Fair Values

3 Months Ended

Sep. 30, 2011

Notes to Financial Statements

Fair Values

Note 17. Fair Values

Assets and Liabilities Recorded at Fair Value

Certain of our assets and liabilities are measured at fair value either (i) on a recurring basis, as of each quarter-end, or (ii) on a nonrecurring basis, as a result of impairment or other events. Generally, loans held-for-sale, real estate held-for-sale, and interest rate swaps are measured at fair value on a recurring basis, while impaired loans and securities are measured at fair value on a nonrecurring basis. These fair values are determined using a variety of inputs and methodologies, which are detailed below.

As discussed in Note 2, the “Fair Value Measurement and Disclosures” Topic of the Codification 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 assets and liabilities, including those of CT Legacy REIT and our consolidated securitization vehicles, which are recorded at fair value as of September 30, 2011 (in thousands):

				Fair Value Measurements Using
				Quoted Prices		Other			Significant
	Total			in Active		Observable			Unobservable
	Fair Value at			Markets		Inputs			Inputs
	September 30, 2011			(Level 1)		(Level 2)			(Level 3)
Measured on a recurring basis:
CT Legacy REIT's loans held-for-sale		$32,107			$—		$—			$32,107
Securitization vehicles' real estate held-for-sale		$10,342			$—		$—			$10,342
CT Legacy REIT's interest rate hedge liabilities		($9,326	)		$—		($9,326	)		$—
Securitization vehicles' interest rate hedge liabilities		($27,482	)		$—		($27,482	)		$—
Measured on a nonrecurring basis:
CT Legacy REIT's impaired loans: (1)
Senior mortgages		$12,038			$—		$—			$12,038
Subordinate interests in mortgages		19,848			—		—			19,848
Mezzanine loans		—			—		—			—
		$31,886			$—		$—			$31,886
Securitization vehicles' securities held-to-maturity (2)		$1,527			$—		$—			$1,527
Securitization vehicles' impaired loans: (1)
Senior mortgages		$16,907			$—		$—			$16,907
Subordinate interests in mortgages		5,419			—		—			5,419
Mezzanine loans		41,078			—		—			41,078
		$63,404			$—		$—			$63,404

(1)	Loans receivable against which we have recorded a provision for loan losses as of September 30, 2011.
(2)	Securities which were other-than-temporarily impaired during the three months ended September 30, 2011.

The following methods and assumptions were used to estimate the fair value of each type of asset and liability which was recorded at fair value as of September 30, 2011:

Loans held-for-sale: Loans held-for-sale are valued based on expected proceeds from a sale of the asset.

Real estate held-for-sale: Real estate held-for-sale is valued based on expected proceeds from a sale of the asset.

Interest rate hedge liabilities: Interest rate hedges are 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. See Notes 10 and 11 for additional details on our interest rate hedges.

Impaired securities: Securities which are other-than-temporarily impaired are generally valued by a combination of (i) obtaining assessments from third-party dealers and, (ii) in cases where such assessments are unavailable or, in the opinion of management, deemed not to be indicative of fair value, discounting expected cash flows using internal cash flow models and estimated market discount rates. In the case of internal models, expected cash flows of each security are based on management’s assumptions regarding the collection of principal and interest on the underlying loans and securities. The table above includes only securities which were impaired during the three months ended September 30, 2011. Previously impaired securities have been subsequently adjusted for amortization, and are therefore no longer reported at fair value as of September 30, 2011.

As of September 30, 2011, one of our consolidated securitization vehicles’ securities was other-than-temporarily impaired and therefore reported at fair value. The dealer valuation obtained for the security was determined to not be indicative of fair value and, accordingly, it was valued internally by discounting expected future cash flows. The security had a 1998 vintage and was rated “BB” by Fitch Ratings, Inc. This security was valued using a discount rate of 10%, resulting in a valuation equal to 5% of the face amount of the security.

Impaired loans: The loans identified for impairment are collateral dependant loans. Impairment on these loans is measured by comparing management’s estimation of fair value of the underlying collateral to the book value of the respective loan. These valuations require significant judgments, which include assumptions regarding capitalization rates, leasing, creditworthiness of major tenants, occupancy rates, availability of financing, exit plan, loan sponsorship, actions of other lenders and other factors deemed necessary by management. The table above includes all impaired loans, regardless of the period in which impairment was recognized.

Additional details of CT Legacy REIT’s loans which were recorded at fair value as of September 30, 2011 are described below:

Senior mortgage loans: One of CT Legacy REIT’s senior mortgage loans with a principal balance of $25.1 million was reported at fair value as of September 30, 2011. This hotel loan matured in September 2011 and has a coupon of 2.0% per annum as of September 30, 2011.

Subordinate interests in mortgages: Three of CT Legacy REIT’s subordinate interests in mortgage loans with an aggregate principal balance of $84.3 million are reported at fair value as of September 30, 2011, including two hotel loans ($43.4 million), and one condominium loan ($40.9 million). These loans have a weighted average maturity of May 2013 and a weighted average coupon of 3.0% per annum as of September 30, 2011.

Mezzanine loans: Two of CT Legacy REIT’s mezzanine loans with an aggregate principal balance of $160.3 million are reported at fair value as of September 30, 2011, including one hotel loan ($152.3 million) and one office loan ($8.0 million). These loans have a weighted average maturity of April 2012 and a weighted average coupon of 3.7% per annum as of September 30, 2011.

Additional details of our consolidated securitization vehicles’ loans which were recorded at fair value as of September 30, 2011 are described below:

Senior mortgage loans: One of our consolidated securitization vehicles’ senior mortgage loans with a principal balance of $33.2 million was reported at fair value as of September 30, 2011, which is classified as a mixed-use/other loan. The loan has a maturity of May 2015 and a coupon of 2.0% per annum as of September 30, 2011.

Subordinate interests in mortgages: Eight of our consolidated securitization vehicles’ subordinate interests in mortgage loans with an aggregate principal balance of $108.6 million are reported at fair value as of September 30, 2011, including three hotel loans ($60.9 million), two office loans ($27.7million), one multifamily loan ($5.5 million), one retail loan ($4.4 million) and one mixed-use/other loan ($10.2 million). The loans have a weighted average maturity of November 2011 and a weighted average coupon of 3.4% per annum as of September 30, 2011.

Mezzanine loans: Two of our consolidated securitization vehicles’ mezzanine loans with an aggregate principal balance of $96.2 million are reported at fair value as of September 30, 2011, including one hotel loans ($75.5 million) and one retail loan ($20.7 million). The loans have a weighted average maturity of May 2011 and a weighted average coupon of 2.4% per annum as of September 30, 2011.

The following table reconciles the beginning and ending balances of assets measured at fair value on a recurring basis using Level 3 inputs (in thousands):

	Loans			Real Estate
	Held-for-Sale			Held-for-Sale
December 31, 2010		$5,750			$8,055
Transfer from loans receivable		32,331			—
Consolidation of additional securitization vehicles		—			3,342
Satisfactions		(5,750	)		—
Adjustments to fair value included in earnings:
Valuation allowance on loans held-for-sale		(224	)		—
Impairment of real estate held-for-sale		—			(1,055	)
September 30, 2011		$32,107			$10,342

Fair Value of Financial Instruments

In addition to the above disclosures for assets and liabilities which are recorded at fair value, GAAP also 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 estimated using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the estimated market 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 an immediate settlement of the instrument. Rather, these fair values reflect the amounts that management believes are realizable in an orderly transaction among willing parties. These disclosure requirements exclude certain financial instruments and all non-financial instruments.

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

Fair Value of Financial Instruments
(in thousands)	September 30, 2011						December 31, 2010
	Carrying Amount		Face Amount		Fair Value		Carrying Amount		Face Amount		Fair Value
Financial assets:
Cash and cash equivalents		$28,219		$28,219		$28,219		$24,449		$24,449		$24,449
Securities held-to-maturity		—		—		—		3,455		36,015		5,518
Loans receivable, net		24,945		24,945		22,450		606,318		979,057		499,176
CT Legacy REIT
Restricted cash		13,715		13,715		13,715		—		—		—
Securities held-to-maturity		2,591		29,494		1,792		—		—		—
Loans receivable, net		207,028		444,486		175,698		—		—		—
Securitization Vehicles
Securities held-to-maturity		397,001		519,073		384,421		504,323		594,434		475,272
Loans receivable, net		783,662		966,666		696,313		2,891,379		3,147,755		2,548,715
Financial liabilities:
Repurchase obligations		—		—		—		372,582		372,680		372,680
Senior credit facility		—		—		—		98,124		98,124		14,719
Junior subordinated notes		—		—		—		132,190		143,753		2,875
Secured notes		7,686		7,686		7,686		—		—		—
Participations sold		24,945		24,945		22,450		259,304		259,304		81,589
CT Legacy REIT
Repurchase obligations		66,637		66,637		66,637		—		—		—
Mezzanine loan		53,367		64,134		64,134		—		—		—
Participations sold		97,465		97,465		—		—		—		—
Securitization Vehicles
Securitized debt obligations		1,352,446		1,351,937		879,388		3,621,229		3,620,446		2,717,787

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

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

Securities held-to-maturity: These investments, other than securities that have been other-than-temporarily impaired, are recorded on a held-to-maturity basis and not at fair value. The fair values presented above have been estimated by a combination of (i) obtaining assessments from third party dealers and, (ii) in cases where such assessments are unavailable or, in the opinion of management, deemed not to be indicative of fair value, discounting expected cash flows using internal cash flow models and estimated market discount rates. The expected cash flows of each security are based on management’s assumptions regarding the collection of principal and interest on the underlying loans and securities.

Loans receivable, net: Other than impaired loans, these assets are recorded at their amortized cost and not at fair value. The fair values presented above were estimated by management taking into consideration factors including capitalization rates, leasing, occupancy rates, availability and cost of financing, exit plan, sponsorship, actions of other lenders and indications of market value from other market participants.

Restricted cash: The carrying amount of restricted is considered to be a reasonable estimate of fair value.

Secured notes: These notes are recorded at their total face balance and not at fair value. The face amount is considered to be a reasonable estimate of fair value as these notes were issued on March 31, 2011.

Participations sold: These liabilities are recorded at their amortized cost and not at fair value. The fair values presented above are consistent with those presented for the related loan assets.

Repurchase obligations: These facilities are recorded at their total face balance and not at fair value. The face amount is considered to be a reasonable estimate of fair value as these facilities were restructured on March 31, 2011.

Mezzanine loan: This instrument is recorded at its amortized cost and not at fair value. The face amount is considered to be a reasonable estimate of fair value as this loan was originated on March 31, 2011.

Securitized debt obligations: These obligations are recorded at the face value of outstanding obligations to third parties and not at fair value.The fair values presented above have been estimated by obtaining assessments from third party dealers.