, 2009	$	391		$	2,536		$	4	$	2,931

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, and when all contingencies have been eliminated. In the event that additional capital calls are made at Fund III, we may be required to refund some or all of the incentive compensation previously received.

8.     Prepaid Expenses and Other Assets

Prepaid expenses and other assets consist of the following as of March 31, 2009 and December 31, 2008 (in thousands):

	March 31, 2009		December 31, 2008
Deferred financing costs, net	$	7,201	$	8,342
Common equity - CT Preferred Trust(s)		678		3,875
Goodwill		2,235		2,235
Prepaid rent/security deposit		929		928
Prepaid expenses		650		1,044
Deposits and other receivables		485		1,422
Other assets		311		523
	$	12,489	$	18,369

Deferred financing costs include costs related to our debt obligations and are amortized using the effective interest method or a method that approximates the effective interest method, as applicable, over the life of the related debt obligations. As of March 31, 2009, deferred financing costs were $7.2 million, net of accumulated amortization.

Our ownership interests in CT Preferred Trust I and CT Preferred Trust II, the statutory trust issuers of our legacy trust preferred securities backed by our junior subordinated notes, are accounted for using the equity method due to our determination that they are variable interest entities in which we are not the primary beneficiary under FIN 46(R). In connection with the debt restructuring described in Note 9, we eliminated 100% of our ownership interest in CT Preferred Trust I, as well as the majority of our common equity interests in CT Preferred Trust II.

In June 2007, we purchased a healthcare loan origination platform for $2.6 million ($1.9 million in cash and $700,000 in common stock) and recorded $2.2 million of goodwill in connection with the acquisition. In December 2008, we transferred the ownership interest in the healthcare loan origination platform back to its original owners. Under the guidance of FAS 142, we assess goodwill for impairment at least annually unless events occur which otherwise require consideration for impairment at an interim date. No impairment charges for goodwill were recorded during the three months ended March 31, 2009 or the year ended December 31, 2008.

- 17 - -

Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

9.     Debt Obligations

As of March 31, 2009 and December 31, 2008, we had $1.9 billion and $2.1 billion of total debt outstanding, respectively. The balances of each category of debt, their respective coupons and all-in effective costs, including the amortization of fees and expenses were as follows (in thousands):

	March 31,		March 31,		December 31,
	2009		2009		2008		March 31, 2009
Debt Obligation	Principal Balance		Book Balance		Book Balance		Coupon(1)			All-In Cost(1)			Maturity Date(2)
Repurchase obligations and secured debt
JP Morgan(3)		$323,784		$323,246		$336,271		1.99	%		2.05	%	March 15, 2011
Morgan Stanley(4)		175,458		175,175		182,937		2.39			2.41		March 15, 2011
Citigroup(5)		44,518		44,419		63,830		1.85			2.18		March 15, 2011
Lehman Brothers(6)		18,014		18,014		18,014		2.00			2.00		June 11, 2013
Goldman Sachs		—		—		88,282		—			—		—
UBS		—		—		9,720		—			—		—
Total repurchase obligations and secured debt		561,774		560,854		699,054		2.10			2.17		April 10, 2011
Collateralized debt obligations (CDOs)
CDO I		249,437		249,437		252,045		1.12			1.54		February 23, 2012
CDO II		296,061		296,061		298,913		1.00			1.24		May 3, 2012
CDO III		255,612		257,063		257,515		5.22			5.24		January 12, 2013
CDO IV(7)		339,536		339,536		347,562		1.11			1.21		October 23, 2012
Total CDOs		1,140,646		1,142,097		1,156,035		2.00			2.18		August 4, 2012
Senior unsecured credit facility - WestLB		100,000		100,000		100,000		3.50			3.50		March 15, 2011
Junior subordinated notes - A (8)(10)		118,594		103,284		—		1.00			4.28		April 30, 2036
Junior subordinated notes - B (9)(10)		22,553		22,553		128,875		7.03			7.14		April 30, 2037
Total/Weighted Average		$1,943,567		$1,928,788		$2,083,964		2.11	%		3.71	% (11)	September 11, 2013

(1)	Floating rate debt obligations assume LIBOR at March 31, 2009 of 0.50%.
(2)	Maturity dates for our repurchase obligations with JP Morgan, Morgan Stanley and Citigroup, and our senior unsecured credit facility, assume we meet the necessary conditions to exercise our one year extension option. Maturity dates for our CDOs represent a weighted average of expected principal repayments to the respective bondholders.
(3)	As of March 31, 2009, loans and securities with an aggregate principal balance of $563.0 million and a carrying value of $575.9 million were pledged as collateral under this facility, which resulted in an amount at risk (generally carrying value of collateral less carrying value of debt) of $267.7 million.
(4)	As of March 31, 2009, loans and securities with an aggregate principal balance of $411.5 million and a carrying value of $365.0 million were pledged as collateral under this facility, which resulted in an amount at risk (generally carrying value of collateral less carrying value of debt) of $189.8 million.
(5)	As of March 31, 2009, loans and securities with an aggregate principal balance of $77.6 million and a carrying value of $74.8 million were pledged as collateral under this facility, which resulted in an amount at risk (generally carrying value of collateral less carrying value of debt) of $30.4 million.
(6)	Our loan agreement with Lehman Brothers was terminated on April 6, 2009.
(7)	Comprised of $326 million of floating rate notes sold and $14 million of fixed rate notes sold at March 31, 2009.
(8)	Represents the junior subordinated notes issued on March 16, 2009 as part of our debt restructuring. The coupon will remain at 1.00% per annum through April 29, 2012, increase to 7.23% per annum for the period from April 30, 2012 through April 29, 2016 and then convert to a variable interest rate of three-month LIBOR + 2.44% per annum through maturity.
(9)	Represents the junior subordinated notes issued on March 29, 2007 that were not included in our debt restructuring on March 16, 2009.
(10)	The junior subordinated notes - A issued on March 16, 2009 are contractually senior to those notes - B issued on March 29, 2007.
(11)	Includes the effective cost of interest rate swaps of 1.28% per annum as of March 31, 2009.

On March 16, 2009, we consummated a restructuring of substantially all of our recourse debt obligations with certain of our secured and unsecured creditors pursuant to the amended terms of our secured credit facilities, our senior unsecured credit agreement and certain of our trust preferred securities.

Repurchase Obligations and Secured Debt

On March 16, 2009, we amended and restructured our secured, recourse credit facilities with: (i) JPMorgan Chase Bank, N.A., JPMorgan Chase Funding Inc. and J.P. Morgan Securities Inc., or collectively JPMorgan, (ii) Morgan Stanley Bank, N.A., or Morgan Stanley, and (iii) Citigroup Financial Products Inc. and Citigroup Global Markets Inc., or collectively Citigroup. We collectively refer to JPMorgan, Morgan Stanley and Citigroup as the participating secured lenders.

Specifically, on March 16, 2009, we entered into separate amendments to the respective master repurchase agreements with JPMorgan, Morgan Stanley and Citigroup. Pursuant to the terms of each such agreement, we repaid the balance outstanding with each participating secured lender by an amount equal to three percent (3%) of the current outstanding principal amount due under its existing secured, recourse credit facility, $17.7 million in the aggregate, and further amended the terms of each such facility, without any change to the collateral pool securing the debt owed to each participating secured lender, to provide the following:

- 18 - -

Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

· Maturity dates were modified to one year from the March 16, 2009 effective date of each respective agreement, which maturity dates may be extended further for two one-year periods. The first one-year extension option is exercisable by us so long as the outstanding balance as of the first extension date is less than or equal to a certain amount, reflecting a reduction of twenty percent (20%), including the upfront payment described above, of the outstanding principal amount from the date of the amendments, and no other defaults or events of default have occurred and are continuing, or would be caused by such extension. The second one-year extension option is exercisable by each participating secured lender in its sole discretion.

· We agreed to pay each secured participating lender periodic amortization as follows: (i) mandatory payments, payable monthly in arrears, in an amount equal to sixty-five (65%) (subject to adjustment in the second year) of the net interest income generated by each such lender’s collateral pool, and (ii) one hundred percent (100%) of the principal proceeds received from the repayment of assets in each such lender’s collateral pool. In addition, under the terms of the amendment with Citigroup, we agreed to pay Citigroup an additional quarterly amortization payment equal to the lesser of: (x) Citigroup’s then outstanding senior secured credit facility balance or (y) the product of (i) the total cash paid (including both principal and interest) during the period to our senior unsecured credit facility in excess of an amount equivalent to LIBOR plus 1.75% based upon a $100.0 million facility amount, and (ii) a fraction, the numerator of which is Citigroup’s then outstanding senior secured credit facility balance and the denominator is the total outstanding secured indebtedness of the secured participating lenders.

· We further agreed to amortize each participating secured lender’s secured debt at the end of each calendar quarter on a pro rata basis until we have repaid our secured, recourse credit facilities and thereafter our senior unsecured credit facility in an amount equal to any unrestricted cash in excess of the sum of (i) $25.0 million, and (ii) any unfunded loan and co-investment commitments.

· Each participating secured lender was relieved of its obligation to make future advances with respect to unfunded commitments arising under investments in its collateral pool.

· We received the right to sell or refinance collateral assets as long as we apply one hundred percent (100%) of the proceeds to pay down the related secured credit facility balance subject to minimum release price mechanics.

· We eliminated the cash margin call provisions and amended the mark-to-market provisions so that future changes in collateral value will be determined based upon changes in the performance of the underlying real estate collateral in lieu of the previous provisions which were based on market spreads. Beginning six months after the date of execution of the agreements, each collateral pool will be valued monthly on this basis. If the ratio of a participating secured lender’s total outstanding secured credit facility balance to total collateral value exceeds 1.15x the ratio calculated as of the effective date of the amended agreements, we will be required to liquidate collateral in order to return to compliance with the prescribed loan to collateral value ratio or post other collateral to bring the ratio back into compliance.

In each master repurchase agreement amendment and the amendment to our senior unsecured credit agreement described in greater detail below, which we collectively refer to as our restructured debt obligations, we also replaced all existing financial covenants with the following uniform covenants which:

· prohibit new balance sheet investments except, subject to certain limitations, co-investments in our investment management vehicles or protective investments to defend existing collateral assets on our balance sheet;

· prohibit the incurrence of any additional indebtedness except in limited circumstances;

· limit the total cash compensation to all employees and, specifically with respect to our chief executive officer, chief operating officer and chief financial officer, freeze their base salaries at 2008 levels, and require cash bonuses to any of them to be approved by a committee comprised of one representative designated by the secured lenders, the administrative agent under the senior unsecured credit facility and the chairman of our board of directors;

· prohibit the payment of cash dividends to our common shareholders except to the minimum extent necessary to maintain our REIT status;

· require us to maintain a minimum amount of liquidity, as defined, of $7.0 million in year one and $5.0 million thereafter;

- 19 - -

Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

· trigger an event of default if both our chief executive officer and chief operating officer cease their current employment with us during the term of the agreement and we fail to hire replacements acceptable to the lenders; and

· trigger an event of default, if any event or condition occurs which causes any obligation or liability of more than $1.0 million to become due prior to its scheduled maturity or any monetary default under our restructured debt obligations if the amount of such obligation is at least $1.0 million.

Pursuant to the restructuring, the interest rates on our secured borrowings remain the same as those previously in effect.

On March 16, 2009, we issued JPMorgan, Morgan Stanley and Citigroup warrants to purchase 3,479,691 shares of our class A common stock at an exercise price of $1.79 per share, which is equal to the closing bid price on the New York Stock Exchange on March 13, 2009. The fair value assigned to these warrants, totaling $940,000, has been recorded as a discount on the related debt obligations with a corresponding increase to additional paid-in capital, and will be accreted as a component of interest expense over the term of each respective facility. The warrants were valued using the Black-Scholes valuation method.

As of March 31, 2009, we had book balances of $323.2 million under our agreement with JP Morgan at an all-in cost of LIBOR plus 1.55%, $175.2 million under our agreement with Morgan Stanley at an all-in cost of LIBOR plus 1.91% and $44.4 million under our agreement with Citigroup at an all-in cost of LIBOR plus 1.68%. These balances reflect the amortization of the warrants issued in conjunction with our debt restructuring described above.

On March 16, 2009, we also entered into an agreement to terminate the master repurchase agreement with Goldman Sachs, pursuant to which we satisfied the indebtedness due under this Goldman Sachs secured credit facility. Specifically, we: (i) pre-funded certain required advances of approximately $2.4 million under one loan in the collateral pool, (ii) paid Goldman Sachs $2.6 million to effect a full release to us of another loan, and (iii) transferred all of the other assets that served as collateral for Goldman Sachs to Goldman Sachs for a purchase price of $85.7 million as payment in full for the balance remaining under the secured credit facility. Goldman Sachs agreed to release us from any further obligation under the secured credit facility.

On February 25, 2009, we entered into a satisfaction, termination and release agreement with UBS pursuant to which the parties terminated their right, title, interest in, to and under a master repurchase agreement. We consented to the transfer to UBS, and UBS unconditionally accepted and retained all of our rights, title and interest in a loan financed under the master repurchase agreement in complete satisfaction of all of our obligations, including all amounts due thereunder.

Subsequent to quarter end, on April 6, 2009, we entered into a satisfaction, termination and release agreement with Lehman Brothers pursuant to which both parties terminated their right, title and interest in, to and under the existing agreement. As of the date of termination, we had an $18.0 million outstanding obligation due under the existing facility, and our recorded book value of the collateral as of March 31, 2009 was $25.9 million. We consented to transfer to Lehman, and Lehman unconditionally accepted, all of our right, title and interest in the collateral, and the termination fully satisfied all of our obligations under the facility.

Senior Unsecured Credit Facility

On March 16, 2009, we entered into an amended and restated senior unsecured credit agreement governing our $100.0 million term loan from WestLB AG, New York Branch, participant and administrative agent, Fortis Capital Corp., Wells Fargo Bank, N.A., JPMorgan Chase Bank, N.A., Morgan Stanley Bank, N.A. and Deutsche Bank Trust Company Americas, which we collectively refer to as the senior unsecured lenders. Pursuant to the amended and restated senior unsecured credit agreement, we and the senior unsecured lenders agreed to:

· extend the maturity date of the senior unsecured credit agreement to be co-terminus with the maturity date of the secured credit facilities with the participating secured lenders (as they may be further extended until March 16, 2012, as described above);

· increase the cash interest rate under the senior unsecured credit agreement to LIBOR plus 3.00% per annum (from LIBOR plus 1.75%), plus an accrual rate of 7.20% per annum less the cash interest rate;

· initiate quarterly amortization equal to the greater of: (i) $5.0 million per annum and (ii) 25% of the annual cash flow received from our currently unencumbered collateralized debt obligation interests;

· pledge our unencumbered collateralized debt obligation interests and provide a negative pledge with respect to certain other assets; and

· replace all existing financial covenants with substantially identical covenants and default provisions to those described above in the participating secured facilities.

- 20 - -

Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

As of March 31, 2009, we had $100.0 million outstanding under our senior unsecured credit facility at a cost of LIBOR plus 3.00%.

Junior Subordinated Notes

On March 16, 2009, we reached an agreement with Taberna Preferred Funding V, Ltd., Taberna Preferred Funding VI, Ltd., Taberna Preferred Funding VIII, Ltd. and Taberna Preferred Funding IX, Ltd., or collectively Taberna, to issue new junior subordinated notes in exchange for $50.0 million face amount of trust preferred securities issued through our statutory trust subsidiary CT Preferred Trust I held by affiliates of Taberna, which we refer to as the Trust I Securities, and $53.1 million face amount of trust preferred securities issued through our statutory trust subsidiary CT Preferred Trust II held by affiliates of Taberna, which we refer to as the Trust II Securities. We refer to the Trust I Securities and the Trust II Securities together as the Trust Securities. The Trust Securities were backed by and recorded as junior subordinated notes issued by us with terms that mirror the Trust Securities.

Pursuant to the exchange agreement dated March 16, 2009, by and among us and Taberna, we issued $118.6 million aggregate principal amount of new junior subordinated notes due on April 30, 2036 (an amount equal to 115% of the aggregate face amount of the Trust Securities exchanged). The interest rate payable under the new subordinated notes is 1% per annum from March 16, 2009, through and including April 29, 2012, which we refer to as the modification period. After the modification period, the interest rate will revert to a blended rate equal to that which was previously payable under the notes underlying the Trust Securities, a fixed rate of 7.23% per annum through and including April 29, 2016, and thereafter a floating rate, reset quarterly, equal to three-month LIBOR plus 2.44% until maturity. The new junior subordinated notes will be contractually senior to the remaining subordinated notes, will mature on April 30, 2036 and will be freely redeemable by us at par at any time. The new junior subordinated notes contain a covenant that through April 30, 2012, subject to certain exceptions, we may not declare or pay dividends or distributions on, or redeem, purchase or acquire any of our equity interests (other than remaining trust preferred securities not exchanged) except to the extent necessary to maintain our status as a REIT. Except for the foregoing, the new junior subordinated notes contain substantially similar provisions as the Trust Securities.

As part of the agreement with Taberna, we also paid $750,000 to cover third party fees and costs incurred in connection with the exchange transaction.

As of March 31, 2009, we had a principal balance of $141.1 million ($125.8 million book balance) of junior subordinated notes at a cash cost of 1.96%.

Collateralized Debt Obligations

As of March 31, 2009, we had collateralized debt obligations, or CDOs, outstanding from four separate issuances with a total face value of $1.1 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. On a combined basis, our CDOs provide us with $1.1 billion of non-recourse, non-mark-to-market, index matched financing at a weighted average cash cost of 0.53% over the applicable indices (2.00% at March 31, 2009) and a weighted average all-in cost of 0.71% over the applicable indices (2.18% at March 31, 2009). During the first quarter, we received downgrades to 13 classes of our third CDO, CT CDO III, and to 15 classes of our fourth CDO, CT CDO IV.

CDO I and CDO II each have interest coverage and overcollateralization tests, which if breached provide for hyper-amortization of the senior notes sold by a redirection of cash flow that would otherwise have been paid to the subordinate classes, some of which are owned by the Company. If such tests are in breach for six consecutive months, the reinvesting feature of the CDO is suspended. The hyper-amortization would cease once the test is back in compliance. The overcollateralization tests are a function of impairments to the CDO collateral. Furthermore, all four of our CDOs provide for the re-classification of interest proceeds from impaired collateral as principal proceeds. During the first quarter of 2009, we were informed by our CDO trustee of impairments due to rating agency downgrades of certain of the securities which serve as collateral in all of our CDOs. The impairments resulted in a breach of the CDO II overcollateralization test and the reclassification of interest proceeds from certain securities as principal proceeds in all four of our CDOs.

Subsequent to quarter end, additional ratings downgrades on securities combined with non-performing loans which serve as collateral for CDO I resulted in a breach of that CDO’s overcollateralization test. As described above, this breach will cause the redirection of cash flow that would otherwise have been paid to the subordinate classes of the CDO, some of which are owned by the Company.

- 21 - -

Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

10.   Participations Sold

Participations sold represent interests in certain loans that we originated and subsequently sold to CT Large Loan 2006, Inc. (one of our investment management vehicles) 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. As of March 31, 2009, we had five such participations sold with a total book balance of $292.7 million at a weighted average coupon of LIBOR plus 3.27% (3.77% at March 31, 2009) and a weighted average yield of LIBOR plus 3.28% (3.78% at March 31, 2009). 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 operations.

As of December 31, 2008, we had five such participations sold with a total book balance of $292.7 million at a weighted average coupon of LIBOR plus 3.27% (3.71% at December 31, 2008) and a weighted average yield of LIBOR plus 3.27% (3.71% at December 31, 2008).

11.   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 interest rate swaps that we employ are designated as cash flow hedges and are designed to hedge fixed rate assets against floating rate liabilities. Under cash flow hedges we pay our hedge counterparties a fixed rate amount and our counterparties pay us a floating rate amount, which are settled monthly, and recorded as a component of interest expense. Our counterparties in these transactions are financial institutions and we are dependent upon the health of these counterparties and a functioning interest rate derivative market in order to effectively execute our hedging strategy.

The following table summarizes the notional and fair values of our derivative financial instruments as of March 31, 2009. 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	Counterparty	Notional Amount		Interest Rate			Maturity	Fair Value
Swap	Cash Flow Hedge	Swiss RE Financial		$271,858		5.10	%	2015		($28,718	)
Swap	Cash Flow Hedge	Bank of America		73,565		4.58	%	2014		(4,251	)
Swap	Cash Flow Hedge	Morgan Stanley		18,359		3.95	%	2011		(1,043	)
Swap	Cash Flow Hedge	JP Morgan Chase		18,047		5.14	%	2014		(2,738	)
Swap	Cash Flow Hedge	JP Morgan Chase		16,894		4.83	%	2014		(2,413	)
Swap	Cash Flow Hedge	JP Morgan Chase		16,377		5.52	%	2018		(3,539	)
Swap	Cash Flow Hedge	JP Morgan Chase		12,310		5.02	%	2009		(173	)
Swap	Cash Flow Hedge	Bank of America		11,054		5.05	%	2016		(1,317	)
Swap	Cash Flow Hedge	JP Morgan Chase		7,062		5.11	%	2016		1,154
Swap	Cash Flow Hedge	Bank of America		5,104		4.12	%	2016		(411	)
Swap	Cash Flow Hedge	JP Morgan Chase		3,283		5.45	%	2015		(622	)
Swap	Cash Flow Hedge	JP Morgan Chase		2,849		5.08	%	2011		(227	)
Swap	Cash Flow Hedge	Morgan Stanley		780		5.31	%	2011		(57	)
Total/Weighted Average				$457,542		4.96	%	2015		($44,355	)

As of March 31, 2009, we were party to 13 interest rate swaps with a combined notional value of $457.5 million. During the three months ended March 31, 2009, we did not enter into any new derivative financial instrument contracts.

- 22 - -

Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

The table below shows the fair values and balance sheet location of our interest rate hedges as of March 31, 2009 and December 31, 2008 (in thousands):

		March 31, 2009				December 31, 2008
Hedge	Type	Fair Value			Balance Sheet Location	Fair Value			Balance Sheet Location
Swap	Cash Flow Hedge		($28,718	)	Interest rate hedge liabilities		($29,383	)	Interest rate hedge liabilities
Swap	Cash Flow Hedge		(4,251	)	Interest rate hedge liabilities		(4,526	)	Interest rate hedge liabilities
Swap	Cash Flow Hedge		(1,043	)	Interest rate hedge liabilities		(1,053	)	Interest rate hedge liabilities
Swap	Cash Flow Hedge		(2,738	)	Interest rate hedge liabilities		(2,867	)	Interest rate hedge liabilities
Swap	Cash Flow Hedge		(2,413	)	Interest rate hedge liabilities		(2,550	)	Interest rate hedge liabilities
Swap	Cash Flow Hedge		(3,539	)	Interest rate hedge liabilities		(3,827	)	Interest rate hedge liabilities
Swap	Cash Flow Hedge		(173	)	Interest rate hedge liabilities		(302	)	Interest rate hedge liabilities
Swap	Cash Flow Hedge		(1,317	)	Interest rate hedge liabilities		(1,366	)	Interest rate hedge liabilities
Swap	Cash Flow Hedge		1,154		Interest rate hedge assets		(706	)	Interest rate hedge liabilities
Swap	Cash Flow Hedge		(411	)	Interest rate hedge liabilities		(430	)	Interest rate hedge liabilities
Swap	Cash Flow Hedge		(622	)	Interest rate hedge liabilities		(663	)	Interest rate hedge liabilities
Swap	Cash Flow Hedge		(227	)	Interest rate hedge liabilities		(241	)	Interest rate hedge liabilities
Swap	Cash Flow Hedge		(57	)	Interest rate hedge liabilities		(60	)	Interest rate hedge liabilities
Total			($44,355	)			($47,974	)

As of March 31, 2009, the derivative financial instruments were reported at their fair value of $1.2 million as interest rate hedge assets and $45.5 million as interest rate hedge liabilities.

The table below shows amounts recorded to other comprehensive income and amounts recorded to interest expense from other comprehensive income for the three months ended March 31, 2009 and 2008 (in thousands):

	Amount of gain (loss)		Amount of loss
	recognized in OCI		reclassified from OCI to income
	for the three months ended		for the three months ended(1)
					Income Statement
Hedge	March 31, 2009	March 31, 2008	March 31, 2009	March 31, 2008	Location
Interest rate swaps	$ 3,618	$ (16,961)	$ (5,202)	$ (1,511)	Interest expense

(1) Represents net amounts paid to swap counterparties during the period, which are included in interest expense, offset by an immaterial amount of non-cash swap amortization.

All of our hedges were classified as highly effective for all of the periods presented, and over the next twelve months we expect approximately $17.1 million to be reclassified from other comprehensive income to interest expense.

Certain of our derivative agreements contain provisions whereby a default on any of our debt obligations could also constitute a default under these derivative obligations. As of March 31, 2009, the fair value of such derivatives in a net liability position related to these agreements was $11.2 million. If we had breached any of these provisions at March 31, 2009, we could have been required to settle our obligations under the agreements at their termination value.

As of March 31, 2009, we were not in default under any of our debt obligations and have not posted any assets as collateral under our derivative agreements.

12.   Shareholders’ Equity

Authorized Capital

We have the authority to issue up to 200,000,000 shares of stock, consisting of (i) 100,000,000 shares of class A common stock and (ii) 100,000,000 shares of preferred stock. The board of directors is generally authorized to issue additional shares of authorized stock without shareholder approval.

Common Stock

Class A common stock are voting shares entitled to vote on all matters presented to a vote of shareholders, except as provided by law or subject to the voting rights of any outstanding preferred stock. Holders of record of shares of class A common stock on the record date fixed by our board of directors are entitled to receive such dividends as may be declared by the board of directors subject to the rights of the holders of any outstanding preferred stock. A total of 22,062,814 shares of common stock were issued and outstanding as of March 31, 2009.

We did not repurchase any of our common stock during the quarter ended March 31, 2009 other than the 4,332 shares we acquired pursuant to elections by incentive plan participants to satisfy tax withholding obligations through the surrender of shares equal in value to the amount of the withholding obligation incurred upon the vesting of restricted stock.

Preferred Stock

We have 100,000,000 shares of preferred stock authorized and have not issued any shares of preferred stock since we repurchased all of the previously issued and outstanding preferred stock in 2001.

- 23 - -

Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

Warrants

As discussed in Note 9, in conjunction with our debt restructuring, we issued certain of our secured lenders warrants to purchases an aggregate 3,479,691 shares of our class A common stock at an exercise price of $1.79 per share. The warrants will become exercisable on March 16, 2012 and expire on March 16, 2019, and may be exercised through a cashless exercise. The fair value assigned to these warrants, totaling $940,000, has been recorded as an increase to additional paid-in capital, and will be amortized over the term of the related debt obligations. The warrants were valued using the Black-Scholes valuation method.

Dividends

We generally intend to distribute each year substantially all of our taxable income (which does not necessarily equal net income as calculated in accordance with GAAP) to our shareholders so as to comply with the REIT provisions of the Internal Revenue Code of 1986, as amended, or the Internal Revenue Code. If necessary for REIT qualification purposes, we may need to distribute any taxable income remaining after giving effect to the distribution of the final regular quarterly dividend each year, together with the first regular quarterly dividend payment of the following taxable year or, at our discretion, in a separate dividend distributed prior thereto. We refer to these dividends as special dividends. As required by covenants in our restructured debt obligations, our cash dividend distributions are restricted to the minimum amount necessary to maintain our status as a REIT. Moreover, such covenants require us to make any distribution in stock to the extent permitted, taking into consideration the recent Internal Revenue Service ruling, “Revenue Procedure 2008-68,” which allow REITs to distribute up to 90% of their dividends in the form of stock for tax years ending on or before December 31, 2009.

In additionto the foregoing restrictions, ourdividend policy remains subject to revision at the discretion of our board of directors. All distributions will be made at the discretion of our board of directors and will depend upon our taxable income, our financial condition, our maintenance of REIT status and other factors as our board of directors deems relevant. No dividends were declared during the three months ended March 31, 2009.

Earnings Per Share

The following table sets forth the calculation of Basic and Diluted earnings per share, or EPS, based on both restricted and unrestricted class A common stock, for the three months ended March 31, 2009 and 2008 (in thousands, except share and per share amounts):

	Three Months Ended March 31, 2009								Three Months Ended March 31, 2008
	Net					Per Share			Net				Per Share
	Loss			Shares		Amount			Income		Shares		Amount
Basic EPS:
Net (loss)/earnings allocable to
common stock	$	(73,146	)		22,304,887	$	(3.28	)	$	14,773		17,942,649	$	0.82
Effect of Dilutive Securities:
Warrants & Options outstanding
for the purchase of common stock		—			—					—		74,764
Diluted EPS:
Net (loss)/earnings per share of
common stock and assumed
conversions		(73,146	)		22,304,887	$	(3.28	)	$	14,773		18,017,413	$	0.82

As of March 31, 2009, Diluted EPS excludes 170,000 options and 3.5 million warrants which were antidilutive for the period. These instruments could potentially impact Diluted EPS in future periods, depending on changes in our stock price. As of March 31, 2008, Diluted EPS excludes 129,000 options which were similarly antidilutive.

- 24 - -

Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

13.   General and Administrative Expenses

General and administrative expenses for the three months ended March 31, 2009 and 2008 consisted of the following (in thousands):

	Three Months Ended
	March 31,
	2009		2008
Personnel costs	$	2,790	$	3,943
Employee stock based compensation		427		1,004
Restructuring costs		3,139		—
Operating and other costs		697		793
Professional services		1,404		1,161
Total	$	8,457	$	6,901

14.   Income Taxes

We made an election to be taxed as a REIT under Section 856(c) of the Internal Revenue Code, 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. 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, we may be subject to material penalties such as federal, state and local income tax on our taxable income at regular corporate rates. As of March 31, 2009 and December 31, 2008, we were in compliance with all REIT requirements.

In 2009 and 2008, CTIMCO paid no federal taxes and paid small amounts of state and local taxes. During the quarter ended March 31, 2009, CTIMCO received a $408,000 state income tax refund related to a prior year return. As of March 31, 2009, we have net operating losses, or NOLs, available to be carried forward and utilized in future periods.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for tax reporting purposes.

15.   Employee Benefit and Incentive Plans

We had four benefit plans in effect as of March 31, 2009: (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 Employee Plan and 1997 Director Plan 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. Shares canceled under the 2004 Plan are available to be reissued under the 2007 Plan. As of March 31, 2009, there were 503,859 shares available under the 2007 Plan.

- 25 - -

Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

Activity under these four plans for the three months ended March 31, 2009 is summarized in the table below in share and share equivalents:

	1997 Employee		1997 Director
Benefit Type	Plan		Plan		2004 Plan			2007 Plan			Total
Options(1)
Beginning Balance		170,477		—		—			—			170,477
Expired		—		—		—			—			—
Ending Balance		170,477		—		—			—			170,477
Restricted Stock(2)
Beginning Balance		—		—		289,637			41,560			331,197
Granted		—		—		—			216,269			216,269
Vested		—		—		(30,819	)		(1,102	)		(31,921	)
Forfeited		—		—		(193,310	)		(8,386	)		(201,696	)
Ending Balance		—		—		65,508			248,341			313,849
Stock Units(3)
Beginning Balance		—		80,017		—			135,434			215,451
Granted/deferred		—		—		—			74,703			74,703
Ending Balance		—		80,017		—			210,137			290,154
Total Outstanding Shares		170,477		80,017		65,508			458,478			774,480

(1)	All options are fully vested as of March 31, 2009.
(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.

The following table summarizes the outstanding options as of March 31, 2009:

Exercise Price per Share	Options Outstanding				Weighted Average Exercise Price per Share				Weighted Average Remaining Life (in Years)
	1997 Employee		1997 Director		1997 Employee		1997 Director		1997 Employee		1997 Director
	Plan		Plan		Plan		Plan		Plan		Plan
$10.00 - $15.00		43,530		—		$13.41		$  —		1.76		—
$15.00 - $20.00		126,947		—		16.38		—		2.27		—
Total/Weighted Average		170,477		—		$15.62		$  —		2.14		—

In addition to the equity interests detailed above, we have granted percentage interests in the incentive compensation received by us from certain of our investment management vehicles. As of March 31, 2009, we had granted a portion of the Fund III incentive compensation received by us.

A summary of the unvested restricted stock as of and for the three month period ended March 31, 2009 was as follows:

	Restricted Stock
	Shares			Grant Date Fair Value
Unvested at January 1, 2009		331,197			$30.61
Granted		216,269			3.32
Vested		(31,921	)	30.65
Forfeited		(201,696	)	28.99
Unvested at March 31, 2009		313,849			$12.99

- 26 - -

Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

A summary of the unvested restricted stock as of and for the three month period ended March 31, 2008 was as follows:

	Restricted Stock
	Shares			Grant Date Fair Value
Unvested at January 1, 2008		423,931			$30.96
Granted		44,550			27.44
Vested		(57,904	)		28.18
Forfeited		(414	)		51.25
Unvested at March 31, 2008		410,163			$30.95

The total fair value of restricted stock which vested during the three month periods ended March 31, 2009 and 2008 was $55,000 and $1.7 million, respectively.

16.   Fair Values of Financial Instruments

As discussed in their respective notes to our consolidated financial statements, certain of our assets and liabilities are measured at fair value on either a recurring or nonrecurring basis. These fair values are determined using a variety of inputs and methodologies, which are discussed below. FAS 157 establishes a fair value hierarchy that prioritizes the inputs used in determining fair value under GAAP, which includes the following classifications, in order of priority:

· Level 1 generally includes only unadjusted quoted prices in active markets for identical assets or liabilities as of the reporting date.

· Level 2 inputs are those which, other than Level 1 inputs, are observable for identical or similar assets or liabilities.

· Level 3 inputs generally include anything which does not meet the criteria of Levels 1 and 2, particularly any unobservable inputs.

The following table summarizes our financial instruments recorded at fair value as of March 31, 2009 (in thousands):

				Fair Value Measurements at Reporting Date Using
	Total Fair Value at March 31, 2009			Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
Measured on a recurring basis:
Loans held-for-sale (1)		$30,014			$18,014		$12,000			$—
Real estate held-for-sale		8,000			—		—			8,000
Interest rate hedge assets		1,154			—		1,154			—
Interest rate hedge liabilities		(45,509	)		—		(45,509	)		—
Measured on a nonrecurring basis:
Loans receivable (2)		$46,645			$—		$—			$46,645
Securities (3)		20,506			—		—			20,506
Warrants		940			—		—			940

(1)	Transactions related to these assets have either closed or have a high probability of closing subsequent to March 31, 2009. Transactions which have closed subsequent to March 31, 2009, although not based on quoted prices in active markets, are categorized as Level 1 inputs.
(2)	Loans receivable against which we have recorded a provision for possible credit losses during the three months ended March 31, 2009.
(3)	Securities which were other-than-temporarily impaired during the three months ended March 31, 2009.

- 27 - -

Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

The following table summarizes activity for our assets measured at fair value on a recurring basis using Level 3 inputs, as of March 31, 2009 (in thousands):

	Real Estate
	Held-for-Sale
December 31, 2008		$9,897
Cash received		(564	)
Impairments included in earnings		(1,333	)
March 31, 2009		$8,000

The following methods and assumptions were used to estimate the fair value of each type of asset and liability which was measured at fair value as of March 31, 2009:

Loans held-for-sale, net: We determined the fair value of loans held-for-sale based upon the transactions which have occurred subsequent to March 31, 2009, as described in Note 20, and those which are highly likely to occur in the near future related to the settlement amount of these assets. Although not quoted market prices, we believe this determination is analogous to a Level 1 input, as defined under FAS 157, for transactions which have closed subsequent to March 31, 2009.

Real estate held-for-sale: This asset was valued by applying an estimated market capitalization rate to the current expected net operating income levels at the property.

Interest rate hedge assets & liabilities: Interest rate hedges were valued using advice from a third party derivative specialist, based on a combination of observable market-based inputs, such as interest rate curves, and unobservable inputs such as credit valuation adjustments due to the risk of non-performance by both us and our counterparties.

Loans Receivable: The fair value of loans against which a provision for possible credit losses has been recorded was determined based on the value of the underlying collateral, the likelihood of default and other factors considered on a loan-by-loan basis.

Securities: Securities which are other-than-temporarily impaired have been valued by discounting expected cash flows using estimated market discount rates. The expected cash flows of each security are based on assumptions regarding the collection of principal and interest on the underlying loans.

Warrants: Warrants issued in conjunction with our debt restructuring were valued using the Black Scholes method based on current and expected dividend yield, volatility, and other factors related to our common stock.

In addition to the above disclosures required by FAS 157, FASB Statement of Financial Accounting Standards No. 107, “Disclosures about Fair Value of Financial Instruments,” or FAS 107, requires disclosure of fair value information about financial instruments, whether or not recognized in the statement of financial position, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based upon estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and the estimated future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. FAS 107 excludes certain financial instruments and all non-financial instruments from our disclosure requirements.

The following methods and assumptions were used to estimate the fair value of each class of financial instruments, excluding those described above which are carried at fair value, for which it is practicable to estimate that value:

Cash and cash equivalents: The carrying amount of cash on hand and money market funds is considered to be a reasonable estimate of fair value.

Securities: These investments are presented on a held-to-maturity basis and not at fair value. The fair values were obtained from a securities dealer or are based on cash flow or other valuation models for securities where management considers the market to be severely dislocated and not indicative of fair value.

Loans receivable, net: These instruments are generally presented at the lower of cost or market value. Therefore, other than loans with provisions for possible credit losses, these assets are reported at their amortized cost and not at fair value. The fair values were estimated by using current institutional purchaser yield requirements for loans with similar credit characteristics.

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Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

Repurchase obligations: As a result of our debt restructuring on March 16, 2009, our repurchase obligations no longer have terms which are comparable to other facilities in the market. Given the unique nature of our restructured obligations, it is not practicable to estimate their fair value. Accordingly, they are included at their current face value in the table below.

Collateralized debt obligations: These obligations are presented on the basis of proceeds received at issuance and not at fair value.The fair value was estimated based upon the amount at which similar placed financial instruments would be valued today.

Senior unsecured credit facility: This instrument is presented on the basis of total cash proceeds borrowed, and not at fair value. The fair value was estimated based on the interest rate that is currently available in the market for similar credit facilities.

Junior subordinated notes: These instruments bear interest at fixed rates. The fair value was obtained by calculating the present value based on current market interest rates.

The following table details the carrying amount, face amount, and approximate fair value of the financial instruments described above (in thousands):

	March 31, 2009						December 31, 2008
	Carrying Amount		Face Value		Fair Value		Carrying Amount		Face Value		Fair Value
Financial assets:
Cash and cash equivalents		$18,268		$18,268		$18,268		$45,382		$45,382		$45,382
Securities		834,329		880,093		538,422		852,211		883,958		582,478
Loans receivable, net		1,688,528		1,809,368		1,225,794		1,791,332		1,855,432		1,589,929
Financial liabilities:
Repurchase obligations		560,854		561,774		561,774		699,054		699,054		699,054
CDOs		1,142,097		1,140,646		377,861		1,156,035		1,154,504		441,245
Sr. unsecured credit facility		100,000		100,000		53,521		100,000		100,000		94,155
Jr. subordinated notes		125,837		141,147		33,523		128,875		128,875		80,099
Participations sold		292,674		292,734		209,414		292,669		292,734		258,416

17.   Supplemental Disclosures for Consolidated Statements of Cash Flows

Interest paid on our outstanding debt obligations during the three months ended March 31, 2009 and 2008 was $18.9 million and $31.9 million, respectively. Taxes recovered by us during the three months ended March 31, 2009 and 2008 were $408,000 and $677,000, respectively. Non-cash investing and financing activity during the three months ended March 31, 2008 resulted from our investments in loans where we sold participations as well as the primarily non-cash settlement of certain of our secured borrowings in conjunction with our debt restructuring on March 16, 2009.

As of March 31, 2009, we had $213,000 included in deposits and other receivables which represented loans that had partial repayments on or prior to March 31, 2009, the proceeds of which had not been remitted to us by our servicers. The recording of these repayments as a component of deposits and other receivables resulted in a non-cash investing activity.

18.   Transactions with Related Parties

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. 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. As of March 31, 2009, this loan was classified as held-for-sale as a result of discussions with the borrower for a potential discounted settlement of the loan.

WRBC beneficially owned approximately 17.4% of our outstanding class A common stock as of April 29, 2009, and a member of our board of directors is an employee of WRBC.

- 29 - -

Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

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.

Until 2007, we paid Equity Group Investments, L.L.C. and Equity Risk Services, Inc., affiliates under common control of the chairman of the board of directors, for certain corporate services provided to us. These services include consulting on insurance matters, risk management, and investor relations. In July 2008, CTOPI, a private equity fund that we manage, held its final closing completing capital raise with $540 million total equity commitments. EGI-Private Equity II, L.L.C., an affiliate under common control of the chairman of the board of directors, owns a 3.7% limited partner interest in CTOPI. During the three months ended March 31, 2009, we recorded $2.1 million in fees from CTOPI, $87,000 of which were attributable to EGI Private Equity II, L.L.C.

During 2008, CTOPI purchased $37.1 million face value of our CDO debt in the open market for $21.1 million.

Affiliates of Samuel Zell own interests in Fund III, an investment management vehicle that we manage and within which we also have an ownership interest.

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.

19.   Segment Reporting

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

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

The Investment Management segment includes all of our 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.

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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, March 31, 2009 (in thousands):

	Balance Sheet			Investment		Inter-Segment
	Investment			Management		Activities			Total
Income from loans and other
investments:
Interest and related income	$	33,239		$	—	$	—		$	33,239
Less: Interest and related expenses		21,268			—		—			21,268
Income from loans and other investments, net		11,971			—		—			11,971
Other revenues:
Management fees		—			4,384		(1,505	)		2,879
Servicing fees		—			1,179		—			1,179
Other interest income		127			14		(13	)		128
Total other revenues		127			5,577		(1,518	)		4,186
Other expenses
General and administrative		5,806			4,156		(1,505	)		8,457
Other interest expense		—			13		(13	)		—
Depreciation and amortization		—			7		—			7
Total other expenses		5,806			4,176		(1,518	)		8,464
Total other-than-temporary impairments on
securities		(14,646	)		—		—			(14,646	)
Portion of other-than-temporary impairments on
securities recognized in other comprehensive
income		5,624			—		—			5,624
Impairments on real estate held-for-sale		(1,333	)		—		—			(1,333	)
Net impairments recognized in earnings		(10,355	)		—		—			(10,355	)
Provision for possible credit losses		(58,763	)		—		—			(58,763	)
Valuation allowance on loans held-for-sale		(10,363	)		—		—			(10,363	)
Loss from equity investments		(1,766	)		—		—			(1,766	)
(Loss)/income before income taxes		(74,955	)		1,401		—			(73,554	)
Income tax benefit		(408	)		—		—			(408	)
Net/(loss) income	$	(74,547	)	$	1,401	$	—		$	(73,146	)
Total assets	$	2,597,920		$	8,095	$	(3,529	)	$	2,602,486

All revenues were generated from external sources within the United States. The “Investment Management” segment earned fees of $1.5 million for management of the “Balance Sheet Investment” segment and was charged $13,000 for inter-segment interest for the three months ended March 31, 2009, which is reflected as offsetting adjustments to other interest income and other interest expense in the inter-segment activities column in the table above.

- 31 - -

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, March 31, 2008 (in thousands):

	Balance Sheet		Investment			Inter-Segment
	Investment		Management			Activities			Total
Income from loans and other
investments:
Interest and related income	$	56,554	$	—		$	—		$	56,554
Less: Interest and related expenses		37,944		—			—			37,944
Income from loans and other investments, net		18,610		—			—			18,610
Other revenues:
Management fees		—		4,465			(2,268	)		2,197
Servicing fees		—		178			—			178
Other interest income		228		8			(48	)		188
Total other revenues		228		4,651			(2,316	)		2,563
Other expenses
General and administrative		3,254		5,915			(2,268	)		6,901
Other interest expense		—		48			(48	)		—
Depreciation and amortization		—		105			—			105
Total other expenses		3,254		6,068			(2,316	)		7,006
Income from equity investments		5		2			—			7
Income/(loss) before income taxes		15,589		(1,415	)		—			14,174
Income tax benefit		—		(599	)		—			(599	)
Net income/(loss)	$	15,589	$	(816	)	$	—		$	14,773
Total assets	$	3,304,940	$	7,980		$	(6,388	)	$	3,306,532

All revenues were generated from external sources within the United States. The “Investment Management” segment earned fees of $2.3 million for management of the “Balance Sheet Investment” segment and was charged $48,000 for inter-segment interest for the three months ended March 31, 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.

20.   Subsequent Events

Subsequent to quarter end, on April 6, 2009, we entered into a satisfaction, termination and release agreement with Lehman Brothers pursuant to which both parties terminated their right, title and interest in, to and under the existing agreement. As of the date of termination, we had an $18.0 million outstanding obligation due under the existing facility, and our recorded book value of the collateral as of March 31, 2009 was $25.9 million. We consented to transfer to Lehman, and Lehman unconditionally accepted, all of our right, title and interest in the collateral, and the termination fully satisfied all of our obligations under the facility. As a result of the transfer, we classified the single loan serving as collateral under the facility as held-for-sale on the consolidated balance sheet as of March 31, 2009, and recorded a $7.9 million valuation allowance, reflecting the difference between the carrying value of the loan and the settlement price.

Subsequent to quarter end, additional ratings downgrades on securities combined with non-performing loans which serve as collateral for CDO I resulted in a breach of that CDO’s overcollateralization test. As described in Note 9, this breach will cause the redirection of cash flow that would otherwise have been paid to the subordinate classes of the CDO, some of which are owned by the Company.

- 32 - -

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

References herein to “we,” “us,” “our” or the “Company” 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 consolidated financial statements. Actual results could differ from these estimates. Other than the adoption of FSP FAS 115-2, FSP FAS 157-4 and FSP FAS 107-1 in the first quarter of 2009, 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 March 16, 2009.

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 quarter of 2009, the state of the commercial real estate markets, both in terms of fundamentals and capital availability, deteriorated at an accelerated pace. Occupancy and rental rates declined in virtually all product types and geographic markets, and borrowers with near-term refinancing needs encountered increased difficulty finding replacement financing. As a result, commercial mortgage delinquencies and defaults are rising rapidly, as sponsors are unable (or unwilling) to support projects in the face of value decline. In the first quarter, our portfolio experienced significant credit deterioration, evidenced by $58.8 million of new provisions for possible loan losses and $16.0 million of impairments on our securities portfolio and real estate owned.

Restructuring of Our Debt Obligations

On March 16, 2009, we consummated a restructuring of substantially all of our recourse debt obligations with certain of our secured and unsecured creditors pursuant to the amended terms of our secured credit facilities, our senior unsecured credit agreement, and certain of our trust preferred securities.

Repurchase Obligations and Secured Debt

On March 16, 2009, we amended and restructured our secured, recourse credit facilities with: (i) JPMorgan Chase Bank, N.A., JPMorgan Chase Funding Inc. and J.P. Morgan Securities Inc., or collectively JPMorgan, (ii) Morgan Stanley Bank, N.A., or Morgan Stanley, and (iii) Citigroup Financial Products Inc. and Citigroup Global Markets Inc., or collectively Citigroup. We collectively refer to JPMorgan, Morgan Stanley and Citigroup as the participating secured lenders.

Specifically, on March 16, 2009, we entered into separate amendments to the respective master repurchase agreements with JPMorgan, Morgan Stanley and Citigroup. Pursuant to the terms of each such agreement, we repaid the balance outstanding with each participating secured lender by an amount equal to three percent (3%) of the current outstanding principal amount due under its existing secured, recourse credit facility, $17.7 million in the aggregate, and further amended the terms of each such facility, without any change to the collateral pool securing the debt owed to each participating secured lender, to provide the following:

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· Maturity dates were modified to one year from the March 16, 2009 effective date of each respective agreement, which maturity dates may be extended further for two one-year periods. The first one-year extension option is exercisable by us so long as the outstanding balance as of the first extension date is less than or equal to a certain amount, reflecting a reduction of twenty percent (20%), including the upfront payment described above, of the outstanding principal amount from the date of the amendments, and no other defaults or events of default have occurred and are continuing, or would be caused by such extension. The second one-year extension option is exercisable by each participating secured lender in its sole discretion.

· We agreed to pay each secured participating lender periodic amortization as follows: (i) mandatory payments, payable monthly in arrears, in an amount equal to sixty-five (65%) (subject to adjustment in the second year) of the net interest income generated by each such lender’s collateral pool, and (ii) one hundred percent (100%) of the principal proceeds received from the repayment of assets in each such lender’s collateral pool. In addition, under the terms of the amendment with Citigroup, we agreed to pay Citigroup an additional quarterly amortization payment equal to the lesser of: (x) Citigroup’s then outstanding senior secured credit facility balance or (y) the product of (i) the total cash paid (including both principal and interest) during the period to our senior unsecured credit facility in excess of an amount equivalent to LIBOR plus 1.75% based upon a $100.0 million facility amount, and (ii) a fraction, the numerator of which is Citigroup’s then outstanding senior secured credit facility balance and the denominator is the total outstanding secured indebtedness of the secured participating lenders.

· We further agreed to amortize each participating secured lender’s secured debt at the end of each calendar quarter on a pro rata basis until we have repaid our secured, recourse credit facilities and thereafter our senior unsecured credit facility in an amount equal to any unrestricted cash in excess of the sum of (i) $25.0 million, and (ii) any unfunded loan and co-investment commitments.

· Each participating secured lender was relieved of its obligation to make future advances with respect to unfunded commitments arising under investments in its collateral pool.

· We received the right to sell or refinance collateral assets as long as we apply one hundred percent (100%) of the proceeds to pay down the related secured credit facility balance subject to minimum release price mechanics.

· We eliminated the cash margin call provisions and amended the mark-to-market provisions so that future changes in collateral value will be determined based upon changes in the performance of the underlying real estate collateral in lieu of the previous provisions which were based on market spreads. Beginning six months after the date of execution of the agreements, each collateral pool will be valued monthly on this basis. If the ratio of a participating secured lender’s total outstanding secured credit facility balance to total collateral value exceeds 1.15x the ratio calculated as of the effective date of the amended agreements, we will be required to liquidate collateral in order to return to compliance with the prescribed loan to collateral value ratio or post other collateral to bring the ratio back into compliance.

In each master repurchase agreement amendment and the amendment to our senior unsecured credit agreement described in greater detail below, which we collectively refer to as our restructured debt obligations, we also replaced all existing financial covenants with the following uniform covenants which:

· prohibit new balance sheet investments except, subject to certain limitations, co-investments in our investment management vehicles or protective investments to defend existing collateral assets on our balance sheet;

· prohibit the incurrence of any additional indebtedness except in limited circumstances;

· limit the total cash compensation to all employees and, specifically with respect to our chief executive officer, chief operating officer and chief financial officer, freeze their base salaries at 2008 levels, and require cash bonuses to any of them to be approved by a committee comprised of one representative designated by the secured lenders, the administrative agent under the senior unsecured credit facility and the chairman of our board of directors;

· prohibit the payment of cash dividends to our common shareholders except to the minimum extent necessary to maintain our REIT status;

· require us to maintain a minimum amount of liquidity, as defined, of $7.0 million in year one and $5.0 million thereafter;

· trigger an event of default if both our chief executive officer and chief operating officer cease their current employment with us during the term of the agreement and we fail to hire replacements acceptable to the lenders; and

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· trigger an event of default, if any event or condition occurs which causes any obligation or liability of more than $1.0 million to become due prior to its scheduled maturity or any monetary default under our restructured debt obligations if the amount of such obligation is at least $1.0 million.

Pursuant to the restructuring, the interest rates on our secured borrowings remain the same as those previously in effect.

On March 16, 2009, we issued JPMorgan, Morgan Stanley and Citigroup warrants to purchase 3,479,691 shares of our class A common stock at an exercise price of $1.79 per share, which is equal to the closing bid price on the New York Stock Exchange on March 13, 2009. The warrants will become exercisable on March 16, 2012 and expire on March 16, 2019, and may be exercised through a cashless exercise.

On March 16, 2009, we also entered into an agreement to terminate the master repurchase agreement with Goldman Sachs, pursuant to which we satisfied the indebtedness due under this Goldman Sachs secured credit facility. Specifically, we: (i) pre-funded certain required advances of approximately $2.4 million under one loan in the collateral pool, (ii) paid Goldman Sachs $2.6 million to effect a full release to us of another loan, and (iii) transferred all of the other assets that served as collateral for Goldman Sachs to Goldman Sachs for a purchase price of $85.7 million as payment in full for the balance remaining under the secured credit facility. Goldman Sachs agreed to release us from any further obligation under the secured credit facility.

On February 25, 2009, we entered into a satisfaction, termination and release agreement with UBS pursuant to which the parties terminated their right, title, interest in, to and under a master repurchase agreement. We consented to the transfer to UBS, and UBS unconditionally accepted and retained all of our rights, title and interest in a loan financed under the master repurchase agreement in complete satisfaction of all of our obligations, including all amounts due thereunder.

Subsequent to quarter end, on April 6, 2009, we entered into a satisfaction, termination and release agreement with Lehman Brothers pursuant to which both parties terminated their right, title and interest in, to and under the existing agreement. As of the date of termination, we had an $18.0 million outstanding obligation due under the existing facility, and our recorded book value of the collateral as of March 31, 2009 was $25.9 million. We consented to transfer to Lehman, and Lehman unconditionally accepted, all of our right, title and interest in the collateral, and the termination fully satisfied all of our obligations under the facility.

Senior Unsecured Credit Facility

On March 16, 2009, we entered into an amended and restated senior unsecured credit agreement governing our $100.0 million term loan from WestLB AG, New York Branch, participant and administrative agent, Fortis Capital Corp., Wells Fargo Bank, N.A., JPMorgan Chase Bank, N.A., Morgan Stanley Bank, N.A. and Deutsche Bank Trust Company Americas, which we collectively refer to as the senior unsecured lenders. Pursuant to the amended and restated senior unsecured credit agreement, we and the senior unsecured lenders agreed to:

· extend the maturity date of the senior unsecured credit agreement to be co-terminus with the maturity date of the secured credit facilities with the participating secured lenders (as they may be further extended until March 16, 2012, as described above);

· increase the cash interest rate under the senior unsecured credit agreement to LIBOR plus 3.00% per annum (from LIBOR plus 1.75%), plus an accrual rate of 7.20% per annum less the cash interest rate;

· initiate quarterly amortization equal to the greater of: (i) $5.0 million per annum and (ii) 25% of the annual cash flow received from our currently unencumbered collateralized debt obligation interests;

· pledge our unencumbered collateralized debt obligation interests and provide a negative pledge with respect to certain other assets; and

· replace all existing financial covenants with substantially identical covenants and default provisions to those described above in the participating secured facilities.

Junior Subordinated Notes

On March 16, 2009, we reached an agreement with Taberna Preferred Funding V, Ltd., Taberna Preferred Funding VI, Ltd., Taberna Preferred Funding VIII, Ltd. and Taberna Preferred Funding IX, Ltd., or collectively Taberna, to issue new junior subordinated notes in exchange for $50.0 million face amount of trust preferred securities issued through our statutory trust subsidiary CT Preferred Trust I held by affiliates of Taberna, which we refer to as the Trust I Securities, and $53.1 million face amount of trust preferred securities issued through our statutory trust subsidiary CT Preferred Trust II held by affiliates of Taberna, which we refer to as the Trust II Securities. We refer to the Trust I Securities and the Trust II Securities together as the Trust Securities. The Trust Securities were backed by and recorded as junior subordinated notes issued by us with terms that mirror the Trust Securities.

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Pursuant to the exchange agreement dated March 16, 2009, by and among us and Taberna, we issued $118.6 million aggregate principal amount of new junior subordinated notes due on April 30, 2036 (an amount equal to 115% of the aggregate face amount of the Trust Securities exchanged). The interest rate payable under the new subordinated notes is 1% per annum from March 16, 2009, through and including April 29, 2012, which we refer to as the modification period. After the modification period, the interest rate will revert to a blended rate equal to that which was previously payable under the notes underlying the Trust Securities, a fixed rate of 7.23% per annum through and including April 29, 2016, and thereafter a floating rate, reset quarterly, equal to three-month LIBOR plus 2.44% until maturity. The new junior subordinated notes will be contractually senior to the remaining subordinated notes, will mature on April 30, 2036 and will be freely redeemable by us at par at any time. The new junior subordinated notes contain a covenant that through April 30, 2012, subject to certain exceptions, we may not declare or pay dividends or distributions on, or redeem, purchase or acquire any of our equity interests (other than remaining trust preferred securities not exchanged) except to the extent necessary to maintain our status as a REIT. Except for the foregoing, the new junior subordinated notes contain substantially similar provisions as the Trust Securities.

As part of the agreement with Taberna, we also paid $750,000 to cover third party fees and costs incurred in connection with the exchange transaction.

Originations

We have historically allocated 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 restructuring of our recourse secured and unsecured debt obligations included covenants which require us to cease our balance sheet investment activities and not incur any further indebtedness unless used to retire the debt due our lenders. Going forward, until these covenants are eliminated through the repayment or refinancing of the restructured debt obligations, we will not make new balance sheet investments, but will continue to carry out investment activities for our investment management vehicles, consistent with our previous strategies and investment mandates for each respective vehicle.

Notwithstanding the current capabilities of our investment management platform, we have maintained a defensive posture with respect to investment originations in light of the continued market volatility. The table below summarizes our total originations and the allocation of opportunities between our balance sheet and the investment management business for the three months ended March 31, 2009 and for the year ended December 31, 2008.

Originations(1)
(in millions)	Three months ended		Year ended
	March 31, 2009		December 31, 2008
Balance sheet		$—		$48
Investment management		3		426
Total originations		$3		$474

(1) Includes total commitments, both funded and unfunded, net of any related purchase discounts.

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Our balance sheet investments include various types of commercial mortgage backed securities and collateralized debt obligations, or Securities, and commercial real estate loans and related instruments, or Loans, which we collectively refer to as our Interest Earning Assets. The table below shows our Interest Earning Assets as of March 31, 2009 and December 31, 2008. 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)	March 31, 2009					December 31, 2008
	Book Value		Yield(1)			Book Value		Yield(1)
Securities		$834		6.75	%		$852		6.87	%
Loans		1,689		4.06	%		1,791		4.09	%
Total / Weighted Average		$2,523		4.95	%		$2,643		4.99	%

(1) Yield on floating rate assets assumes LIBOR at March 31, 2009 and December 31, 2008, of 0.50% and 0.44%, respectively. For $37.9 million face value ($33.7 million book value) of our securities, calculations use an effective rate based on cash received.

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. As of March 31, 2009, our eight Unfunded Loan Commitments totaled $19.7 million. Of the total Unfunded Loan Commitments, $12.8 million will only be funded when and/or if the borrower meets certain performance hurdles with respect to the underlying collateral. As of March 31, 2009, $5.6 million of the Unfunded Loan Commitments relates to a Loan classified as held-for-sale, as described in Note 5 to the consolidated financial statements.

Although generally provided for in the terms of our restructured debt obligations, our lenders are no longer required to advance a portion of these commitments and our ability to fund these Unfunded Loan Commitments will be contingent upon our having sufficient liquidity available to us after required payments to our creditors.

In addition to our investments in Interest Earning Assets, we have two equity investments in unconsolidated subsidiaries as of March 31, 2009. These represent our equity co-investments in private equity funds that we manage, CT Mezzanine Partners III, Inc., or Fund III, and CT Opportunity Partners I, LP, or CTOPI.

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

Equity Investments
(in thousands)	March 31,		December 31,
	2009		2008
Fund III		$390		$597
CTOPI		2,537		1,782
Capitalized costs/other		4		4
Total		$2,931		$2,383

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 may include collateral level budget approvals, lease approvals, loan covenant enforcement, escrow/reserve management/collection, collateral release approvals and other rights that we may negotiate.

During the three months ended March 31, 2009, one Loan with an outstanding balance of $2.4 million was fully repaid. In addition, two Loans with an aggregate outstanding balance of $92.1 million as of March 31, 2009, which did not qualify for extension pursuant to the corresponding loan agreements, were extended during the quarter.

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The table below details Loans where we have foreclosed upon the underlying collateral and own an equity interest in real estate, and Loans against which we have recorded a provision for possible credit loss, or reserve. Also included are Loans that are categorized as Watch List Loans, currently performing Loans that we actively monitor and manage to mitigate the risk of potential future non-performance.

Portfolio Performance(1)
(in millions, except for number of investments)	March 31, 2009			December 31, 2008
Interest earning assets ($ / #)		$2,523 / 146			$2,643 / 150
Real estate owned, net (2) ($ / #)		$8 / 1			$10 / 1
Percentage of interest earning assets		0.3	%		0.4	%
Loans with reserves
Performing loans ($ / #)		$26 / 3			$12 / 2
Non-performing loans ($ / #)		$21 / 7			$12 / 3
Total ($ / #)		$47 / 10			$24 / 5
Percentage of interest earning assets		1.9	%		0.9	%
Watch List Loans (3)
Book value ($ / #)		$395 / 15			$383 / 17
Percentage of interest earning assets		15.7	%		14.5	%

(1)	Portfolio statistics exclude Loans classified as held-for-sale.
(2)	Includes one Loan which has been transferred to Real estate held-for-sale with a gross asset balance of $11.3 million, against which we have recorded a cumulative $3.3 million and $2.0 million impairment as of March 31, 2009 and December 31, 2008, respectively.
(3)	Includes one additional Loan with a book value of $6.6 million that has been retroactively classified as a Watch List Loan as of December 31, 2008 based upon revised criteria.

As of March 31, 2009, we had 10 Loans with an aggregate net book value of $46.8 million ($163.1 million principal balance, net of $116.3 million of reserves) against which we had recorded a provision for possible credit losses.

In 2008, the Company and its co-lender foreclosed on a Loan secured by a multifamily property, and took title to the collateral securing the original Loan. At the time the foreclosure occurred, the Loan had a book balance of $11.9 million which was reclassified as Real estate held-for-sale (also referred to as Real Estate Owned) on our consolidated balance sheet as of December 31, 2008 to reflect our ownership interest in the property. Since that time, we have received $564,000 of accumulated cash from the property, which has been recorded as a reduction to our basis in the asset. We have recorded an aggregate $3.3 million impairment to reflect the property at fair value as of March 31, 2009.

In addition to our Loans receivable, which are a component of our Interest Earning Assets, we also held two Loan investments which were classified as held-for-sale as of quarter-end. These Loans had an aggregate carrying value of $30.0 million, net of a valuation allowance of $10.4 million as of March 31, 2009. One of these Loans is classified as held-for-sale as a result of the satisfaction, termination and release agreement with Lehman Brothers on April 6, 2009, as described in Note 20 to the consolidated financial statements. We are currently in discussions with the borrowers under the other Loan to settle their obligation on a discounted basis and, accordingly, that Loan is classified as held-for-sale.

We actively manage our Securities portfolio 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 watch list population. Realized losses on underlying loans 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, under the guidance of EITF 99-20, “Recognition of Interest Income and Impairment of Purchased and Retained Beneficial Interests in Securitized Financial Assets,” as amended by FASB Staff Position EITF 99-20-1, “Amendments to the Impairment Guidance of EITF Issue No. 99-20,” we concluded that an aggregate $14.6 million other-than-temporary impairment was warranted related to six of our Securities, which had an aggregate net book value of $21.9 million as of March 31, 2009. Of this total other-than-temporary impairment, $9.0 million was related to credit losses, as defined under FASB Staff Position FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments,” and has been recorded through earnings, and $5.6 million was related to other factors and has been recorded as a component of other comprehensive loss with no impact on earnings.

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At quarter end, there were significant differences between the estimated fair value and the book value of some of the Securities in our portfolio. We believe these differences to be related to the disruption in the capital markets and the general negative bias against structured financial products and not reflective of a change in cash flow expectations from these securities. Accordingly, we have recorded no additional other-than-temporary impairments on our Securities.

The ratings performance of our Securities portfolio over the three months ended March 31, 2009 and the year ended December 31, 2008 is detailed below:

Rating Activity(1)
	Three months ended	Year ended
	March 31, 2009	December 31, 2008
Securities Upgraded	1	6
Securities Downgraded	11	13

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

We continue to foresee three trends in asset performance in 2009 that are likely to lead to further defaults and downgrades: (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 financial markets, (ii) real estate fundamentals will weaken as the U.S. economy continues to deteriorate and (iii) capitalization rates for commercial real estate will continue to increase with corresponding reductions in values. These trends may result in negotiated extensions or modifications of the terms of our investments or the exercise of foreclosure and other remedies, however, we cannot predict the effect these trends will have on the performance and value of our investments.

Capitalization

While new balance sheet investment activities are currently prohibited by our restructured debt obligations, if they are resumed, such activities, as well as those of our investment management business, 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 collectively refer to as Interest Bearing Liabilities, currently include repurchase agreements, CDOs, a senior unsecured credit facility and junior subordinated notes (which we also refer to as trust preferred securities). Our equity capital is currently comprised entirely of common equity.

During the first quarter, certain of our Interest Bearing Liabilities, including repurchase agreements and secured debt, our senior unsecured credit facility and junior subordinated notes, were restructured, exchanged, terminated, or otherwise satisfied pursuant to the transactions described in Note 9 to the consolidated financial statements. In addition, we are subject to certain covenants under our restructured debt obligations which, among other things, restrict our ability to incur additional indebtedness for the foreseeable future. The table below shows our capitalization mix as of March 31, 2009 and December 31, 2008:

Capital Structure(1)
(in millions)	March 31, 2009			December 31, 2008
Repurchase obligations and secured debt(2)		$562			$699
Collateralized debt obligations(2)		1,141			1,155
Senior unsecured credit facility(2)		100			100
Junior subordinated notes(2)(3)		141			129
Total interest bearing liabilities		$1,944			$2,083
Weighted average effective cost of debt(4)		3.71	%		3.48	%
Shareholders’ equity		$327			$401
Ratio of interest bearing liabilities to shareholders’ equity	5.9:1			5.2:1

(1)	Excludes participations sold.
(2)	Amounts represent principal balances as of March 31, 2009.
(3)	During the first quarter of 2009, we exchanged certain of our legacy junior subordinated notes with a face value of $103.1 million for new junior subordinated notes with a face value of $118.6 million, as described in Note 9 to the consolidated financial statements. In connection with this transaction, we also eliminated $3.2 million of our ownership interests in the legacy statutory trusts.
(4)	Floating rate debt obligations assume LIBOR at March 31, 2009 and December 31, 2008, of 0.50% and 0.44%, respectively. Includes the effective cost of interest rate swaps of 1.28% and 1.01% as of March 31, 2009 and December 31, 2008, respectively.

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A summary of selected structural features of our Interest Bearing Liabilities as of March 31, 2009 and December 31, 2008 is detailed in the table below:

Interest Bearing Liabilities
	March 31, 2009	December 31, 2008
Weighted average life	4.6 yrs.	4.2 yrs.
% Recourse	41.3%	44.5%
% Subject to mark-to-market provisions	1.0%	33.5%

Our CDO liabilities as of March 31, 2009 and December 31, 2008 are described below:

Collateralized Debt Obligations
(in millions)
		March 31, 2009					December 31, 2008
	Issuance Date	Book Value		All-in Cost(1)			Book Value		All-in Cost(1)
CDO I(2)	7/20/04		$249		1.54	%		$252		1.52	%
CDO II (2)	3/15/05		296		1.24			299		1.18
CDO III	8/04/05		257		5.24			257		5.27
CDO IV(2)	3/15/06		340		1.21			348		1.15
Total			$1,142		2.19	%		$1,156		2.15	%

(1)	Includes amortization of premiums and issuance costs.
(2)	Floating rate CDO liabilities assume LIBOR at March 31, 2009 and December 31, 2008, of 0.50% and 0.44%, respectively.

The table below summarizes our repurchase agreements and secured debt liabilities as of March 31, 2009 and December 31, 2008:

Repurchase Agreements and Secured Debt
($ in millions)	March 31, 2009	December 31, 2008
Counterparties	4	6
Outstanding repurchase borrowings and secured debt	$562	$699
All-in cost	L + 1.67%	L + 1.66%

The most subordinated components of our debt capital structure are our junior subordinated notes that back trust preferred securities issued to third parties. These securities represent long-term, subordinated, unsecured financing and generally carry limited covenants. On March 16, 2009, we reached an agreement with certain holders of these notes to issue new junior subordinated notes in exchange for $50.0 million face amount of trust preferred securities issued through our statutory trust subsidiary CT Preferred Trust I, which we refer to as the Trust I Securities, and $53.1 million face amount of trust preferred securities issued through our statutory trust subsidiary CT Preferred Trust II, which we refer to as the Trust II Securities. Pursuant to the exchange agreement, we issued $118.6 million aggregate principal amount of new junior subordinated notes due on April 30, 2036 (an amount equal to 115% of the aggregate face amount of the Trust Securities being exchanged) that are contractually senior to the remaining trust preferred securities. On a combined basis, the junior subordinated notes provide us with financing at a current cash cost of 1.96% per annum.

We did not issue any new shares of common stock during the quarter. Changes in the number of shares resulted from restricted stock grants, forfeitures and vesting as well as stock unit grants.

Shareholders’ Equity
	March 31, 2009	December 31, 2008
Book value (in millions)	$327	$401
Shares:
Class A common stock	21,748,965	21,740,152
Restricted stock	313,849	331,197
Stock units	290,154	215,451
Warrants & Options(1)	—	—
Total	22,352,968	22,286,800
Book value per share	$14.64	$18.01

(1) Dilutive shares issuable upon the exercise of outstanding warrants and options assuming a March 31, 2009 and December 31, 2008 stock price, respectively, and the treasury stock method.

As of March 31, 2009, we had 22,062,814 of our class A common stock and restricted stock outstanding.

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Other Balance Sheet Items

Participations sold represent interests in certain loans that we originated and subsequently sold to CT Large Loan 2006, Inc. (one of our investment management vehicles) 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 FASB Statement of Financial Accounting Standards No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities,” or FAS 140. As of March 31, 2009, we had five such participations sold with a total book balance of $292.7 million at a weighted average coupon of LIBOR plus 3.27% (3.77% at March 31, 2009) and a weighted average yield of LIBOR plus 3.28% (3.78% at March 31, 2009). 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 operations.

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.

Our counterparties in these transactions are large financial institutions and we are dependent upon the health of these counterparties and a functioning interest rate derivative market in order to effectively execute our hedging strategy.

The table below details our interest rate exposure as of March 31, 2009 and December 31, 2008:

Interest Rate Exposure
(in millions)	March 31, 2009			December 31, 2008
Value exposure to interest rates(1)
Fixed rate assets		$875			$880
Fixed rate debt		(410	)		(395	)
Interest rate swaps		(458	)		(466	)
Net fixed rate exposure		$7			$19
Weighted average life (fixed rate assets)	4.7 yrs			4.9 yrs
Weighted average coupon (fixed rate assets)		6.96	%		6.90	%
Cash flow exposure to interest rates(1)
Floating rate assets		$1,856			$1,949
Floating rate debt less cash		(1,807	)		(1,931	)
Interest rate swaps		458			466
Net floating rate exposure		$507			$484
Weighted average life (floating rate assets)	2.7 yrs			2.9 yrs
Weighted average coupon (floating rate assets) (2)		3.71	%		3.52	%
Net income impact from 100 bps change in LIBOR		$5.1			$4.8

(1)	All values are in terms of face or notional amounts, and include loans classified as held-for-sale.
(2)	Weighted average coupon assumes LIBOR at March 31, 2009 and December 31, 2008 of 0.50% and 0.44%, respectively. For $37.9 million face value ($33.7 million book value) of our securities, calculations use an effective rate based on cash received.

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Investment Management Overview

In addition to our balance sheet investment activities, we act as an investment manager for third parties. We have developed our investment management business to leverage our platform, generate fee revenue from investing third party capital and, in certain instances, earn co-investment income. Our active investment management mandates are described below:

· CT High Grade Partners II, LLC, or CT High Grade II, held its 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 sector and does not employ leverage. We earn a 0.40% per annum management fee on invested capital. On March 19, 2009, the fund’s investment period was extended to May 30, 2010.

· CT Opportunity Partners I, LP, or CTOPI, is a multi-investor private equity fund designed to invest in commercial real estate debt and equity, specifically taking advantage of the current dislocation in the commercial real estate capital markets. On July 14, 2008, CTOPI held its final closing completing its capital raise with $540 million total 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 (1.60% per annum of total equity commitments during the investment period and of invested capital thereafter) and incentive management fees (a net 17.7% of profits after a 9% preferred return and a 100% return of capital).

· CT High Grade MezzanineSM, or CT High Grade, closed in November 2006, with a single, related party investor committing $250 million. This separate account targets lower risk subordinate debt investments and does not utilize leverage; we earn management fees of 0.25% per annum on 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 2006, Inc., or CT Large Loan, closed in May 2006 with total equity commitments of $325 million from eight third party investors. The fund employs leverage and we earn management fees of 0.75% per annum of invested assets (capped at 1.5% on invested equity). The investment period ended in May 2008.

· CTX Fund I, L.P., or 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.

· CT Mezzanine Partners III, Inc., or Fund III, is a vehicle we co-sponsored with a joint venture partner that had an investment period that ran from 2003 to 2005. The fund 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, who receives 37.5% of Fund III’s incentive management fees. During the quarter ended March 31, 2009, the term of the fund was extended to June 2, 2011.

As of March 31, 2009, 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, as of March 31, 2009
(in millions)							Incentive Management Fee
		Total	Total Capital	Co-		Base	Company	Employee
	Type	Investments(1)	Commitments	Investment %		Management Fee	%	%
Investing:
CT High Grade II	Fund	$150	$667	—		0.40% (Assets)	N/A	N/A
CTOPI	Fund	287	540	4.63%	(2)	1.60% (Equity)	100%(3)	—%(4)
Liquidating:
CT High Grade	Sep. Acc.	344	350	—		0.25% (Assets)	N/A	N/A
CT Large Loan	Fund	275	325	—	(5)	0.75% (Assets)(6)	N/A	N/A
CTX Fund	Fund	8	10	—	(5)	(Assets)(7)	100%(7)	—%(7)
Fund III	Fund	44	425	4.71%		1.42% (Equity)	57%(8)	43%(4)

(1)	Represents total investments, on a cash basis, as of period-end.
(2)	We have committed to invest $25 million in CTOPI.
(3)	CTIMCO earns net incentive management fees of 17.7% of profits after a 9% preferred return on capital and a 100% return of capital, subject to a catch-up.

(4) Portions of the Fund III incentive management fees received by us have been allocated to our employees as long-term performance awards. We have not allocated any of the CTOPI incentive management fee to employees as of March 31, 2009.

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(5)	We co-invest on a pari passu, asset by asset basis with CT Large Loan and CTX Fund.
(6)	Capped at 1.5% of equity.
(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. As of March 31, 2009, we manage one such $500 million CDO and earn base management fees of 0.10% of assets and have the potential to earn incentive management fees.
(8)	CTIMCO (62.5%) and our co-sponsor (37.5%) earn net incentive management fees of 18.9% of profits after a 10% preferred return on capital and a 100% return of capital, subject to a catch-up.

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.

Results of Operations

Comparison of Results of Operations: Three Months Ended March 31, 2009 vs. March 31, 2008
(in thousands, except per share data)
	2009			2008			$ Change			% Change
Income from loans and other investments:
Interest and related income	$	33,239		$	56,554		$	(23,315	)		(41.2	%)
Interest and related expenses		21,268			37,944			(16,676	)		(43.9	)
Income from loans and other investments, net		11,971			18,610			(6,639	)		(35.7	)
Other revenues:
Management fees		2,879			2,197			682			31.0
Servicing fees		1,179			178			1,001			562.4
Other interest income		128			188			(60	)		(31.9	)
Total other revenues		4,186			2,563			1,623			63.3
Other expenses:
General and administrative		8,457			6,901			1,556			22.5
Depreciation and amortization		7			105			(98	)		(93.3	)
Total other expenses		8,464			7,006			1,458			20.81
Total other-than-temporary impairments on securities		(14,646	)		—			(14,646	)		N/A
Portion of other-than-temporary impairments on securities recognized in other comprehensive income		5,624			—			5,624			N/A
Impairments on real estate held-for-sale		(1,333	)		—			(1,333	)		N/A
Net impairments recognized in earnings		(10,355	)		—			(10,355	)		N/A
Provision for possible credit losses		(58,763	)		—			(58,763	)		N/A
Valuation allowance on loans held-for-sale		(10,363	)		—			(10,363	)		N/A
(Loss)/income from equity investments		(1,766	)		7			(1,773	)		(100.0	)
Income tax benefit		(408	)		(599	)		191			(31.9	)
Net (loss)/income	$	(73,146	)	$	14,773		$	(87,919	)		(595.1	%)
Net (loss)/income per share - diluted	$	(3.28	)	$	0.82		$	(4.10	)		(499.9	%)
Dividend per share	$	—		$	0.80		$	(0.80	)		(100.0	%)
Average LIBOR		0.46	%		3.31	%		(2.85	%)		(86.1	%)

Income from loans and other investments, net

A decline in Interest Earning Assets ($602 million or 19% from March 31, 2008 to March 31, 2009) and an 86% decrease in average LIBOR contributed to a $23.3 million, or 41%, decrease in interest income between the first quarter of 2008 and the first quarter of 2009. Lower LIBOR and a decrease in leverage of $398.0 million, or 17%, from March 31, 2008 to March 31, 2009 resulted in a $16.7 million, or 44%, decrease in interest expense for the period. On a net basis, net interest income decreased by $6.6 million, or 36%.

Management fees

Base management fees from our investment management business increased $682,000, or 31%, during the first quarter of 2009 compared with the first quarter of 2008. The increase was attributed primarily to an increase of $920,000 in fees from CTOPI due to increased capital commitments, $146,000 in new fee income from CT High Grade II, partially offset by a decrease in fee income from CT Large Loan.

Servicing fees

Servicing fees increased $1.0 million in the first quarter of 2009 compared with the first quarter of 2008, primarily due to a one-time special servicing fee of $1.2 million received by CTIMCO.

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General and administrative expenses

General and administrative expenses include personnel costs, operating expenses and professional fees. Total general and administrative expenses increased $1.6 million, or 23%, between the first quarter of 2008 and the first quarter of 2009. The increase in 2009 was a result of $3.1 million in non-recurring costs associated with our debt restructuring partially offset by a decrease of $1.7 million in personnel costs.

Depreciation and amortization

Depreciation and amortization decreased by $98,000, or 93%, from the first quarter of 2008 compared to the first quarter of 2009. The decrease was primarily due to $79,000 of capitalized costs from Fund III being written off in the first quarter of 2008 and lower levels of fixed assets during 2009.

Net other-than-temporary impairments recognized in earnings

During the first quarter of 2009, we recorded an other-than-temporary impairment of $1.3 million on our Real estate held-for-sale. We also recorded a gross other-than-temporary impairment of $14.6 million on six of our Securities due to an adverse change in our cash flow expectations on those Securities. Of this, $5.6 million was included in other comprehensive income, resulting in a net $9.0 million other-than-temporary impairment included in earnings for the quarter . No other-than-temporary impairments were recorded during the first quarter of 2008.

Provision for possible credit losses

During the first quarter of 2009, we recorded an aggregate $58.8 million provision for possible credit losses against eight loans that we classified as non-performing. No provision for possible credit losses was recorded during the first quarter of 2008.

Valuation allowance on loans held-for-sale

During the first quarter of 2009,we recorded a $10.4 million valuation allowance against two loans that we classified as held-for-sale to reflect these assets at fair value. No loans were classified as held-for-sale as of March 31, 2008.

(Loss)/income from equity investments

The loss from equity investments during the first quarter of 2009 resulted from our share of losses at CTOPI and Fund III. Our share of losses from CTOPI was $1.6 million, primarily due to fair value adjustments on the underlying investments. The income from equity investments in the first quarter of 2008 resulted primarily from our share of operating income/(loss) at Fund III and CTOPI.

Income tax benefit

During the first quarter of 2009, we received $408,000 in tax refunds that we recorded as an offset to income tax expense. CTIMCO, our investment management subsidiary, is a taxable REIT subsidiary and subject to taxes on its earnings. In the first quarter of 2008, CTIMCO recorded an operating loss before income taxes, which resulted in a GAAP income tax benefit of $599,000, all of which we recorded.

Net (loss)/income

Net income decreased by $87.9 million from the first quarter of 2008 compared to the first quarter of 2009. The decrease in net income was primarily a result of $10.4 million in other-than-temporary impairments, $58.8 million in provisions for possible credit losses, and a $10.4 million valuation allowance recorded against loans held-for-sale. We also experienced a $6.6 million decrease in net interest margin due to lower levels of interest earning assets and lower LIBOR. On a diluted per share basis, net (loss)/income was ($3.28) and $0.82 in the first quarter of 2009 and 2008, respectively.

Dividends

We did not pay a dividend in the first quarter of 2009. In the first quarter of 2008 we paid a dividend of $0.80.

Liquidity and Capital Resources

Sources of liquidity as of March 31, 2009 include unrestricted cash in the amount of $18.3 million, net operating income, repayments under Loans and Securities and asset disposition proceeds. Uses of liquidity include unfunded loan commitments of $19.7 million, unfunded capital commitments to our managed funds of $19.2 million, dividends necessary to maintain our REIT status, and debt repayments. We believe our current sources of capital, coupled with our expectations regarding potential asset dispositions and other transactions, will be adequate to meet both short-term and medium-term cash requirements.

Our liquidity and capital resources outlook was significantly impacted by the restructuring of our debt obligations during the first quarter of 2009. We agreed to pay each of our participating secured lenders additional principal amortization equal to 65% of the net interest margin and 100% of the principal proceeds from assets in their collateral pool, which amounts would otherwise have been free cashflow available to the Company. We have also agreed to make minimum aggregate principal payments to each of our participating secured lenders equal to 20% of our outstanding borrowings as of March 16, 2009, the date of our debt restructuring, to qualify for the first one year extension option under the restructured facilities in March of 2010. In addition to the required repayments to our secured lenders, we agreed to make a minimum $5.0 million repayment under our senior unsecured credit facility by March of 2010.

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Cash Flows

We experienced a net decrease in cash of $27.1 million for the three months ended March 31, 2009, compared to a net increase of $96.7 million for the three months ended March 31, 2008.

Cash provided by operating activities during the three months ended March 31, 2009 was $6.7 million, compared to cash provided by operating activities of $11.8 million during the same period of 2008. The change was primarily due to a decrease in our net interest margin and non-recurring restructuring costs incurred in the first quarter of 2009

For the three months ended March 31, 2009, cash provided by investing activities was $3.9 million, compared to $300,000 used in investing activities during the same period in 2008. The change was primarily due to a decrease in originations, acquisitions, and additional fundings of $22.5 million during the three months ended March 31, 2009 compared to the three months ended March 31, 2008, a decrease in principal repayments of $26.9 million for the same periods, and a net decrease in restricted cash investing activities of $10.1 million.

For the three months ended March 31, 2009, cash used in financing activities was $37.7 million, compared to $85.2 million provided by financing activities during the same period in 2008. The change was due to a variety of factors including $112.6 million of proceeds received from our public offering of common shares in the first quarter of 2008, $25.0 million of proceeds received from our credit facility in the first quarter of 2008, a net increase of $40.1 million in repayments on repurchase obligations, a net increase of $9.5 million in repayments on our collateralized debt obligations and an $18.7 million decrease in restricted cash financing activities during the three months ended March 31, 2009.

Capitalization

Our authorized capital stock consists of 100,000,000 shares of $0.01 par value class A common stock, of which 22,062,814 shares were issued and outstanding as of March 31, 2009, and 100,000,000 shares of preferred stock, none of which were outstanding as of March 31, 2009.

Pursuant to the terms of our debt restructuring on March 16, 2009, we issued JPMorgan, Morgan Stanley and Citigroup warrants to purchase 3,479,691 shares of our class A common stock at an exercise price of $1.79 per share, the closing bid price on the New York Stock Exchange on March 13, 2009. The warrants will become exercisable on March 16, 2012 and expire on March 16, 2019, and may be exercised through a cashless exercise.

Repurchase Obligations and Secured Debt

As of March 31, 2009, we were party to three master repurchase agreements with three counterparties, with aggregate total outstanding borrowings of $542.8 million. We were also a party to a secured loan agreement with borrowings of $18.0 million as of March 31, 2009. Our total borrowings as of March 31, 2009 under master repurchase agreements and our secured loan agreement were $560.9 million. The terms of these agreements are described in Note 9 to the consolidated financial statements.

Collateralized Debt Obligations

As of March 31, 2009, we had CDOs outstanding from four separate issuances with a total face value of $1.1 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. On a combined basis, our CDOs provide us with $1.1 billion of non-recourse, non-mark-to-market, index matched financing at a weighted average cash cost of 0.53% over the applicable indices (2.00% at March 31, 2009) and a weighted average all-in cost of 0.71% over the applicable indices (2.18% at March 31, 2009).

CDO I and CDO II each have interest coverage and overcollateralization tests, which if breached provide for hyper-amortization of the senior notes sold by a redirection of cash flow that would otherwise have been paid to the subordinate classes, some of which are owned by us. If such tests are in breach for six consecutive months, the reinvesting feature of the CDO is suspended. The hyper-amortization would cease once the test is back in compliance. The overcollateralization tests are a function of impairments to the CDO collateral. Furthermore, all four of our CDOs provide for the re-classification of interest proceeds from impaired collateral as principal proceeds. During the first quarter of 2009, we were informed by our CDO trustee of impairments due to rating agency downgrades of certain of the securities which serve as collateral in all of our CDOs. The impairments resulted in a breach of the CDO II overcollateralization test and the reclassification of interest proceeds from certain securities as principal proceeds in all four of our CDOs.

Subsequent to quarter end, additional ratings downgrades on securities combined with non-performing loans which serve as collateral for CDO I resulted in a breach of that CDO’s overcollateralization test. As described above, this breach will cause the redirection of cash flow that would otherwise have been paid to the subordinate classes of the CDO, some of which are owned by the Company.

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Senior Unsecured Credit Facility

On March 16, 2009, we entered into an amended and restated senior unsecured credit agreement governing our $100.0 million term loan from WestLB AG, New York Branch, participant and administrative agent, Fortis Capital Corp., Wells Fargo Bank, N.A., JPMorgan Chase Bank, N.A., Morgan Stanley Bank, N.A. and Deutsche Bank Trust Company Americas, which we collectively refer to as the senior unsecured lenders. As of March 31, 2009, we had $100.0 million outstanding under our senior unsecured credit facility at a cost of LIBOR plus 3.00%. The terms of this agreement is described in Note 9 to the consolidated financial statements.

Junior Subordinated Notes

On March 16, 2009, we reached an agreement with Taberna Preferred Funding V, Ltd., Taberna Preferred Funding VI, Ltd., Taberna Preferred Funding VIII, Ltd. and Taberna Preferred Funding IX, Ltd., or collectively Taberna, to issue new junior subordinated notes in exchange for $50.0 million face amount of trust preferred securities issued through our statutory trust subsidiary CT Preferred Trust I held by affiliates of Taberna, which we refer to as the Trust I Securities, and $53.1 million face amount of trust preferred securities issued through our statutory trust subsidiary CT Preferred Trust II held by affiliates of Taberna, which we refer to as the Trust II Securities. We refer to the Trust I Securities and the Trust II Securities together as the Trust Securities. The Trust Securities were backed by and recorded as junior subordinated notes issued by us with terms that mirror the Trust Securities. The terms of the $118.6 million aggregate principal amount of new junior subordinated notes issued pursuant to this exchange are described in Note 9 to the consolidated financial statements.

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Contractual Obligations

The following table sets forth information about certain of our contractual obligations as of March 31, 2009:

Contractual Obligations(1)
(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	$	562	$	78	$	466	$	18	$	—
Collateralized debt obligations		1,141		—		—		—		1,141
Senior unsecured credit facility		100		5		95		—		—
Junior subordinated notes		141		—		—		—		141
Total long-term debt obligations		1,944		83		561		18		1,282
Unfunded commitments
Loans		20		5		5		10		—
Equity investments		19		—		19		—		—
Total unfunded commitments		39		5		24		10		—
Operating lease obligations		14		1		3		3		7
Total	$	1,997	$	89	$	588	$	31	$	1,289

(1) We are also subject to interest rate swaps for which we cannot estimate future payments due.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements.

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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 risk factors 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.

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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 minimizing 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. Each derivative used as a hedge is matched with an asset or liability with which it is expected to have a high correlation. 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 March 31, 2009, a 100 basis point change in LIBOR would impact our net income by approximately $5.1 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 to 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.

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The following table provides information about our financial instruments that are sensitive to changes in interest rates as of March 31, 2009. For financial assets and debt obligations, the table presents cash flows (in certain cases, face adjusted for expected losses) 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.

	Expected Maturity/Repayment Dates (1)
	2009	2010	2011	2012	2013	Thereafter	Total	Fair Value
	(in thousands)
Assets:
Securities
Fixed rate	$39,197	$17,803	$96,524	$106,859	$177,712	$256,515	$694,610	$476,282
Interest rate(2)	6.60%	7.28%	7.37%	7.04%	6.85%	6.12%	6.68%
Variable rate	$20,810	$22,241	$17,995	$90,295	$13,500	$1,584	$166,425	$62,140
Interest rate(2)(3)	3.30%	2.31%	2.09%	4.75%	7.35%	4.45%	4.16%
Loans receivable, net
Fixed rate	$6,290	$1,283	$27,831	$1,160	$1,246	$94,160	$131,970	$132,102
Interest rate(2)	8.49%	8.05%	8.46%	7.79%	7.78%	7.86%	8.02%
Variable rate	$41,167	$134,982	$730,542	$553,106	$89,905	$11,358	$1,561,060	$1,093,692
Interest rate(2)	4.22%	4.13%	3.20%	3.80%	4.23%	2.46%	3.58%
Loans held-for-sale
Fixed rate	$—	$—	$—	$—	$—	$27,500	$27,500	$18,014
Interest rate(2)	—	—	—	—	—	8.41%	8.41%
Variable rate	$—	$—	$—	$14,444	$—	$—	$14,444	$12,000
Interest rate(2)	—	—	—	5.00%	—	—	5.00%
Debt Obligations:
Repurchase obligations
Variable rate (4)	$—	$78,403	$465,357	$—	$18,014	$—	$561,774	$561,774
Interest rate(2)	—	2.15%	2.10%	—	2.00%	—	2.10%
CDOs
Fixed rate	$7,277	$5,711	$42,055	$58,747	$112,164	$43,021	$268,975	$114,912
Interest rate(2)	5.41%	5.46%	5.16%	5.16%	5.19%	5.98%	5.32%
Variable rate	$50,292	$57,945	$185,979	$359,383	$92,651	$125,421	$871,671	$262,949
Interest rate(2)	0.82%	0.82%	0.82%	0.94%	1.51%	1.13%	0.99%
Senior unsecured credit facility
Fixed rate	$—	$5,000	$95,000	$—	$—	$—	$100,000	$53,521
Interest rate(2)	—	3.50%	3.50%	—	—	—	3.50%
Junior subordinated notes
Fixed rate	$—	$—	$—	$—	$—	$141,147	$141,147	$33,523
Interest rate(2)	—	—	—	—	—	1.96%	1.96%
Participations sold
Variable rate	$—	$—	$91,220	$201,515	$—	$—	$292,735	$209,414
Interest rate(2)	—	—	2.37%	4.40%	—	—	3.77%
Derivative Financial Instruments:
Interest rate swaps
Notional amounts	$40,397	$13,383	$46,400	$81,886	$39,947	$235,529	$457,542	$(44,355)
Fixed pay rate(2)	4.71%	5.06%	4.65%	4.98%	4.97%	5.06%	4.96%
Variable receive rate(2)	0.55%	0.55%	0.54%	0.55%	0.55%	0.55%	0.55%

(1)	Expected repayment dates and amounts are based on contractual agreements as of March 31, 2009, and do not give effect to (i) the subsequent events described in Note 20 to the consolidated financial statements, or (ii) other transactions which may be expected to occur in the future.
(2)	Represents weighted average rates where applicable. Variable rates are based on LIBOR of 0.50%, which is the rate as of March 31, 2009.
(3)	For $37.9 million face value ($33.7 million book value) of our securities, calculations use an effective rate based on cash received.
(4)	As discussed in Note 16 to the consolidated financial statements, due to the unique nature of our restructured repurchase obligations and secured debt, it is not practicable to estimate a fair value for these instruments. Accordingly, the amount included in the table above represents the current principal amount of these obligations.

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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 are reasonably likely to materially affect, our internal control over financial reporting.

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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

Pursuant to the terms of our debt restructuring on March 16, 2009, we issued JPMorgan, Morgan Stanley and Citigroup warrants to purchase 3,479,691 shares of our class A common stock at an exercise price of $1.79 per share, which is equal to the closing bid price on the New York Stock Exchange on March 13, 2009. The warrants will become exercisable on March 16, 2012 and expire on March 16, 2019, and may be exercised through a cashless exercise.

The warrants were issued in reliance upon the exemption provided in Section 4(2) of the Securities Act of 1933, as amended, and the safe harbor of Rule 506 under Regulation D. Any certificates representing such securities will contain restrictive legends preventing sale, transfer or other disposition, unless registered under the Securities Act of 1933. No form of general solicitation or general advertising was conducted in connection with the issuance.

ITEM 3: Defaults Upon Senior Securities

None.

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

None.

ITEM 5: Other Information

None.

- 52 - -

ITEM 6: Exhibits

	3.1a	Charter of the Capital Trust, Inc. (filed as Exhibit 3.1.a to Capital Trust, Inc.’s Current Report on Form 8-K (File No. 1-14788) filed on April 2, 2003 and incorporated herein by reference).
	3.1b	Certificate of Notice (filed as Exhibit 3.1 to Capital Trust, Inc.’s Current Report on Form 8-K (File No. 1-14788) filed on February 27, 2007 and incorporated herein by reference).
	3.2	Second Amended and Restated By-Laws of Capital Trust, Inc. (filed as Exhibit 3.2 to Capital Trust, Inc.’s Current Report on Form 8-K (File No. 1-4788) filed on February 27, 2007 and incorporated herein by reference).
·	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, 2008, filed on March 16, 2009 with the Securities and Exchange Commission.

________________________

· Filed herewith

- 53 - -

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.
May5, 2009	/s/ John R. Klopp
Date	John R. Klopp
	Chief Executive Officer
May5, 2009	/s/ Geoffrey G. Jervis
Date	Geoffrey G. Jervis
	Chief Financial Officer

- 54 - -

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 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 functions):

(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: May 5, 2009

  /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 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 functions):

(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: May 5, 2009

  /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 March 31, 2009 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 results of operations of the Company.

/s/ John R. Klopp   

John R. Klopp

Chief Executive Officer

May 5, 2009

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 March 31, 2009 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 results of operations of the Company.

/s/ Geoffrey G. Jervis   

Geoffrey G. Jervis

Chief Financial Officer

May 5, 2009

EX-99.1

Exhibit 99.1

RISK FACTORS

Risks Related to Our Investment Activities

Our efforts to stabilize our business with the restructuring of our debt obligations may not be successful as our balance sheet portfolio is subject to the risk of further deterioration and ongoing turmoil in the financial markets.

We have previously invested on a leveraged basis, which magnifies the consequences of a deterioration in the performance of our portfolio of investments. Even with the restructuring of our debt obligations, we may not be able to satisfy our obligations to our lenders and maintain the stability we intend from our restructuring. The impact of the economic recession on the commercial real estate sector in general, and our portfolio in particular, cannot be predicted and we expect to experience defaults by borrowers and other impairments to our investments. These events may trigger defaults under our restructured debt obligations that may result in the exercise of remedies that cause severe losses in the book value of our investments. Therefore, an investment in our class A common stock is subject to a high degree of risk.

Our restructured debt obligations with our lenders prohibit new balance sheet investment activities, which prevents us from growing our balance sheet portfolio.

Following a series of negotiations that were precipitated by our decision to conserve our cash resources and not meet further margin calls made by our secured lenders, we have restructured our debt obligations with our participating secured and unsecured lenders, a development that has consequences to our business. Under the terms of the restructured debt obligations, we are prohibited from acquiring or originating new investments. This restriction precludes us from growing our balance sheet portfolio at a time when investment opportunities that provide attractive risk-adjusted returns may otherwise be available to us. Our interest earning investments will continue to be reduced which will negatively impact our net investment income. There can be no assurance that we will be able to retire completely or refinance our restructured debt obligations so that we can resume our balance sheet investment activities.

Our liquidity will be impacted by our restructured debt obligations.

Our restructured debt obligations further reduce our current liquidity as a result of up front payments and ongoing required amortization and additional interest payments. The reduction in liquidity may impair our ability to meet our obligations and, given the covenants contained in our restructured debt obligations, our ability to improve our liquidity position will be constrained. In addition, we must maintain a minimum of $7.0 million in liquidity during 2009 and $5.0 million thereafter, a requirement that may limit our ability to make commitments to investment management vehicles and, ultimately, that we may not be able to achieve.

Our restructured debt obligations are subject to debt to collateral value ratio maintenance covenants for which we can provide no assurance as to our future compliance.

Under the terms of ourdebtrestructuring, we eliminated the cash margin call provisions and amended the mark-to-market provisions that were in effect under the original terms of the secured credit facilities. Under the revised secured credit facilities, going forward, collateral value will be determined by our lenders based upon changes in the performance of the underlying real estate collateralas opposed to changes in market spreads underthe original terms. Beginning September 2009, or earlier in the case of defaults on loans that collateralizeany of our secured credit facilities, each collateral pool will be valued monthly on this basis. If the ratio of a secured lender’s total outstanding secured credit facility balance to total collateral value exceeds 1.15x the ratio calculated as of the effective date of the amended agreements, we will be required to liquidate collateral and reduce the borrowings or post other collateral to bring the ratio back into compliance with the prescribed ratio. There can be no assurances that we will pass these tests and, as the commercial real estate markets continue to deteriorate,we expect that passing these tests will become more difficult. If we fail these tests, sales of assets to return to compliance will be extremely difficult in light of the lack of liquidity for the types of assets that serve as collateral and, even if we locate buyers forthe collateral, the sales prices may be insufficient to reduce the ratio of outstanding secured credit facility balance to total collateral value. Failure to remedy these tests is an event of default under our secured credit facilities and would trigger a cross default under other of our financial instruments. Any such action would have a material adverse impact on our business and financial condition and would negatively impact our share price.

The U.S. and other financial markets have been in turmoil and the U.S. and other economies in which we operate are in the midst of an economic recession which can be expected to negatively impact our operations.

The U.S. and other financial markets have been experiencing extreme dislocations and a severe contraction in available liquidity globally as important segments of the credit markets are frozen as lenders are unwilling or unable to originate new credit. Global financial markets have been disrupted by, among other things, volatility in security prices, credit rating downgrades, the failure and near failure of a number of large financial institutions and declining valuations, and this disruption has been acute in real estate related markets. This disruption has lead to a decline in business and consumer confidence and increased unemployment and has precipitated an economic recession around the globe. As a consequence, owners and operators of commercial real estate that secure or back our investments may experience distress and real estate values in the U.S. or elsewhere may decline. We are unable to predict the likely duration or severity of the current disruption in financial markets and adverse economic conditions which could materially and adversely affect our business, financial condition and results of operations, including leading to significant impairment to our assets and our ability to generate income.

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 financial markets, including the lack of available debt financing for commercial real estate;

·   tenant bankruptcies;

·   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;

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·   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 or collateralizing 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. In addition, our restructured debt obligations contain covenants which limit the amount of protective investments we may make to preserve value in collateral securing our investments.

A prolonged economic slowdown, a lengthy or severe recession, a credit crisis, or declining real estate values could harm our operations or may adversely affect our liquidity.

We believe the risks associated with our business are more severe during periods of economic slowdown or recession like those we are currently experiencing, particularly if these periods are accompanied by declining real estate values. The recent dislocation of the global credit markets and anticipated collateral consequences to commercial activity of businesses unable to finance their operations as required may lead to a weakening of general economic conditions and precipitate declines in real estate values and otherwise exacerbate troubled borrowers’ ability to repay loans in our portfolio or backing our CMBS. 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 as the real estate economy weakens. Continued weakened economic conditions could negatively affect occupancy levels and rental rates in the markets in which the collateral supporting our investments are located, which, in turn, may have a material adverse impact on our cash flows and operating results of our borrowers. 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 share price.

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 or achieve our target rate of returns.

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. Under the terms of the restructured debt obligations, we are required to cease our balance sheet investment activities and may not incur any further indebtedness unless used to retire the debt due our lenders. As a result, we are precluded from carrying out our historical leveraged investment strategy for our balance sheet.

We have historically obtained leverage through the issuance of CDOs, repurchase agreements and other borrowings. 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, and there can be no assurance that these agreements will be renewed or extended at expiration. Our ability to obtain financing through the CDO market, which has been closed since 2007, is subject to conditions in the financial 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. In particular, recent turmoil in the credit markets has severely impeded the ability of borrowers, even well capitalized borrowers, to obtain credit from lenders operating in virtually frozen credit markets, and it can be expected that this development will negatively impact our ability to finance our assets. At this time, we are unable to refinance our restructured debt obligations with our lenders. There can be no assurance that U.S. and non-U.S. government efforts to improve conditions in the credit markets will be successful in the short term or at all, and the amount of leverage available from our investment management vehicles’lenders may be significantly reduced or, in certain cases, even eliminated.

3

We are obligated to fund unfunded commitments under our loan agreements.

We are required to fund unfunded obligations to our borrowers. Historically, prior to our restructuring, we relied upon our lenders to fund a portion of these commitments. Going forward, we can rely only on our immediately available liquidity to meet these commitments. If we do not have the liquidity in excess of the minimum amounts required under our restructured debt obligations, and the lenders do not consent to our obtaining additional financing, if available, we would default on these commitments and potentially lose value in these investments and expose ourselves to litigation.

We are subject to counterparty risk associated with our debt obligations and interest rate swaps.

Our counterparties for these critical financial relationships include both domestic and international financial institutions. Many of them have been severely impacted by the credit market turmoil and have been experiencing financial pressures. In some cases, our counterparties have filed bankruptcy.

We are subject to the general risk of a leveraged investment strategy and the specific risks of our restructured indebtedness.

Our restructured secured debt obligations are secured by our investments, which are subject to being revalued by our credit providers. If the value of the underlying property collateralizing our investments declines, we may be required to liquidate our investments, the impact of which could be magnified if such a liquidation is at a commercially inopportune time, such as the market environment we are currently experiencing. In addition, the occurrence of any event or condition which causes any obligation or liability of more than $1.0 million to become due prior to its scheduled maturity or any monetary default under our restructured debt obligations if the amount of such obligation is at least $1.0 million could constitute a cross-default under our restructured debt obligations. If a cross-default occurs, the maturity of almost all of our indebtedness could be accelerated and become immediately due and payable.

We may guarantee some of our leverage and contingent obligations.

We guarantee the performance of our obligations, including, but not limited to, 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 indebtedness, such as our credit and derivative agreements, we make certain representations, warranties and affirmative and negative covenants that restrict our ability to operate while still utilizing those sources of credit. Currently, our restructured debt obligations prohibit us from acquiring or originating new balance sheet investments except, subject to certain limitations, co-investments in our investment management vehicles or protective investments to defend existing collateral assets on our balance sheet, and from incurring additional indebtedness unless used to pay down such obligations. In addition, such representations, warranties and covenants include, but are not limited to covenants which:

4

·   limit the total cash compensation to all employees and, specifically with respect to our chief executive officer, chief operating officer and chief financial officer, freeze their base salaries at 2008 levels, and require cash bonuses to any of them to be approved by a committee comprised of one representative designated by the secured lenders, the administrative agent under the senior unsecured credit facility and the chairman of our board of directors;

·   prohibit the payment of cash dividends to our common shareholders except to the minimum extent necessary to maintain our REIT status;

·   require us to maintain a minimum amount of liquidity, as defined, of $7.0 million in 2009 and $5.0 million thereafter;

·   trigger an event of default if both our chief executive officer and chief operating officer cease their current employment with us during the term of the agreement and we fail to hire a replacement acceptable to the lenders; and

·   trigger an event of default, if any event or condition occurs which causes any obligation or liability of more than $1.0 million to become due prior to its scheduled maturity or any monetary default under our restructured debt obligations if the amount of such obligation is at least $1.0 million.

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 opportunitiesfor our managed vehicles and our balance sheet assuming we are able to resume balance sheet investment activity. In general, the availability of desirable 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.

5

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 investments include 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. 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. 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.

Accounting for derivatives under GAAP is extremely complicated. Any failure by us to account for our derivatives properly in accordance with GAAP in our consolidated 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. 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. 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 are 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

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

6

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, such as the recent volatility of the financial markets, and may have a significant effect on the actual rate of return received on an investment.

As we acquire or originate investments when permittedfor 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 effectively eliminated.

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 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 may have a negative impact on our cash flow.

The terms of CDOs 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. Certain of our CDOs provide that, if defaults, losses, or rating agency downgrades cause a decline in collateral value or cash flow levels, the cash flow otherwise payable to our retained subordinated classes may be redirected to repay classes of CDOs senior to ours until the tests are brought in compliance. In certain instances, we have breached these tests and cash flow has been redirected and there can be no assurances that this will not occur on all of our CDOs. Once breached there is no certainty about when or if the cash flow redirection will remedy the tests’ failure or that cash flow will be restored to our subordinated classes.

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.

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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.

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 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 have difficulty or be unable to sell some of our loans and commercial mortgage backed securities.

A prolonged period of frozen capital markets and an out of favor real estate sector may prevent us from selling our loans and CMBS. Given the terms of our recent restructuring, we may be forced to sell assets in order to meet required debt reduction levels. If the market for real estate loans and CMBS remains in its current state, this may be difficult or impossible, causing further losses or events of default.

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.

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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.

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 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 and Management of CDOs

Our recent balance sheet restructuring may adversely impact our investment management business.

In large part, our ability to raise capital and garner other investment management and advisory business is dependent upon our reputation as a balance sheet manager and credit underwriter, as well as the ability to demonstrate that we have the resources to execute mandates. Our recent restructuring will likely negatively impact our abilities in this regard.

We are subject to risks and uncertainties associated with operating our investment management business, and we may not achieve 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 develop and operate 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.

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

We face significant competition from large financial and other institutions that have proven track records in marketing and managing 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.

CTIMCO’s role as collateral manager for our CDOs and investment manager for our funds may expose us to liabilities to investors.

We are subject to potential liabilities to investors as a result of CTIMCO’s role as collateral manager for our CDOs and our investment management business generally. In serving in such roles, we could be subject to claims by CDO investors and investors in our funds that we did not act in accordance with our duties under our CDO and investment fund documentation or that we were negligent in taking or refraining from taking actions with respect to the underlying collateral in our CDOs or in making investments. In particular, the discretion that we exercise in managing the collateral for our CDOs and the investments in our investment management business could result in liability due to the current negative conditions in the commercial real estate market and the inherent uncertainties surrounding the course of action that will result in the best long term results with respect to such collateral and investments. This risk could be increased due to the affiliated nature of our roles. If we were found liable for our actions as collateral manager or investment manager and we were required to pay significant damages to our CDO and investment advisory investors, our financial condition could be materially adversely effected.

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 our chief executive officer, John R. Klopp, and our chief credit officer, Thomas C. Ruffing, were scheduled to expire on December 31, 2008, unless further extended, but prior to that date we entered in agreements with them committing the parties to determine whether or not to extend or renew their respective employment agreements and, if so extended or renewed, to execute amended employment agreements reflecting such change in the first quarter of 2009. The employment agreement with our chief operating officer, Stephen D. Plavin, would have expired on December 28, 2008, had we not exercised our option to extend for an additional twelve months. The employment agreement with 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. There can be no assurance that Messrs. Klopp and Ruffing will enter into amended employment agreements extending their employment with us. In addition, the departure of both Mr. Klopp and Mr. Plavin from their employment with us constitutes an event of default under our restructured debt obligations unless a suitable replacement acceptable to the lenders is hired by us.

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Our ability to compensate our employees is limited by our restructured debt obligations.

Our restructured debt obligations limit the aggregate cash compensation we are able to pay our employees (excluding our chief executive officer, chief operating officer and chief financial officer), to 2008 aggregate compensation levels. In the case of our chief executive officer, chief operating officer and chief financial officer, salaries are frozen at 2008 levels and cash bonus compensation must be approved by our lenders. This may impact our ability to retain our employees or attract new employees.

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 once our balance sheet investment activity resumes 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.

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.

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Risks Relating to Our Class A Common Stock

Sales or other dilution of our equity may adversely affect the market price of our class A common stock.

In connection with restructuring our debt obligations, we issued warrants to purchase 3,479,691 shares of our class A common stock, which represents approximately 16% of our outstanding class A common stock as of April 29, 2009. The market price of our class A common stock could decline as a result of sales of a large number of shares of class A common stock acquired upon exercise of the warrants in the market. If the warrants are exercised, the issuance of additional shares of class A common stock would dilute the ownership interest of our existing shareholders.

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 2,599,491 shares of our class A common stock representing approximately 11.8% of our outstanding class A common stock as of April 29, 2009. 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 April 29, 2009. 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 acquirer or its affiliate and us are prohibited for five years after the most recent date on which the acquirer 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 acquirer or its affiliate attaining such status, such as the issuance of shares of our class A common stock to WRBC, the acquirer 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 acquirer, would entitle the acquirer 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 acquirer 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 acquirer 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 acquirer 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 price of our class A common stock may be impacted by many factors.

As with any public company, a number of factors may impact the trading 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;

·   the market’s perception of our ability to successfully manage our portfolio and our recent restructuring; and;

·   the general economic environment and the commercial real estate property and capital markets.

Our restructured debt obligations restrict us from paying cash dividends, which reduces the attractiveness of an investment in our class A common stock.

The restrictions on our inability to pay cash dividends, except in a limited manner, will reduce the current dividend yield on our class A common stock and this can negatively impact the price of our class A common stock as investors seeking current income pursue alternative investments.

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 expect in the future when we generate taxable income 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 our compliance with other requirements, 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. There have been recent changes to the Internal Revenue Code that would allow us to pay required dividends in the form of additional shares of common stock equal in value up to 90% of the required dividend. We expect that as we undertake efforts to conserve cash and enhance our liquidity and comply with our restructured debt obligationscovenants, future required dividends on our class A common stock will be paid in the form of class A common stock to the fullest extent permitted. There can be no assurance as to when we will no longer be subject to debt obligation covenants or will cease our efforts to conserve cash and enhance liquidity to an extent we believe positions us to resume the payment of dividends completely or substantially in cash.

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;

·   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;

·   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; and

·   we generally would not be eligible to requalify as a REIT for four full taxable years.

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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. Our restructured debt obligations may cause us to recognize taxable income without any corresponding cash income and we may be required to distribute additional dividends in cash and/or class A common stock.

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