Note 6. CT Legacy REIT

As discussed in Note 1, in connection with the March 2011 restructuring, we transferred substantially all of our directly held interest earning assets to a subsidiary of CT Legacy REIT. CT Legacy REIT is beneficially owned 52% by us, 24% by an affiliate of Five Mile Capital (the former mezzanine lender to CT Legacy REIT), and 24% by the former lenders under our senior credit facility. In addition, the former holders of our junior subordinated notes received class B common stock, a subordinate class of common stock which entitles its holders to receive approximately 25% of the dividends that would otherwise be payable to us on our equity interest in the common stock of CT Legacy REIT, after aggregate cash distributions of $50.0 million have been paid to all other classes of common stock. We manage CT Legacy REIT and CT Legacy Asset as a liquidating portfolio.

On February 10, 2012, we refinanced CT Legacy REIT’s mezzanine loan and repurchase facility with a single, new $124.0 million repurchase facility with JPMorgan. The borrower under the new JPMorgan facility, CT Legacy Asset, is a wholly owned subsidiary of CT Legacy REIT and owns all of its assets, other than cash. As a result of the refinancing, we discontinued consolidation of CT Legacy Asset. As a result, its assets and liabilities were deconsolidated from our financial statements as of February 10, 2012. We recognized a gain of $146.4 million on the deconsolidation of CT Legacy Asset, which was primarily the reversal of charges to GAAP equity resulting from losses previously recorded in excess of our economic interests in securitization vehicles which were consolidated by CT Legacy Asset.

As of September 30, 2012, our consolidated balance sheet includes (i) restricted cash of $16.1 million at CT Legacy REIT, and (ii) a $100.1 million investment in CT Legacy Asset, a 100% owned subsidiary of CT Legacy REIT. Prior to February 10, 2012, CT Legacy Asset was consolidated and therefore our consolidated balance sheet included its loans receivables, securities held-to-maturity, other assets, debt obligations and other liabilities.

The liabilities of CT Legacy Asset are all non-recourse to CT Legacy REIT and us. Neither we, nor CT Legacy REIT is obligated to provide, nor have we or CT Legacy REIT provided, any financial support to CT Legacy Asset.

As described in Note 2, our consolidated balance sheets separately present: (i) our direct assets and liabilities, (ii) the direct assets and liabilities of CT Legacy REIT, and (iii) the assets and liabilities of consolidated securitization vehicles. The following disclosures relate specifically to the direct assets and liabilities of CT Legacy REIT, as separately stated on our consolidated balance sheets.

A. Securities Held-to-Maturity – CT Legacy REIT

CT Legacy REIT’s securities portfolio consists of CMBS, CDOs, and other securities. Activity relating to these securities for the nine months ended September 30, 2012 was as follows (in thousands):

	CMBS			CDOs & Other			Total Book Value

December 31, 2011		$1,346			$1,256			$2,602

Principal paydowns		(17	)		—			(17	)
Discount/premium amortization & other		18			7			25
Deconsolidation of CT Legacy Asset (1)		(1,347	)		(1,263	)		(2,610	)

September 30, 2012		$—			$—			$—


(1)	As further described above, we deconsolidated CT Legacy Asset in the first quarter of 2012. As a result, the securities owned by CT Legacy REIT are no longer included in our consolidated financial statements.

The following table details overall statistics for CT Legacy REIT’s securities portfolio as of September 30, 2012 and December 31, 2011:

	September 30, 2012	December 31, 2011
Number of securities	─	6
Number of issues	─	5
Rating (1) (2)	N/A	CCC+
Fixed / Floating (in millions) (3)	$─ / $─	$2 / $1
Coupon (1) (4)	N/A	5.43%
Yield (1) (4)	N/A	3.31%
Life (years) (1) (5)	N/A	4.9


(1)	Represents a weighted average as of December 31, 2011.
(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.
(3)	Represents the aggregate net book value of the portfolio allocated between fixed rate and floating rate securities.
(4)	Coupon is based on the securities’ contractual interest rates, while yield is based on expected cash flows for each security, and considers discounts/premiums and asset non-performance. Calculations for floating rate securities are based on LIBOR of 0.30% as of December 31, 2011.
(5)	Weighted average life is based on the timing and amount of future expected principal payments through the expected repayment date of each respective investment.

The table below details the ratings and vintage distribution of CT Legacy REIT’s securities as of December 31, 2011 (in thousands):

	Rating as of December 31, 2011
			CCC and
Vintage		B	Below		Total
2003		$—		$1,256		$1,256
1997		179		—		179
1996		—		1,167		1,167
Total		$179		$2,423		$2,602

Other-than-temporary impairments

The following table summarizes activity related to the other-than-temporary impairments of CT Legacy REIT’s securities during the nine months ended September 30, 2012 (in thousands):

	Gross Other-Than-Temporary Impairments			Credit Related Other-Than-Temporary Impairments			Non-Credit Related Other-Than-Temporary Impairments

December 31, 2011		$26,557			$26,105			$452

Amortization of other-than-temporary impairments		(24	)		(11	)		(13	)
Deconsolidation of CT Legacy Asset (1)		(26,533	)		(26,094	)		(439	)

September 30, 2012		$—			$—			$—


(1)	As further described in Note 1 above, we deconsolidated CT Legacy Asset in the first quarter of 2012. As a result, the securities owned by CT Legacy REIT, some of which were other-than-temporarily impaired, are no longer included in our consolidated financial statements.

Unrealized losses and fair value of securities

Certain of CT Legacy REIT’s securities were carried at values in excess of their fair values. This difference can be caused by, among other things, changes in credit spreads and interest rates.

The following table shows the gross unrealized losses and fair value of securities for which the fair value is lower than their book value as of December 31, 2011, and that are not deemed to be other-than-temporarily impaired (in millions):

	Less Than 12 Months				Greater Than 12 Months					Total

			Gross				Gross					Gross
	Estimated		Unrealized		Estimated		Unrealized			Estimated		Unrealized
	Fair Value		Loss		Fair Value		Loss			Fair Value		Loss			Book Value (1)

Floating Rate		$—		$—		$0.2		($1.1	)		$0.2		($1.1	)		$1.3

Fixed Rate		1.2		—		—		—			1.2		—			1.2

Total		$1.2		$—		$0.2		($1.1	)		$1.4		($1.1	)		$2.5


(1)	Excludes, as of December 31, 2011, $179,000 of securities which were carried at or below fair value and securities against which an other-than-temporary impairment equal to the entire book value was recognized in earnings.

As of December 31, 2011, two of CT Legacy REIT's securities with an aggregate book value of $2.5 million were carried at a value in excess of their fair value. Fair value for these securities was $1.4 million as of December 31, 2011. In total, as of December 31, 2011, CT Legacy REIT had six investments in securities with an aggregate book value of $2.6 million that have an estimated fair value of $1.6 million, including two investments in CMBS with an estimated fair value of $1.4 million and four investments in CDOs and other securities with an estimated fair value of $158,000.

We determine fair values using a combination of third-party dealer assessments of value and our own internal financial model-based estimations of fair value. See Note 12 for further discussion of fair value.

Our estimation of cash flows expected to be generated by our securities portfolio is based upon an internal review of the underlying 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. 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.

B. Loans Receivable, Net – CT Legacy REIT

Activity relating to CT Legacy REIT’s loans receivable for the nine months ended September 30, 2012 was as follows (in thousands):

	Gross Book Value			Provision for Loan Losses			Net Book Value (1)

December 31, 2011		$436,314			($229,800	)		$206,514

Principal paydowns		(254	)		—			(254	)
Discount/premium amortization & other		28			—			28
Deconsolidation of CT Legacy Asset (2)		(436,088	)		229,800			(206,288	)

September 30, 2012		$—			$—			$—


(1)	Includes loans with a total principal balance of $436.0 million as of December 31, 2011.
(2)	As further described above, we deconsolidated CT Legacy Asset in the first quarter of 2012. As a result, the loans owned by CT Legacy REIT are no longer included in our consolidated financial statements.

The following table details overall statistics for CT Legacy REIT’s loans receivable portfolio as of September 30, 2012 and December 31, 2011:

	September 30, 2012	December 31, 2011
Number of investments	─	17
Fixed / Floating (in millions) (1)	$─ / $─	$56 / $151
Coupon (2) (3)	N/A	4.59%
Yield (2) (3)	N/A	5.21%
Maturity (years) (2) (4)	N/A	1.4


(1)	Represents the aggregate net book value of the portfolio allocated between fixed rate and floating rate loans.
(2)	Represents a weighted average as of December 31, 2011.
(3)	Calculations for floating rate loans are based on LIBOR of 0.30% as of December 31, 2011.
(4)	Represents the final maturity of each investment assuming all extension options are executed.

The tables below detail the types of loans in CT Legacy REIT’s portfolio, as well as the property type and geographic distribution of the properties securing these loans, as of September 30, 2012 and December 31, 2011 (in thousands):

	September 30, 2012					December 31, 2011
Asset Type	Book Value		Percentage			Book Value		Percentage
Senior mortgages		$—		―	%		$77,986		37	%
Subordinate interests in mortgages		—		—			58,078		28
Mezzanine loans		—		—			47,271		23
Other		—		—			23,179		12
Total		$—		―	%		$206,514		100	%

Property Type	Book Value		Percentage			Book Value		Percentage
Office		$—		―	%		$84,519		41	%
Hotel		—		—			75,240		36
Multifamily		—		—			14,212		7
Other		—		—			32,543		16
Total		$—		―	%		$206,514		100	%

Geographic Location	Book Value		Percentage			Book Value		Percentage
Northeast		$—		―	%		$64,040		31	%
Southwest		—		—			40,353		19
West		—		—			38,179		18
Southeast		—		—			20,076		10
Northwest		—		—			9,364		5
International		—		—			34,502		17
Total		$—		―	%		$206,514		100	%

Loan risk ratings

Quarterly, management evaluates CT Legacy REIT’s loan portfolio for impairment as described in Note 2. In conjunction with our quarterly loan portfolio review, management assesses the performance of each loan, and assigns a risk rating based on several factors including risk of loss, LTV, collateral performance, structure, exit plan, and sponsorship. Loans are rated one (less risk) through eight (greater risk), which ratings are defined in Note 2.

The following table allocates the net book value and principal balance of CT Legacy REIT’s loans receivable based on our internal risk ratings as of September 30, 2012 and December 31, 2011 (dollars in thousands):

		Loans Receivable as of September 30, 2012						Loans Receivable as of December 31, 2011
Risk Rating		Number of Loans		Principal Balance		Net Book Value		Number of Loans		Principal Balance		Net Book Value
	1 - 3		—		$—		$—		5		$91,940		$92,333
	4 - 5		—		—		—		5		64,151		64,127
	6 - 8		—		—		—		7		279,882		50,054

Total			—		$—		$—		17		$435,973		$206,514

In making this risk assessment, one of the primary factors we consider is how senior or junior each loan is relative to other debt obligations of the borrower. The following tables further allocate CT Legacy REIT’s loans receivable by both loan type and our internal risk ratings as of September 30, 2012 and December 31, 2011 (dollars in thousands):

		Senior Mortgage Loans
		as of September 30, 2012						as of December 31, 2011
Risk Rating		Number of Loans		Principal Balance		Net Book Value		Number of Loans		Principal Balance		Net Book Value
	1 - 3		—		$—		$—		1		$27,503		$27,503
	4 - 5		—		—		—		2		21,000		20,976
	6 - 8		—		—		—		2		42,569		29,507

Total			—		$—		$—		5		$91,072		$77,986

		Subordinate Interests in Mortgages
		as of September 30, 2012						as of December 31, 2011
Risk Rating		Number of Loans		Principal Balance		Net Book Value		Number of Loans		Principal Balance		Net Book Value
	1 - 3		—		$—		$—		1		$13,000		$13,000
	4 - 5		—		—		—		1		24,531		24,531
	6 - 8		—		—		—		4		85,024		20,547

Total			—		$—		$—		6		$122,555		$58,078

		Mezzanine & Other Loans
		as of September 30, 2012						as of December 31, 2011
Risk Rating		Number of Loans		Principal Balance		Net Book Value		Number of Loans		Principal Balance		Net Book Value
	1 - 3		—		$—		$—		3		$51,437		$51,830
	4 - 5		—		—		—		2		18,620		18,620
	6 - 8		—		—		—		1		152,289		—

Total			—		$—		$—		6		$222,346		$70,450

C. Loans Held-for-Sale, Net – CT Legacy REIT

Activity relating to CT Legacy REIT’s loans held-for-sale for the nine months ended September 30, 2012 was as follows (in thousands):

	Gross Book Value			Valuation Allowance			Net Book Value

December 31, 2011		$32,331			($1,456	)		$30,875

Deconsolidation of CT Legacy Asset (1)		(32,331	)		1,456			(30,875	)

September 30, 2012		$—			$—			$—


(1)	As further described above, we deconsolidated CT Legacy Asset in the first quarter of 2012. As a result, the loans held-for-sale owned by CT Legacy REIT are no longer included in our consolidated financial statements.

D. Debt Obligations – CT Legacy REIT

As of September 30, 2012, CT Legacy REIT did not have any debt obligations outstanding. As of December 31, 2011, CT Legacy REIT had $113.6 million of total debt obligations outstanding. The balances of each category of debt were as follows (in thousands):

	September 30,				December 31,
	2012				2011
Debt Obligations	Principal Balance (1)		Book Value (1)		Principal Balance		Book Value

Repurchase obligation (JPMorgan)		$—		$—		$58,464		$58,464

Mezzanine loan		—		—		65,275		55,111

Total/Weighted Average		$—		$—		$123,739		$113,575


(1)	As further described above, we deconsolidated CT Legacy Asset in the first quarter of 2012. As a result, the debt obligations of CT Legacy REIT are no longer included in our consolidated financial statements.

Repurchase Obligations

In conjunction with our restructuring on March 31, 2011, our three legacy repurchase obligations were assumed by wholly-owned subsidiaries of CT Legacy REIT, and the recourse to Capital Trust, Inc. was eliminated. On February 10, 2012, we refinanced CT Legacy REIT’s one remaining repurchase facility and its mezzanine loan with a single, new $124.0 million repurchase facility with JPMorgan. The new facility is an obligation of CT Legacy Asset, matures in December 2014, carries a rate of LIBOR+6.00% as of September 30, 2012, and has paydown hurdles and associated potential rate increases over the term of the facility. As a result of the refinancing, we discontinued consolidation of CT Legacy Asset. See Note 1 and the introduction to Note 6 for further discussion on the deconsolidation of CT Legacy Asset.

Mezzanine Loan

On March 31, 2011, CT Legacy REIT entered into an $83.0 million mezzanine loan with Five Mile Capital that carried an interest rate of 15.0% per annum, of which 7.0% may be deferred, and that had a maturity date of March 31, 2016. The mezzanine loan was not recourse to Capital Trust, Inc. except for certain limited non-recourse, “bad boy” carve outs.

As of December 31, 2011, the mezzanine loan had an outstanding principal balance of $65.3 million (including deferred interest) and a book balance of $55.1 million. As discussed above, on February 10, 2012, we refinanced CT Legacy REIT’s JPMorgan repurchase facility and its mezzanine loan with a single, new $124.0 million repurchase facility with JPMorgan. As a result of the refinancing, we discontinued consolidation of CT Legacy Asset. See Note 1 and the introduction to Note 6 for further discussion on the deconsolidation of CT Legacy Asset.

E. Participations Sold – CT Legacy REIT

Participations sold represent interests in certain loans that we originated and subsequently sold to one of our investment management vehicles or to third-parties. We have historically presented these participations sold as both assets and non-recourse liabilities because these arrangements do not qualify as sales under GAAP. Generally, participations sold are recorded as assets and liabilities in equal amounts on our consolidated balance sheets, and an equivalent amount of interest income and interest expense is recorded on our consolidated statements of operations. However, impaired loan assets must be reduced through the provision for loans losses while the associated non-recourse liability cannot be reduced until the participation has been contractually extinguished. This can result in an imbalance between the loan participations sold asset and liability. We have no economic exposure to these liabilities.

The following table describes CT Legacy REIT’s participations sold assets and liabilities as of December 31, 2011 (in thousands):

	September 30,		December 31,
	2012		2011
Participations sold assets
Gross carrying value		$—		$97,465
Less: Provision for loan losses		—		(97,465	)
Net book value of assets		—		—

Participations sold liabilities
Net book value of liabilities		—		97,465
Net impact to shareholders' equity		$—		($97,465	)

F. Derivative Financial Instruments – CT Legacy REIT

CT Legacy REIT is not party to any interest rate swap agreements. As of December 31, 2011, CT Legacy REIT’s formerly consolidated subsidiary, CT Legacy Asset, was party to five interest rate swaps with a notional amount of $60.8 million and fair value of $8.8 million.

During the period from January 1, 2012 to February 10, 2012, while we consolidated CT Legacy Asset, it made net payments of $262,000 under its interest rate swaps which were recorded as a component of interest expense. During the same period, we recognized $291,000 as a component of interest expense for the change in fair value of these swaps. In addition, as a result of the deconsolidation of CT Legacy Asset, we reclassified $1.8 million from other comprehensive income to interest expense. This amount represents the unamortized balance of prior fair value adjustments to these interest rate swaps from the second quarter of 2011, when we discontinued the designation of these swaps as cash flow hedges.

G. Investment in CT Legacy Asset – CT Legacy REIT

As discussed in Note 1, on February 10, 2012, we refinanced CT Legacy REIT’s mezzanine loan and repurchase facility with a single, new $124.0 million repurchase facility with JPMorgan. The borrower under the new JPMorgan facility, CT Legacy Asset, is a wholly owned subsidiary of CT Legacy REIT and owns all of its assets, other than cash. As a result of the refinancing, we discontinued consolidation of CT Legacy Asset. As a result, its assets and liabilities were deconsolidated from our financial statements as of February 10, 2012.

We have elected the fair value option of accounting for CT Legacy REIT’s investment in CT Legacy Asset, pursuant to which we record this investment at fair value rather than at our historical cost investment amount. Additionally, changes in the fair value of this investment are recognized in our consolidated statement of operations. The fair value of CT Legacy REIT’s investment in CT Legacy Asset was $89.7 million and $100.1 million at February 10, 2012 and September 30, 2012, respectively.

The liabilities of CT Legacy Asset are all non-recourse to us, and we are not obligated to provide, nor have we provided, any financial support to CT Legacy Asset or CT Legacy REIT. We are only exposed to investment losses in CT Legacy Asset via our investment in CT Legacy REIT, which itself holds only two assets, cash of $16.1 million and an investment in CT Legacy Asset of $100.1 million. Net of noncontrolling interests, our investment in CT Legacy REIT is $53.1 million. After giving effect to the $11.1 million which will ultimately be payable under our secured notes and $7.8 million payable under the CT Legacy REIT management incentive awards plan, our maximum exposure to loss from CT Legacy REIT, and therefore CT Legacy Asset, is $34.2 million.

The following table represents summarized financial information for CT Legacy Asset (in thousands):

	For the Period from February 11, 2012
	through September 30, 2012 (1)
Income Statement
Total revenues (2)		$140,741
Total expenses (3)		(12,001	)
Net gain		$128,740

	As of September 30, 2012
Balance Sheet
Total assets		$615,720


(1)	Includes activity and balances of VIEs consolidated by CT Legacy Asset.
(2)	Includes interest income and gain on extinguishment of debt.
(3)	Includes interest expense, general and administrative expenses, provisions and impairments.