UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

FORM 10-K

 

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

For the fiscal year ended December 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 No. 1-32248

 

GRAMERCY CAPITAL CORP.

(Exact name of registrant as specified in its charter)

Maryland	06-1722127
(State or other jurisdiction incorporation or organization)	(I.R.S. Employer of Identification No.)

420 Lexington Avenue, New York, NY 10170

(Address of principal executive offices — zip code)

(212) 297-1000

(Registrant’s telephone number, including area code)

 

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

Title of Each Class	Name of Each Exchange on Which Registered
Common Stock, $0.001 Par Value	New York Stock Exchange
Series A Cumulative Redeemable
Preferred Stock, $0.001 Par Value	New York Stock Exchange

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.Yes o No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.Yes o No x

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 Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 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 o No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

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

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

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

As of March 16, 2010, there were 49,934,792 shares of the Registrant’s common stock outstanding. The aggregate market value of common stock held by non-affiliates of the registrant (43,628,603 shares) at June 30, 2009, was $70,242,051. The aggregate market value was calculated by using the closing price of the common stock as of that date on the New York Stock Exchange, which was $1.61 per share.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s Proxy Statement for its 2009 Annual Stockholders’ Meeting expected to be filed within 120 days after the close of the registrant’s fiscal year are incorporated by reference into Part III of this Annual Report on Form 10-K.

GRAMERCY CAPITAL CORP.
FORM 10-K
  
TABLE OF CONTENTS

10-K PART AND ITEM NO.

	Page
PART I
1. Business		1
1A. Risk Factors		18
1B. Unresolved Staff Comments		54
2. Properties		55
3. Legal Proceedings		59
4. Reserved		59
PART II
5. Market for Registrant’s Common Equity, Related Stockholders Matters and Issuer Purchases of Equity Securities		59
6. Selected Financial Data		62
7. Management’s Discussion and Analysis of Financial Condition and Results of Operations		64
7A. Quantitative and Qualitative Disclosures About Market Risk		101
8. Financial Statements and Supplementary Data		102
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		195
9A. Controls and Procedures		195
9B. Other Information		195
PART III
10. Directors, Executive Officers and Corporate Governance of the Registrant		195
11. Executive Compensation		195
12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		196
13. Certain Relationships and Related Transactions and Director Independence		196
14. Principal Accounting Fees and Services		196
PART IV
15. Exhibits, Financial Statements and Schedules		196
Signatures		202

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ITEM 1. BUSINESS

General

Gramercy Capital Corp. is a self-managed, integrated commercial real estate finance and property investment company. On April 1, 2008, we completed the acquisition of American Financial Realty Trust (NYSE: AFR), or American Financial, in a transaction with a total value of approximately $3.3 billion, including the assumption of approximately $1.3 billion of American Financial’s secured debt.

Our property investment business, which operates under the name Gramercy Realty, focuses on the acquisition and management of commercial properties leased primarily to regulated financial institutions and affiliated users throughout the United States. These institutions are for the most part deposit taking commercial banks, thrifts and credit unions, which we generally refer to as “banks.” Our portfolio of wholly-owned and jointly-owned bank branches and office buildings is leased to large banks such as Bank of America, N.A., or Bank of America, Wachovia Bank National Association (now owned by Wells Fargo & Company, or Wells Fargo), or Wachovia Bank, Regions Financial Corporation, or Regions Financial, and Citizens Financial Group, Inc., or Citizens Financial, and to mid-sized and community banks. Our commercial real estate finance business, which operates under the name Gramercy Finance, focuses on the direct origination, acquisition and portfolio management of whole loans, bridge loans, subordinate interests in whole loans, mezzanine loans, preferred equity, commercial mortgage-backed securities, or CMBS, and other real estate related securities. Neither Gramercy Finance nor Gramercy Realty is a separate legal entity but are divisions through which our commercial real estate finance and property investment businesses are conducted.

At December 31, 2009, we owned approximately 25.6 million net rentable square feet of commercial real estate in 36 states and the District of Columbia with an aggregate book value of approximately $3.7 billion, in addition to $1.4 billion of loan investments, $984.7 million of commercial mortgage real estate securities investments, or CMBS, and $700.6 million in other assets. As of December 31, 2009, approximately 54.6% of the our assets were comprised of commercial property, 20.4% of debt investments, 14.6% of commercial mortgage real estate securities and 10.4% of other assets.

Our corporate offices are located in midtown Manhattan at 420 Lexington Avenue, New York, New York 10170. As of December 31, 2009, we had 131 employees. We can be contacted at (212) 297-1000. We maintain a website at www.gkk.com. On our website, you can obtain, free of charge, a copy of our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, or the Exchange Act, as soon as practicable after we file such material electronically with, or furnish it to, the Securities and Exchange Commission, or the SEC. We have also made available on our website our audit committee charter, compensation committee charter, nominating and corporate governance committee charter, code of business conduct and ethics and corporate governance principles. You can also read and copy materials we file with the SEC at its Public Reference Room at 100 F Street, NE, Washington, DC 20549 (1-800-SEC-0330). The SEC maintains an Internet site (http://www.sec.gov) that contains reports, proxy and information statements, and other information regarding the issuers that file electronically with the SEC.

Corporate Structure

We were formed in April 2004 as a Maryland corporation and we completed our initial public offering in August 2004. We conduct substantially all of our operations through our operating partnership, GKK Capital LP, or our Operating Partnership. We are the sole general partner of our Operating Partnership. Prior to the internalization of our management in April 2009, we were externally managed and advised by GKK Manager LLC, or the Manager, then a wholly-owned subsidiary of SL Green Realty Corp. (NYSE: SLG), or SL Green, which owned approximately 12.5% of the outstanding shares of our common stock as of December 31, 2009 and is our largest stockholder. On April 24, 2009, we completed the internalization of our management through the direct acquisition of the Manager from SL Green. As a result of the internalization, beginning in May 2009, management and incentive fees payable by us to the Manager ceased and we added 77 former employees of the Manager to our own staff.

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We have elected to be taxed as a real estate investment trust, or REIT, under the Internal Revenue Code of 1986, as amended, or the Internal Revenue Code, and generally will not be subject to U.S. federal income taxes to the extent we distribute our taxable income, if any, to our stockholders. We have in the past established, and may in the future establish, taxable REIT subsidiaries, or TRSs, to effect various taxable transactions. Those TRSs would incur U.S. federal, state and local taxes on the taxable income from their activities.

Unless the context requires otherwise, all references to “Gramercy,” “the Company,” “we,” “our,” and “us” in this annual report mean Gramercy Capital Corp., a Maryland corporation, and one or more of its subsidiaries, including our operating partnership.

Current Market Conditions

During 2008, 2009 and to date in 2010, the global capital markets continued to experience tremendous volatility and a wide-ranging lack of liquidity. The impact of the global credit crisis on our sector has been acute. Transaction volume has declined significantly, credit spreads for all forms of mortgage debt investments have reached all-time highs, and other forms of financing from the debt markets have been dramatically curtailed. Financial institutions still hold significant inventories of unsold loans and CMBS, creating a further overhang on the markets. We believe that the continuing dislocation in the debt capital markets, coupled with a recession in the U.S., has reduced property valuations and has adversely impacted commercial real estate fundamentals. These developments can impact and have impacted the performance of our existing portfolio of financial and real property assets. Among other things, such conditions have resulted in our recognizing significant amounts of loan loss reserves and impairments, narrowed our margin of compliance with debt and CDO covenants, depressed the price of our common stock and has effectively removed our ability to raise public capital. It has reduced our borrowers’ ability to repay their loans, and when combined with declining real estate values on our collateral for such loans, increased the likelihood that we will continue to take further loan loss reserves. Additionally, it has led to increased vacancies in our properties. Furthermore, the volatility in the capital markets has caused stress to all financial institutions, and our business is dependent upon these counterparties for, among other things, financing, rental payments on the majority of our owned properties, and interest rate derivatives. We expect that the adverse circumstances and trends in our business and securities will begin to improve only as the credit markets and overall economy recovers. Continued disruption in the global credit markets or further deterioration in those markets may have a material adverse effect on our ability to repay or refinance our borrowings and our ability to grow and operate our business.

We have responded to these difficult conditions by sharply decreasing investment activity to maintain our liquidity, extending debt maturities and restructuring certain of our debt facilities. In addition, beginning with the third quarter of 2008, our board of directors elected to not pay a dividend on our common stock. Our board of directors also elected not to pay the Series A preferred stock dividend of $0.50781 per share beginning with the fourth quarter of 2008. The unpaid preferred stock dividend has been accrued for five quarters. Based on current estimates of our taxable loss, we expect that we will have no distribution requirements in order to maintain our REIT status for the 2009 tax year and we expect that we will continue to elect to retain capital for liquidity purposes until the requirement to make a cash distribution to satisfy our REIT requirements arise. We may elect to pay dividends to satisfy our REIT distribution requirements on our common stock in cash or a combination of cash and shares of our common stock as permitted under U.S. federal income tax laws. However, in accordance with the provisions of our charter, we may not pay any dividends on our common stock until all accrued dividends and the dividend for the then current quarter on the Series A preferred stock are paid in full.

Even if efforts to successfully stabilize and add liquidity to the financial markets are successful, we may need to modify our strategies, businesses or operations, and we may incur increased capital requirements and constraints or additional costs in order to compete in a changed business environment. Given the volatile nature of the current market, we may not timely anticipate or manage existing, new or additional risks, contingencies or developments and trends in new products and service, in the current or future environment. Our failure to do so could materially and adversely affect our business, financial condition, results of operations and prospects.

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Business and Strategy

Property Investment

Our property investment business operates under the name Gramercy Realty. It focuses on the acquisition and management of commercial properties primarily leased on a long-term basis to regulated financial institutions and affiliated users throughout the United States. The Gramercy Realty portfolio of bank branches and office buildings is leased to large banks such as Bank of America, Wachovia Bank (now owned by Wells Fargo), Regions Financial and Citizens Financial and to mid-sized and community banks. In addition, our Gramercy Finance division holds certain interests in commercial properties that were acquired prior to our merger with American Financial and which we continue to operate outside the Gramercy Realty portfolio.

Summarized in the table below are our key property portfolio statistics as of December 31, 2009:

	Number of Properties				Rentable Square Feet				Occupancy
Portfolio(1)	December 31, 2009		December 31, 2008		December 31, 2009		December 31, 2008		December 31, 2009			December 31, 2008
Branches		583		624		3,726,399		4,006,066		85.5	%		84.5	%
Office Buildings		324		337		21,847,249		22,800,748		85.9	%		89.5	%
Land		6		8		—		—		—			—
Total		913		969		25,573,648		26,806,814		85.9	%		88.7	%

(1) Excludes investments in unconsolidated joint ventures

Gramercy Realty’s investment strategy is to acquire, operate and selectively dispose of commercial properties leased to investment-grade financial services companies for the purpose of generating stable earnings, substantial depreciation expense to shield us from taxes and the distribution requirements of earnings, and the potential for long-term capital appreciation in the value of the underlying real estate.

Important elements of Gramercy Realty’s strategy are: (i) property acquisitions — acquiring properties from, or that are already leased to, financial institutions and other credit tenants with suitable financial strength and defensible business models, in geographic markets we believe will exhibit, in the intermediate and long-term, attractive real estate fundamentals, or which are vacant or have low occupancy and may provide opportunities for capital appreciation; (ii) portfolio dispositions — opportunistic sales of non-strategic assets that are leased to tenants that are not considered to be central to our customer relationships and underperforming assets with low customer occupancy; (iii) leasing existing vacancy; and (iv) effective asset and property management.

Gramercy Realty continuously evaluates its properties to identify those that are most suitable to meet our long-term objectives. Properties that do not meet our long-term earnings growth objectives are generally considered for disposition.

Gramercy Realty seeks to capitalize on its knowledge of the market for bank branches and office properties occupied by financial institutions by applying a proactive approach to leasing, which includes: (i) identifying the most attractive and efficient use of vacant or low occupancy properties; (ii) renegotiating short-term leases to achieve longer lease terms at market rates; (iii) using market research; and (iv) utilizing a broad network of third-party brokers. Gramercy Realty has in the past provided customers who lease multiple properties with specialized lease structures such as substitution, relocation and early termination rights, rent step-downs and in some cases, shorter lease terms in selected properties within a portfolio.

Gramercy Realty seeks to capitalize on its knowledge of its portfolio and the needs of its multi-property tenants by applying a customer-focused, hands-on approach to asset and property management, which includes: (i) focusing on tenant satisfaction by providing quality tenant services at affordable rental rates; (ii) hiring and closely overseeing third party property managers; and (iii) imposing strict return-on-investment procedures when evaluating capital expenditures, acquisitions, and dispositions.

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Due to the nature of the business of Gramercy Realty’s tenant base, which places a high premium on serving its customers from a well-established distribution network, Gramercy Realty typically enters into long-term leases with financial institution tenants. As of December 31, 2009, the weighed average remaining term of our leases was 9.3 years and approximately 79.6% of our base revenue was derived from triple-net and bond-net leases. A significant portion of revenue from our property investment business is derived from tenants with investment grade ratings. As of December 31, 2009, 68.4% of the minimum rental payments required to be paid during calendar year 2010 under all tenant leases in the Gramercy Realty portfolio, or 2010 Contractual Rent, will be derived from entities, with or whose parent entities have, current credit ratings of “A” or better. The top ten tenants by percentage of 2010 Contractual Rent are as follows:

Tenants / Financial Institutions	Credit Rating(1)		Number of Locations		Leased Square Feet		Percentage of Total Rentable Square Feet			Percentage of 2010 Contractual Rent
1 Bank of America, N.A.		Aa3		367		11,293,451		44.2	%		44.8	%
2 Wachovia Bank, National Association(2)		Aa2		131		4,515,076		17.7	%		12.7	%
3 Regions Financial Corporation(3)		Baa3		71		653,604		2.6	%		3.2	%
4 Citizens Financial Group(4)		A1		9		267,585		1.0	%		2.5	%
5 General Services Administration (GSA)		Aaa		5		243,560		1.0	%		2.1	%
6 Zurich Financial Services Group (as assignee of American International Group, Inc.)(5)		NR		1		263,058		1.0	%		2.0	%
7 Branch Banking & Trust Co. (BB&T)		Aa2		22		395,589		1.5	%		1.7	%
8 KeyBank National Association		A2		31		144,218		0.6	%		1.3	%
9 Citco Fund Services (USA), Inc.		NR		1		104,343		0.4	%		1.1	%
10 Fifth Third Bancorp(6)		Baa1		16		60,791		0.2	%		0.9	%
				654		17,941,275		70.2	%		72.3	%

(1) All ratings from Moody’s.

(2) Now owned by Wells Fargo.

(3) Individual lease agreements with tenants that are unrated subsidiaries of Regions Financial, including Regions Bank and AmSouth Bank.

(4) Individual lease agreements with tenants that are unrated subsidiaries of Citizens Financial, including RBS Citizens, N.A. and Citizens Bank of Pennsylvania. Citizens Financial is a wholly owned subsidiary of Royal Bank of Scotland Group PLC.

(5) Individual lease agreement with unrated Zurich Financial Services Group affiliate.

(6) Individual lease agreements with tenants that are unrated subsidiaries of Fifth Third Bank, National Association.

Gramercy Realty’s portfolio includes a group of 13 office buildings and two parking facilities containing approximately 3.8 million square feet, of which approximately 2.4 million square feet is leased to Bank of America, which collectively are referred to as the Dana Portfolio. Under the terms of the Dana Portfolio lease, which was originally entered into by Bank of America, as tenant, and Dana Commercial Credit Corporation, as landlord, as part of a larger bond-net lease transaction, Bank of America was required to make annual base rental payments of approximately $40.4 million through January 2010, approximately $3.0 million in January 2011, and no annual base rental payments thereafter through lease expiration in June 2022. In December 2009, Gramercy Realty received the full 2010 rental payment from Bank of America of approximately $40.4 million from the Dana Portfolio. We have also received termination notices from Bank of America covering approximately 360,000 square feet of currently leased space, which terminations will become effective at various times prior to December 31, 2010. Additionally, under the terms of the lease agreement with Regions Financial, rent for approximately 570,000 square feet will step down by

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approximately $5.1 million annually, beginning in July 2010. As a result of these and other factors, beginning in 2010, Gramercy Realty’s cash flow after debt service and capital requirements will be significantly lower and is expected to turn negative.

Commercial Real Estate Finance

Our commercial real estate finance business operates under the name Gramercy Finance. We invest in a diversified portfolio of real estate loans, including whole loans, bridge loans, subordinate interests in whole loans, mezzanine loans, CMBS and preferred equity involving commercial properties throughout the United States. When evaluating transactions, we assess our risk-adjusted return and target transactions with yields that seek to provide excess returns for the risks being taken. Due to current market conditions, we are engaged in a relatively small amount of new investment activity. We have focused most of our attention on the asset management of our portfolio of debt and CMBS investments.

We generate income principally from the spread between the yields on our assets and the cost of our borrowing and hedging activities. We have historically financed, or may finance in the future, assets through a variety of techniques, including repurchase agreements, secured and unsecured credit facilities, CDOs, unsecured junior subordinated corporate debt, issuances of CMBS, and other structured financings. In addition, we attempt to match fund interest rates with like-kind debt (i.e., fixed-rate assets are financed with fixed-rate debt, and floating rate assets are financed with floating rate debt), through the use of hedges such as interest rate swaps, caps, or through a combination of these strategies. This allows us to reduce the impact of changing interest rates on our cash flow and earnings. We actively manage our positions, using our credit, structuring and asset management resources to enhance returns.

We attempt to actively manage and maintain the credit quality of our portfolio by using our management team’s expertise in structuring and repositioning investments to improve the quality and yield on managed investments. When investing in higher leverage transactions, we use guidelines and standards developed and employed by senior management, including the underwriting of collateral performance and valuation, reviewing the creditworthiness of the equity investors, securing additional forms of collateral and developing strategies to effect repayment. If defaults occur, we employ our asset management resources to mitigate the severity of any losses and seek to optimize the recovery from assets in the event that we foreclose upon them.

We seek to control the negotiation and structure of the debt transactions in which we invest, which enhances our ability to mitigate our losses, to negotiate loan documents that afford us appropriate rights and control over our collateral, and to have the right to control the debt that is senior to our position. We generally avoid investments where we cannot secure adequate control rights, unless we believe the default risk is very low and the transaction involves high-quality sponsors. Our flexibility to invest in all or any part of a debt capital structure enables us to participate in many transactions and to retain only the investments that meet our investment parameters.

Our commercial real estate finance investments include the following:

Whole Loans — We have originated fixed-rate, permanent whole loans with terms of up to 15 years. We may separate certain of these loans into tranches, which can be securitized and resold. When we do so, we occasionally retain that component of the whole loan that we believe has the most advantageous risk-adjusted returns. The retained interest can be the senior interest, a subordinate interest, a mezzanine loan or a preferred equity interest created in connection with such whole loan origination. At origination, our whole loans typically had last-dollar loan-to-value ratios between 65% and 75%. The initial stated maturity of our whole loan investments range from five years to 15 years. We may sell these investments prior to maturity.

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Bridge Loans — We have offered floating rate bridge whole loans to borrowers who are seeking debt capital with a final term to maturity of not more than five years to be used in the acquisition, construction or redevelopment of a property. Typically, the borrower has identified a property in a favorable market that it believes to be poorly managed or undervalued. Bridge financing enables the borrower to employ short-term financing while improving the operating performance and physical aspects of the property and avoid burdening it with restrictive long-term debt. The bridge loans we originated are predominantly secured by first mortgage liens on the property. At origination, our bridge loans typically had last-dollar loan-to-value ratios between 70% and 80%. The initial stated maturity of our bridge loans range from two years to five years, and we frequently hold these investments to maturity.

Our bridge loans occasionally have led to additional financing opportunities since bridge facilities are often a first step toward permanent financing or a sale of the underlying real estate. We generally view securitization as a financing rather than a trading activity. We have pooled together smaller bridge loans with other loans and retained the resulting non-investment grade interests (and interest-only certificates, if any) resulting from these securitizations, which historically have taken the form of CDOs.

Subordinate Interests in Whole Loans — We have purchased from third parties, and may retain from whole loans we originate and co-originate and securitize or sell, subordinate interests in whole loans. Subordinate interests are participation interests in mortgage notes or loans secured by a lien subordinated to a senior interest in the same loan. The subordination is generally evidenced by a co-lender or participation agreement between the holders of the related senior interest and the subordinate interest. In some instances, the subordinate interest lender may additionally require a security interest in the stock or partnership interests of the borrower as part of the transaction. When we originate whole loans, we may divide them, and securitize or sell the senior interest and keep a subordinate interest for investment, or the opposite.

At origination, our subordinate interests in whole loans typically had last-dollar loan-to-value ratios between 65% and 85%. Subordinate interest lenders have the same obligations, collateral and borrower as the senior interest lender, but typically are subordinated in recovery upon a default. Subordinate interests in whole loans share certain credit characteristics with second mortgages, in that both are subject to greater credit risk with respect to the underlying mortgage collateral than the corresponding senior interest.

Subordinate interests created from bridge loans generally will have terms matching those of the whole loan of which they are a part, typically two to five years. Subordinate interests created from whole loans generally will have terms of five years to fifteen years. We expect to hold subordinate interests in whole loans to their maturity.

Upon co-origination or acquisition of subordinate interests in whole loans from third parties, we may earn income on the investment, in addition to the interest payable on the subordinate piece, in the form of fees charged to the borrower under that note or by receiving principal payments in excess of the discounted price (below par value) we paid to acquire the note. When we create subordinate interests out of whole loans and then sell the senior interest, we allocate our basis in the whole loan among the two (or more) components to reflect the fair market value of the new instruments. We may realize a profit on sale if our allocated value is below the sale price or we may realize a loss on sale if our allocated value is above the sale price. Our ownership of a subordinate interest with controlling class rights, which typically means we have the ability to determine when, and in what manner, to exercise the rights and remedies afforded the holder of the senior interest, may, in the event the financing fails to perform according to its terms, cause us to elect to pursue our remedies as owner of the subordinate interest, which may include foreclosure on, or modification of, the note. In some cases, usually restricted to situations where the appraised value of the collateral for the debt falls below agreed levels relative to the total outstanding debt, the owner of the senior interest may be able to foreclose or modify the note against our wishes as holder of the subordinate interest. As a result, our economic and business interests may diverge from the interests of the holders of the senior interest. These divergent interests among the holders of each investment may result in conflicts of interest.

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Mezzanine Loans — We have originated mezzanine loans that are senior to the borrower’s equity in, and subordinate to a mortgage loan, on a property. These loans are secured by pledges of ownership interests, typically in whole but occasionally in part (but usually with effective sole control over all the ownership interests), in entities that directly or indirectly own the real property. In addition, we may require other collateral to secure mezzanine loans, including letters of credit, personal guarantees, or collateral unrelated to the property. We typically structure our mezzanine loans to receive a stated coupon (benchmarked usually against LIBOR, or occasionally against a Treasury index or a swap index). We may in certain select instances structure our mezzanine loans to receive a stated coupon plus a percentage of gross revenues and a percentage of the increase in the fair market value of the property securing the loan, payable upon maturity, refinancing or sale of the property.

At origination, these investments typically have initial terms from two to ten years. Some transactions entail the issuance of more than one tranche or class of mezzanine debt. At origination, our mezzanine loans usually had last-dollar loan-to-value ratios of between 65% and 90%, depending on their vintage. Mezzanine loans frequently have maturities that match the maturity of the related mortgage loan but may have shorter or longer terms. We expect to hold these investments to maturity.

Commercial Mortgage-Backed Securities (CMBS) — Through our Real Estate Securities Group, or RESG, we acquire, or have acquired, CMBS that are created when commercial loans are pooled and securitized. CMBS are secured by or evidenced by ownership interests in a single commercial mortgage loan or a pool of mortgage loans secured by commercial properties. We expect a majority of our CMBS to be rated by at least one rating agency. CMBS are generally pass-through certificates that represent beneficial ownership interests in common law trusts whose assets consist of defined portfolios of one or more commercial mortgage loans. They are typically issued in multiple tranches whereby the more senior classes are entitled to priority distributions from the trust’s income to make specified interest and principal payments on such tranches. Losses and other shortfalls on the mortgage pool are borne by the most subordinate classes, which receive payments only after the more senior classes have received all principal and/or interest to which they are entitled.

The credit quality of CMBS depends on the credit quality of the underlying mortgage loans, which is a function of factors including but not limited to:

• the principal amount of loans relative to the value of the related properties;

• the mortgage loan terms (e.g. amortization and remaining term);

• market assessment and geographic location;

• construction quality and economic utility of the property; and

• the creditworthiness of the tenants.

Expected maturities of our CMBS investments range from several months to up to 15 years. We expect to hold our CMBS investments to maturity.

Preferred Equity — We have originated preferred equity investments in entities that directly or indirectly own commercial real estate. Preferred equity is not secured, but holders have priority relative to common equity holders on cash flow distributions and proceeds from capital events. In addition, preferred holders can often enhance their position and protect their equity position with covenants that limit the entity’s activities and grant us the exclusive right to control the property after an event of default. Occasionally, the first mortgage on a property prohibits additional liens and a preferred equity structure provides an attractive financing alternative. With preferred equity investments, we may become a special limited partner or member in the ownership entity and may be entitled to take certain actions, or cause liquidation, upon a default. Preferred equity typically is more highly leveraged, with last-dollar loan-to-value ratios at origination of 85% to more than 90%. We expect our preferred equity to have mandatory redemption dates (that is, maturity dates) that range from three years to five years, and we expect to hold these investments to maturity.

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The aggregate carrying values, allocated by product type and weighted average coupons of our loans, and other lending investments and CMBS investments as of December 31, 2009 and December 31, 2008, were as follows (dollars in thousands):

	Carrying Value(1)				Allocation by Investment Type						Fixed Rate Average Yield(2)						Floating Rate Average Spread over LIBOR(3)
	2009		2008		2009			2008			2009			2008			2009		2008
Whole loans, floating rate	$	830,617	$	1,222,991		60.2	%		55.3	%		—			—			454  bps		418  bps
Whole loans, fixed rate		122,846		189,946		8.9	%		8.6	%		6.9	%		7.2	%		—		—
Subordinate interests in whole loans, floating rate		76,331		80,608		5.5	%		3.6	%		—			—			246  bps		564  bps
Subordinate interests in whole loans, fixed rate		44,988		63,179		3.2	%		2.9	%		7.5	%		9.2	%		—		—
Mezzanine loans, floating rate		190,668		396,190		13.7	%		17.9	%		—			—			577  bps		654  bps
Mezzanine loans, fixed rate		85,898		248,558		6.2	%		11.2	%		8.1	%		10.2	%		—		—
Preferred equity, floating rate		28,228		—		2.0	%		—			—			—			1,064  bps		—
Preferred equity, fixed rate		4,256		12,001		0.3	%		0.5	%		7.2	%		10.2	%		—		—
Subtotal/Weighted average		1,383,832		2,213,473		100.0	%		100.0	%		7.4	%		9.0	%		476  bps		480  bps
CMBS, floating rate		67,876		70,893		6.9	%		8.1	%		—			—			254  bps		945  bps
CMBS, fixed rate		916,833		799,080		93.1	%		91.9	%		7.8	%		6.3	%		—		—
Subtotal/Weighted average		984,709		869,973		100.0	%		100.0	%		7.8	%		6.3	%		254  bps		945  bps
Total	$	2,368,541	$	3,083,446		100.0	%		100.0	%		7.7	%		7.3	%		463  bps		498  bps

(1) Loans and other lending investments and CMBS investments are presented net of unamortized fees, discounts, unfunded commitments, reserves for loan losses and other adjustments.

(2) Weighted average effective yield and weighted average effective spread calculations include loans classified as non-performing. The schedule includes non-performing loans classified as whole loans — floating rate of approximately $55,122 with an effective spread of 660 basis points and non-performing loans classified as mezzanine loans — floating rate of approximately $319 with an effective spread of 858 basis points.

(3) Spreads over an index other than 30 day-LIBOR have been adjusted to a LIBOR based equivalent. In some cases, LIBOR is floored, giving rise to higher current effective spreads.

The weighted average last dollar loan to value of our loans and other lending investments at the date of origination and the percentage of non-performing loans and sub-performing loans were as follows (dollars in thousands):

	Number of Investments		Unpaid Principal Balance		Carrying Value		Weighted Average Last Dollar Loan to Value(1)			Non- performing			Sub- performing
Whole loans		33	$	1,125,815	$	953,462		76.3	%		5.78	%		16.80	%
Subordinate interests in whole loans		10		201,760		121,319		77.5	%
Mezzanine loans		17		505,221		276,567		80.8	%		0.12	%
Preferred equity		2		60,792		32,484		79.3	%
Total		62	$	1,893,588	$	1,383,832		77.8	%		4.01	%		11.58	%

(1) Loan to Value is based upon appraised value at the date of origination. Interest only strips have no appraised value for calculation.

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All of our term CDO liabilities are in their reinvestment periods, which means when the underlying assets repay we are able to reinvest the proceeds (assuming we are in compliance with certain financial covenants in our CDOs) in new assets without having to repay the liabilities. Because credit spreads are currently much wider than when we issued these liabilities, we currently expect to earn a higher return on equity on capital redeployed in this market. Approximately $576.4 million, or 41.7%, of our loans have maturity dates in 2010. However, many of these loans contain extension options of at least six months (many subject to performance criteria) and we expect that substantially all loans that qualify will be extended, so it is difficult to estimate how much capital from initial maturities or early pre-payments may be recycled into higher earning investments.

The period during which we are permitted to reinvest principal payments on the underlying assets into qualifying replacement collateral for one of our CDOs will expire in July 2010 and will expire for our other two CDOs in July 2011 and August 2012, respectively. In the past, our ability to reinvest has been instrumental in maintaining compliance with the over-collateralization and interest coverage tests for our CDOs. Following the conclusion of the reinvestment period in one of our CDOs, our ability to maintain compliance with such tests for that CDO will be negatively impacted.

As of December 31, 2009, Gramercy Finance also held interests in two credit tenant net lease investments, or CTL investments, two interests in joint ventures holding fee positions on properties subject to long-term ground leases and a 100% fee interest in a property subject to a long-term ground lease.

Financing Strategy

Our financing strategy historically had focused on the use of match-funded financing structures. This means that we sought whenever possible to match the maturities of our financial obligations with the maturities of our debt and CMBS investments to minimize the risk that we have to refinance our liabilities prior to the maturities of our assets, and to reduce the impact of changing interest rates on our cash flow and earnings. In addition, subject to maintaining our qualification as a REIT, we seek whenever possible to match fund interest rates with like-kind debt (i.e., fixed-rate assets are financed with fixed-rate debt, and floating rate assets are financed with floating rate debt), through the use of hedges such as interest rate swaps, caps, or through a combination of these strategies. This allowed us to reduce the impact on our cash flow and earnings of changing interest rates. We used short-term financing in the form of our repurchase agreements, unsecured revolving credit facilities and bridge financings in conjunction with or prior to the implementation of longer-term match-funded financing.

Gramercy Realty properties subject to long-term remaining lease terms are typically financed with long-term, fixed rate mortgage loans issued by life insurance companies or other institutional lenders. However, we had entered into relatively short-term borrowing arrangements to acquire American Financial, such as the mortgage and mezzanine loans collectively referred to as Goldman mortgage and Goldman senior and junior mezzanine loans which are described more fully in Note 9 to the Consolidated Financial Statements. For funding in our Gramercy Finance business, we have historically utilized securitization structures, including CDOs, as well as other match-funded financing structures. Our CDOs are multiple class debt securities, or bonds, secured by pools of assets, such as CMBS, bridge loans, permanent loans, subordinate interests in whole loans and mezzanine loans. In our CDOs, the assets are owned via sale, assignment or participation by the issuer and co-issuer of the applicable CDO and subject to trustee oversight for the benefit of the holders of the bonds. The bonds were rated by one or more rating agencies. One or more classes of the bonds were marketed to a wide variety of fixed income investors, which enabled us to achieve a relatively low cost of long-term financing. CDOs were a suitable long-term financing vehicle for our investments because they enabled us to maintain our strategy of funding substantially all of our assets and related liabilities using the same, or similar, LIBOR benchmark, lock-in a long-term cost of funds tied to LIBOR, and reduced the risk that we have to refinance our liabilities prior to the maturities of our investments.

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Each CDO may be replenished, pursuant to limitations imposed by the indenture (including compliance with certain financial covenants) and rating agency guidelines, with substitute collateral for debt investments that are repaid or sold during the first five years of the CDO. Thereafter, the CDO securities will be retired in sequential order from senior-most to junior-most as debt investments are repaid or sold. The financial statements of the issuers are consolidated in our financial statements. The originally rated investment grade notes in our CDOs are treated as a secured financing, and are non-recourse to us. Proceeds from the sale of the originally rated investment grade notes issued in each CDO were used to repay outstanding debt under our repurchase agreements and to fund additional investments.

Our charter and bylaws do not limit the amount of indebtedness we can incur. Our board of directors has discretion to deviate from or change our indebtedness policy at any time. However, we seek to maintain an adequate capital base to protect against various business environments in which our financing and hedging costs might exceed the interest income from our investments. These conditions could occur, for example, due to credit losses or when, due to interest rate fluctuations, interest income on our investment lags behind interest rate increases on our borrowings, which are predominantly variable rate. We use leverage for the sole purpose of financing our portfolio and not for the purpose of speculating on changes in interest rates.

We have historically relied on the securitization markets as a source of efficient match-funded financing structures for our portfolio of commercial real estate loans and CMBS investment portfolio. The current state of the global capital markets makes it unlikely that in the near term we will be able to issue liabilities similar to our existing CDOs. This capital markets environment has led to increased cost of funds and reduced availability of efficient debt capital, factors which have caused us to reduce our investment activity. We have also seen a significant decline in our stock price, which has limited our access to additional equity capital. In this environment, we have sought to raise capital through other means, such as modifying debt arrangements, selling assets and aggressively managing our loan portfolio to encourage repayments.

Origination, Acquisition and Asset Management

Our origination, acquisition and disposition of investments are based on careful review and preparation, and generally proceeds as follows:

• potential investments are analyzed for consistency with investment parameters adopted by our board of directors;

• potential investment transactions considered are presented at a pipeline meeting attended by our senior executive officers; and

• prior to consummation, potential investment opportunities must receive the required level of approvals from our senior management and, when applicable, board of directors approval as described more fully below.

Investment transactions of $3.0 million or less must be approved by one of our senior executive officers. The affirmative vote of all members of a credit committee consisting, of our most senior officers, is necessary to approve all transactions over $3 million. The investment committee of our board of directors must unanimously approve all transactions involving investments of (i) $50 million or more with respect to CMBS investments, (ii) $35 million or more with respect to whole loans, (iii) $30 million or more with respect to subordinate interests in whole loans, and (iv) $20 million or over with respect to mezzanine loans, preferred equity, CTL and real estate investments. The full board of directors must approve investments (i) over $75 million with respect to whole loans and CMBS investments, (ii) over $65 million with respect to subordinate interests in whole loans, (iii) over $55 million with respect to mezzanine loans, and (iv) over $50 million with respect to preferred equity, CTL and other real estate investments.

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Origination

We utilize an extensive national network of relationships with property owners, developers, mortgage loan brokers, commercial and investment banks and institutional investors. We originate investments in our Gramercy Realty segment directly with financial institutions who are tenants/sellers of properties, and through financial intermediaries experienced in structuring corporate real property transactions. We originate debt investments in direct transactions with borrowers, we co-originate with or acquire existing loan assets from third parties, primarily financial institutions and we may occasionally co-invest with other institutional partners.

Acquisition

Once a potential investment has been identified, we perform comprehensive financial, structural, property, real estate market, operational and legal due diligence to assess the risks of the investment. We generally review the following criteria as part of the underwriting process, where applicable:

• the historic, in-place and projected property revenues and expenses;

• the potential for near-term revenue growth and opportunity for expense reduction and increased operating efficiencies;

• accountants may be engaged to audit operating expense recovery income;

• the property’s location and its attributes;

• the valuation of the property based upon financial projections prepared by us and confirmed by an independent “as is” and/or “as stabilized” appraisal;

• market assessment, including, review of tenant lease files, surveys of property sales and leasing comparables based on conversations with local property owners, leasing brokers, investment sales brokers and other local market participants, and an analysis of area economic and demographic trends, and a review of an acceptable mortgagee’s title policy;

• market rents, leasing projections for major vacant spaces and near-term vacancies, frequently prepared by commercial leasing brokers with local knowledge, or by members of our leasing and asset management group, and confirmed by discussion with other owners of competitive commercial properties in the same sub-market;

• the terms and form of the leases at a property;

• structural and environmental review of the property, including review of engineering and environmental reports and a site inspection, to determine future maintenance and capital expenditure requirements;

• the requirements for any reserves, including those for immediate repairs or rehabilitation, replacement reserves, tenant improvement and leasing commission costs, real estate taxes and property, casualty and liability insurance;

• the “Net Cash Flow” for a property, which is a set of calculations and adjustments prepared to assist in evaluating a property’s cash flows. The Net Cash Flow is generally the estimated stabilized annual revenue derived from the use and operation of the property (consisting primarily of rental income and reimbursement of expenses where applicable) after an allowance for vacancies, concessions and credit losses, less estimated stabilized annual expenses;

• for financing transactions, credit quality of the borrower and sponsors through background checks and review of financial strength and real estate operating experience; and

• for real estate investments, the credit quality and financial conditions of the financial institution that occupies all, or substantially all, of the property(ies) considered for acquisition.

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For commercial property transactions at Gramercy Realty, key factors that are considered in investment decisions include, but are not limited to, the proposed acquisition price, availability of financing, return on invested capital, the financial condition of the tenant, the importance of the property to the tenant’s business (which is often determined by the business groups that occupy the property), the design and functionality of the property, the property’s physical condition, local real estate market conditions, zoning, and the structure of the proposed or existing lease for the property.

For debt investments at Gramercy Finance, key factors that are considered in credit decisions include, but are not limited to, debt service coverage, loan-to-value ratios and property and financial operating performance. Consideration is also given to other factors such as the experience, financial strength, reputation and investment track record of the borrower and individual sponsors, additional forms of collateral and identified likely strategies to effect repayment. Once diligence is completed, we determine the level in the capital structure at which an investment will be made, the pricing for such an investment, and the required legal and structural protections.

Asset Management

Our leasing and asset management group within Gramercy Realty is organized by geographic region and provides for our owned properties: tenant relationship management, leasing, operations, property management, lease administration, property accounting and construction management. Regional heads are primarily accountable for the profitability and investment performance of their portfolios, and have control over income statements and capital expenditures, subject to oversight and approval of senior management. Our approach is intended to provide greater control over operations, capital expenditures, and return on investment.

Our loan servicing and asset management group within Gramercy Finance monitors our debt investments to identify any potential underperformance of the asset and work to remedy the situation in an expeditious manner in order to mitigate any effects of underperformance. The asset manager is responsible for understanding our business plan with respect to each investment and the borrower’s business plan with respect to each property underlying our debt investment and monitoring performance measured against that plan. We believe that asset management is a vital component of our business because it enables us to be responsive, timely, anticipate changes to financing requirements and generally develop a strong relationship that can lead to repeat business.

Operating Policies

Investment and Borrowing Guidelines

We operate pursuant to the following general guidelines for our investments and borrowings:

• no investments are made that we believe would cause us to fail to qualify as a REIT;

• no investments are made that we believe would cause us to be regulated as an investment company under the Investment Company Act;

• substantially all assets and investments are financed in whole or in part through mortgages, securitization, syndication and secured borrowings, and assets intended for inclusion in traditional securitization transactions will be hedged, where possible, against movements in the applicable swap yield through customary techniques;

• We engage an outside advisory firm to assist in executing and monitoring hedges, advising management on the appropriateness of such hedges, and establishing the appropriate tax and accounting treatment of our hedges; and

• we will not co-invest with SL Green or any of its affiliates unless the terms of such transaction are approved by a majority of our independent directors.

These investment guidelines may be changed by our board of directors without the approval of our stockholders.

For debt investments, the affirmative vote of all members of a credit committee consisting of our most senior executive officers is necessary to approve all transactions over $3 million.

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Hedging Activities

Subject to maintaining qualification as a REIT, we use a variety of commonly used derivative instruments that are considered conventional, or “plain vanilla” derivatives, including interest rate swaps, caps, collars and floors, in our risk management strategy to limit the effects of changes in interest rates on our operations. Each of our CDOs maintains a minimum amount of allowable unhedged interest rate risk. The CDO that closed in 2005 permits a minimum amount of unhedged interest rate risk of 20% of the net outstanding principal balance and both the CDO that closed in 2006 and the CDO that closed in 2007 permit a minimum amount of unhedged interest rate risk of 5% of the net outstanding principal balance. Our hedging strategy consists of entering into interest rate swap and interest rate cap contracts for Gramercy Finance and interest rate caps for Gramercy Realty. The value of our derivatives may fluctuate over time in response to changing market conditions, and will tend to change inversely with the value of the risk in our liabilities that we intend to hedge. Hedges are sometimes ineffective because the correlation between changes in value of the underlying investment and the derivative instrument is less than was expected when the hedging transaction was undertaken. We continuously monitor the effectiveness of our hedging strategies and we have retained the services of an outside financial services firm with expertise in the use of derivative instruments to advise us on our overall hedging strategy, to effect hedging trades, and to provide the appropriate designation and accounting of all hedging activities from a GAAP and tax accounting and reporting perspective.

These instruments are used to hedge as much of the interest rate risk as we determine is in the best interest of our stockholders, given the cost of such hedges and the need to maintain our qualifications as a REIT. To the extent that we enter into a hedging contract to reduce interest rate risk on indebtedness incurred to acquire or carry real estate assets, any income that we derive from the contract is not considered income for purposes of the REIT 95% gross income test and is either non-qualifying for the 75% gross income test (hedges entered into prior to August 1, 2008), or is not considered income for purposes of the 75% gross income test (hedges entered into after July 31, 2008). This change in character for the 75% gross income test was included in the Housing and Economic Recovery Act of 2008. We can elect to bear a level of interest rate risk that could otherwise be hedged when we believe, based on all relevant facts, that bearing such risk is advisable.

Disposition Policies

We evaluate our assets on a regular basis to determine if they continue to satisfy our investment criteria. Subject to market conditions certain restrictions applicable to REITs, we may sell our investments opportunistically and use the proceeds of any such sale for debt reduction, additional acquisitions or working capital purposes.

Equity Capital Policies

Subject to applicable law, our board of directors has the authority, without further stockholder approval, to issue additional authorized common stock and preferred stock or otherwise raise capital, including through the issuance of senior securities, in any manner and on the terms and for the consideration it deems appropriate.

We may, under certain circumstances, repurchase our common or preferred stock in private transactions with our stockholders if those purchases are approved by our board of directors. Our board of directors has no present intention of causing us to repurchase any shares, and any action would only be taken in conformity with applicable federal and state laws and the applicable requirements for qualifying as a REIT, for so long as our board of directors concludes that we should remain a qualified REIT.

Other Policies

We operate in a manner that we believe will not subject us to regulation under the Investment Company Act. We may invest in the securities of other issuers for the purpose of exercising control over such issuers. We do not underwrite the securities of other issuers.

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Future Revisions in Policies and Strategies

Our board of directors has the power to modify or waive our investment guidelines, policies and strategies. Among other factors, developments in the market that either affect the policies and strategies mentioned herein or that change our assessment of the market may cause our board of directors to revise our investment guidelines, policies and strategies. Without the approval of two-thirds of the votes entitled to be cast by our stockholders, we may not, however, amend our charter to change the requirement that a majority of our board of directors consist of independent directors or the requirement that a majority of our independent directors approve related party transactions.

Competition

In our investment activities, we compete with other REITs, specialty finance companies, savings and loan associations, banks, mortgage bankers, insurance companies, mutual funds, hedge funds, institutional investors, investment banking firms, private equity firms, other lenders, governmental bodies and other entities, which may have greater financial resources and lower costs of capital available to them than we have. We also compete with numerous commercial properties for tenants. Some of the properties we compete with may be newer or have more desirable locations or the competing properties’ owners may be willing to accept lower rents than are acceptable to us. In addition, the competitive environment for leasing is affected considerably by a number of factors including, among other things, changes in economic factors and supply and demand of space. These factors may make it difficult for us to lease existing vacant space and space associated with future lease expirations at rental rates that are sufficient to meeting our capital needs.

To the extent that a competitor is willing to risk larger amounts of capital in a particular transaction or to employ more liberal standards when evaluating potential investments than we are, our origination volume and profit margins for our investment portfolio could be adversely affected. Our competitors may also be willing to accept lower returns on their investments and may succeed in originating or acquiring assets that we have targeted for acquisition. Although we believe that we are positioned to compete effectively in each facet of our business, there is considerable competition in our market sector and there can be no assurance that we will compete effectively or that we will not encounter further increased competition in the future that could limit our ability to conduct our business effectively.

Compliance With The Americans With Disabilities Act Of 1990

Properties that we acquire, and the properties underlying our investments, are required to meet federal requirements related to access and use by disabled persons as a result of the Americans with Disabilities Act of 1990. In addition, a number of additional federal, state and local laws may require modifications to any properties we purchase, or may restrict further renovations of our properties, with respect to access by disabled persons. Noncompliance with these laws or regulations could result in the imposition of fines or an award of damages to private litigants. Additional legislation could impose additional financial obligations or restrictions with respect to access by disabled persons. If required changes involve greater expenditures than we currently anticipate, or if the changes must be made on a more accelerated basis, our ability to make distributions could be adversely affected.

Industry Segments

Prior to the acquisition of American Financial, we were a REIT focused primarily on originating and acquiring loans and securities related to real estate and operated in only one segment. As a result of the acquisition of American Financial, as of April 2008, we have determined that we operate two reportable operating segments: Finance and Real Estate. The reportable segments were determined based on the management approach, which looks to our internal organizational structure. These two lines of business require different support infrastructures.

The Real Estate segment includes all of our activities related to the ownership and leasing of commercial real estate. In connection with the significant increase in the size and scope of our real estate portfolio resulting from the American Financial acquisition, we developed an integrated asset management platform within Gramercy Realty to consolidate responsibility for, and control over, leasing, lease administration, property management, operations, construction management, tenant relationship management and property accounting.

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The Finance segment includes all of our activities related to senior and mezzanine real estate debt and senior and mezzanine capital investment activities and the financing thereof, including our CMBS investments. These include a dedicated management team within Gramercy Finance for real estate lending, origination, acquisition, sales and syndications, asset management and primary and special servicing.

Segment revenue and profit information is presented in Note 23 to the Consolidated Financial Statements.

Employees

As of December 31, 2009, we had 131 employees. Our employees are not represented by a collective bargaining agreement.

Corporate Governance and Internet Address; Where Readers Can Find Additional Information

We emphasize the importance of professional business conduct and ethics through our corporate governance initiatives. Our board of directors consists of a majority of independent directors; the Audit, Nominating and Corporate Governance, and Compensation Committees of our board of directors are composed exclusively of independent directors. We have adopted corporate governance guidelines and a code of business conduct and ethics.

We file annual, quarterly and current reports, proxy statements and other information required by the Exchange Act with the SEC. Readers may read and copy any document that we file at the SEC’s Public Reference Room located at 100 F Street, N.E., Washington, D.C. 20549, U.S.A. Please call the SEC at 1-800-SEC-0330 for further information on the Public Reference Room. Our SEC filings are also available to the public from the SEC’s internet site at http://www.sec.gov. Copies of these reports, proxy statements and other information can also be inspected at the offices of the New York Stock Exchange, Inc., 20 Broad Street, New York, New York 10005.

Our internet site is http://www.gkk.com. We make available free of charge through our internet site our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and Forms 3, 4 and 5 filed on behalf of directors and executive officers and any amendments to those reports filed or furnished pursuant to the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Also posted on our website in the “Investor Relations-Corporate Governance” section are charters for our Audit Committee, Compensation Committee and Nominating and Corporate Governance Committee as well as our Corporate Governance Guidelines and our Code of Business Conduct and Ethics governing our directors, officers and employees. Information on, or accessible through, our website is not a part of, and is not incorporated into, this report.

Investment Company Act Exemption

We have conducted our operations and intend to continue to conduct our operations so as not to become regulated as an investment company under the Investment Company Act. We believe that there are a number of exclusions or exemptions under the Investment Company Act that may be applicable to us. We will either be excluded from the definition of an investment company under Section 3(a)(1)(C) of the Investment Company Act, by owning or proposing to acquire investment securities having a value not exceeding 40% of the value of the our total assets (exclusive of U.S. Government securities and cash items) on an unconsolidated basis, or by qualifying for the exclusions from registration provided by Sections 3(c)(5)(C) and/or 3(c)(6) of the Investment Company Act. We will monitor our portfolio periodically and prior to each acquisition to confirm that we continue to qualify for the relevant exclusion or exemption.

Qualifying for the Section 3(c)(5)(C) exemption requires that at least 55% of our portfolio be comprised of “qualifying assets,” and a total of at least 80% of our portfolio be comprised of “qualifying assets” and “real estate-related assets,” a category that includes qualifying assets. We generally expect whole loans, real property investments, and Tier 1 mezzanine loans to be qualifying assets. Substantially all of the commercial properties owned in our Gramercy Realty segment are considered to be “real estate-related assets.” The treatment of distressed debt securities as qualifying assets is based on the characteristics of the particular type of loan, including its foreclosure rights. Junior (first loss) interests in CMBS pools may constitute qualifying assets under Section 3(c)(5)(C), provided that we have the unilateral right to foreclose, directly or indirectly, on the mortgages in the pool and that we may act as the controlling class or directing holder of the pool.

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Tier 1 mezzanine loans are loans granted to a mezzanine borrower that directly owns interests in the entity that owns the property being financed. Subordinate interests in whole loans may constitute qualifying assets under Section 3(c)(5)(C), provided that we have, among other things, approval rights in connection with any material decisions pertaining to the administration and servicing of the relevant mortgage loan and, in the event that the mortgage loan becomes non-performing, we have effective control over the remedies relating to the enforcement of the loan, including ultimate control of the foreclosure process. We generally do not treat preferred equity investments as qualifying assets. In relying on the exemption provided by Section 3(c)(5)(C), we also make investments so that at least 80% of our portfolio is comprised of qualifying assets and real estate-related assets, we expect that all of these classes of investments will be considered real estate-related assets under the Investment Company Act for purposes of the 80% investment threshold.

Qualification for the Section 3(a)(1)(C), Section 3(c)(5)(C) and/or Section 3(c)(6) exclusions or exemptions may limit our ability to make certain investments. To the extent that the staff of the SEC provides more specific guidance regarding the treatment of assets as qualifying assets or real estate-related assets, we may be required to adjust our investment strategy accordingly. Any additional guidance from the staff of the SEC could provide additional flexibility to us, or it could further inhibit our ability to pursue the investment strategy we have chosen.

Environmental Matters

Under various federal, state and local environmental laws, ordinances and regulations, a current or previous owner of real estate (including, in certain circumstances, a secured lender that succeeds to ownership or control of a property) may become liable for the costs of removal or remediation of certain hazardous or toxic substances at, on, under or in its property. Those laws typically impose cleanup responsibility and liability without regard to whether the owner or control party knew of or was responsible for the release or presence of such hazardous or toxic substances. The costs of investigation, remediation or removal of those substances may be substantial. The owner or control party of a site may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from a site. Certain environmental laws also impose liability in connection with the handling of or exposure to asbestos-containing materials, pursuant to which third parties may seek recovery from owners of real properties for personal injuries associated with asbestos-containing materials. Absent succeeding to ownership or control of real property, a secured lender is not likely to be subject to any of these forms of environmental liability. We are not currently aware of any environmental issues which could materially affect us or our operations.

Federal regulations require building owners and those exercising control over a building’s management to identify and warn, via signs and labels, of potential hazards posed by workplace exposure to installed asbestos-containing materials and potentially asbestos-containing materials in the building. The regulations also set forth employee training, record keeping and due diligence requirements pertaining to asbestos-containing materials and potential asbestos-containing materials. Significant fines can be assessed for violation of these regulations. Building owners and those exercising control over a building’s management may be subject to an increased risk of personal injury lawsuits by workers and others exposed to asbestos-containing materials and potentially asbestos-containing materials as a result of these regulations. The regulations may affect the value of a building containing asbestos-containing materials and potential asbestos-containing materials in which we have invested. Federal, state and local laws and regulations also govern the removal, encapsulation, disturbance, handling and/or disposal of asbestos-containing materials and potential asbestos-containing materials when such materials are in poor condition or in the event of construction, remodeling, renovation or demolition of a building. Such laws may impose liability for improper handling or a release into the environment of asbestos-containing materials and potential asbestos-containing materials and may provide for fines to, and for third parties to seek recovery from, owners or operators of real properties for personal injury or improper work exposure associated with asbestos-containing materials and potentially asbestos-containing materials.

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Prior to closing any property acquisition, we obtain environmental assessments in a manner we believe prudent in order to attempt to identify potential environmental concerns at such properties. These assessments are carried out in accordance with an appropriate level of due diligence and generally include a physical site inspection, a review of relevant federal, state and local environmental and health agency database records, one or more interviews with appropriate site-related personnel, review of the property’s chain of title and review of historic aerial photographs and other information on past uses of the property. We may also conduct limited subsurface investigations and test for substances of concern where the result of the first phase of the environmental assessments or other information indicates possible contamination or where our consultants recommend such procedures.

While we purchase many of our properties on an “as is” basis, our purchase contracts for such properties contain an environmental contingency clause, which permits us to reject a property because of any environmental hazard at such property. However, we do acquire properties which may have asbestos abatement requirements, for which we set aside appropriate reserves.

We believe that our portfolio is in compliance in all material respects with all federal and state regulations regarding hazardous or toxic substances and other environmental matters.

Insurance

We carry commercial liability and all risk property insurance, including flood, where required, earthquake, wind and terrorism coverage, on substantially all of the properties that we own. For certain net leased properties, however, we rely on our tenant’s insurance and do not maintain separate coverage. We continue to monitor the state of the insurance market and the scope and costs of specialty coverage, including flood, earthquake, wind and terrorism. However, we cannot anticipate what coverage will be available on commercially reasonable terms in future policy years.

Our debt instruments, consisting primarily of mortgage loans secured by our properties (which are generally non-recourse to us), and senior and junior mezzanine loans, contain customary covenants requiring us to maintain insurance. Although we believe that we have adequate insurance coverage for purposes of these agreements, we may not be able to obtain an equivalent amount of coverage at reasonable costs in the future. Further, if lenders insist on greater coverage than we are able to obtain it could adversely affect our ability to finance and/or refinance our properties and expand our portfolio.

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ITEM 1A. RISK FACTORS

Risks Related to Our Business

Liquidity in the capital markets is essential to our businesses and future growth and we rely on external sources to finance a significant portion of our operations. We have limited liquidity and we may be required to pursue certain measures in order to maintain or enhance our liquidity.

Liquidity is essential to our business and our ability to operate and grow and to fund existing obligations. A primary source of liquidity for us has been the equity and debt capital markets, including issuing common equity, perpetual preferred equity and trust preferred securities. We depend on external financing to fund the growth of our business mainly because, as a REIT, we are required under the Internal Revenue Code to distribute 90% of our taxable income to our stockholders, including taxable income where we do not receive corresponding cash. Our access to equity or debt financing depends on the willingness of third parties to make equity investments in us and provide us with corporate level debt. It also depends on conditions in the capital markets generally. Companies in the real estate industry, including us, are currently experiencing, and have at times historically experienced, limited availability of capital, and new capital sources may not be available on acceptable terms, if at all. Our ability to raise capital could be impaired if the capital markets have a negative perception of our long-term and short-term financial prospects or the prospects for mortgage REITs and the commercial real estate market generally. We cannot be certain that sufficient funding or capital will be available to us in the future on terms that are acceptable to us, if at all. If we cannot obtain sufficient funding on acceptable terms, or at all, we will not be able to operate and/or grow our business, which would likely have a negative impact on the market price of our common stock and our ability to make distributions to our stockholders. In such an instance, a lack of sufficient liquidity would have a material adverse impact on our operations, cash flow, financial condition and our ability to continue as a going concern.

Currently, we have limited liquidity. As of December 31, 2009, our unrestricted cash balance was $138.3 million. We currently do not have a corporate credit facility to draw against for liquidity purposes.

We may be required to pursue certain measures in order to maintain or enhance our liquidity, including seeking the extension or replacement of our debt facilities, potentially selling assets at unfavorable prices and/or reducing our operating expenses. Sales of assets held in the CDOs do not generate unrestricted cash or further liquidity for us because proceeds from CDO asset sales are restricted and available only for reinvestment within the CDOs during the applicable reinvestment period and subject to compliance with various collateral qualification tests. We cannot assure you that we will be successful in measures to improve our liquidity.

For information about our available sources of funds, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources” and the notes to the Consolidated Financial Statements in this Annual Report on Form 10-K.

Certain of our outstanding mortgage and mezzanine loans in Gramercy Realty will mature in March 2011. There is no guarantee that we will be able to refinance all or any portion of indebtedness under these loans prior to maturity. In the event we are only able to refinance a portion of the loans, we would be required to pay a shortfall between the amount refinanced and the principal of the loans. We may not have sufficient capital to satisfy the shortfall, and failure to refinance the entire loans or satisfy the shortfall would subject us to risk of default or foreclosure of underlying property collateral which consists of substantially all of Gramercy Realty assets.

Each of our $241.3 million mortgage loan with Goldman Sachs Commercial Mortgage Capital, L.P., or GSCMC, Citicorp North America, Inc., or Citicorp, and SL Green, or the Goldman Mortgage Loan, and our $553.5 million senior and junior mezzanine loans with GSCMC, Citicorp, KBS Real Estate Investment Trust, Inc. and SL Green, or the Goldman Mezzanine Loans, collateralized by substantially all the properties held by Gramercy Realty and our equity interest in the entities comprising our Gramercy Realty division, will mature in March 2011. These loans were extended from its original maturity in March 2010 when we entered into amendments to these loans. We likely will be unable to refinance the entire amount of indebtedness under the Goldman Mortgage Loan and the Goldman Mezzanine Loans prior to their final maturity. In the event we are unable to refinance the entire outstanding principal of the Goldman Mortgage Loan and the Goldman

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Mezzanine Loans, we will be required to pay the shortfall between the amount we can refinance (if we can at all) and the principal balance. There is no guarantee we will be able to refinance these loans on favorable terms, or at all. We cannot assure you that we will have sufficient capital to satisfy the shortfall, and failure to do so would subject us to risk of default under the Goldman Mortgage Loan and the Goldman Mezzanine Loans. A default could result in the foreclosure of the underlying collateral which consists of all of the Gramercy Realty properties and/or our equity interests in the entities that comprise our Gramercy Realty division collateralizing these loans, which would materially and adversely affect our business, financial condition and results of operations. A loss of the Gramercy Realty portfolio in such circumstances would trigger a substantial book loss to us and would likely result in our company having negative book value.

We utilize a significant amount of debt to finance our portfolios of debt investments and real estate investments, which may subject us to an increased risk of loss, adversely affecting the return on our investments and reducing cash available for distribution.

We utilize a significant amount of debt to finance our operations, which can compound losses and reduce the cash available for distributions to our stockholders. We generally leverage our portfolios through the use of securitizations, including the issuance of CDOs, mortgage and mezzanine borrowings and other borrowings. The leverage we employ varies depending on our ability to obtain financing, the loan-to-value and debt service coverage ratios of our assets, the yield on our assets, the targeted leveraged return we expect from our portfolios and our ability to meet ongoing covenants related to our asset mix and financial performance. Currently, neither our charter nor our bylaws impose any limitations on the extent to which we may leverage our assets. Substantially all of our assets are pledged, as collateral for our secured borrowings. Our return on our investments and cash available for distribution to our stockholders may be reduced to the extent that changes in market conditions cause the cost of our financing to increase relative to the income that we can derive from the assets we acquire. For example, we have purchased, and may purchase in the future, both subordinate classes of bonds and certain investment grade classes of bonds in our CDOs which represent leveraged investments in the collateral debt securities and other underlying assets. The use of leverage through such CDOs creates the risk for the holders of these classes of bonds of increased exposure to losses on a leveraged basis as a result of defaults with respect to such collateral debt securities. As a result, the occurrence of defaults with respect to only a small portion of the collateral debt securities could result in the complete loss of the investment of the holders of the subordinate classes of bonds and defaults with respect to larger or a material portion of the collateral debt securities could result in complete or partial losses of the investment of the holders of certain investment grade classes of bond.

Our debt service payments, including payments in connection with any CDOs, reduce our net income available for distributions. Moreover, we may not be able to meet our debt service obligations and, to the extent that we cannot, we risk the loss of some or all of our assets to foreclosure or sale to satisfy our debt obligations. Additionally, our ability to make scheduled payments of principal or interest on, or to refinance, our indebtedness depends on our future performance, which, to a certain extent, is subject to general economic, financial, competitive and other factors beyond our control. In particular, the current credit crisis, which began in earnest in mid-2007 and spread throughout the global economy in 2008, 2009, and 2010 to date has materially impacted our business. The credit crisis has, among other things, increased our costs of funds, eliminated our access to the unsecured debt markets and adversely affected our results of operations.

Our outstanding debt contains restrictive covenants relating to our operations.

When we obtain financing, lenders may impose restrictions on us that affect our ability to incur additional debt, our capability to make distributions to stockholders and our flexibility to determine our operating policies. Loan documents may contain negative covenants that could limit, among other things, our ability to repurchase stock, distribute more than a certain amount of our funds from operations and employ leverage beyond certain amounts.

Loan documents also may require compliance with various financial covenants, including minimum liquidity and net worth as well as specified financial ratios such as fixed charge coverage, unencumbered assets to unsecured indebtedness, leverage and debt service coverage. A breach of financial covenants could result in an acceleration of our debt if a waiver or modification is not agreed upon with the lenders, and our ability to continue as a going concern would be affected.

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As a result of the credit crisis, our financial performance and credit metrics have put pressure on our ability to meet financial covenants in certain of our mortgage and other debt financings. While we were in compliance with our covenants as of December 31, 2009, we cannot be certain we will continue to be in compliance in the future.

Failure to comply with CDO coverage tests may have a negative impact on our liquidity and net cash flows.

The terms of our CDOs include certain over-collateralization and interest coverage tests, which are used primarily to determine whether and to what extent principal and interest paid on the debt securities and other assets that serve as collateral underlying the CDOs may be used to pay principal and interest on the various classes of notes payable issued by the CDOs. If any of the various CDO tests are not satisfied, distributions that we currently receive with respect to our equity interests in the CDOs, interest and principal payments that we currently receive on certain of the tranches of CDO notes that we hold, as well as the subordinate management fees that we currently receive, will instead be redirected to pay principal on certain senior tranches of CDO notes that are not held by us. Because a material portion of our net cash flow in 2009 came from our CDOs, failure to satisfy the CDO tests could materially and adversely affect our liquidity and net cash flows. Our 2007 CDO failed its over-collaterization tests at the November 2009 distribution date and we do not expect it to regain compliance in 2010. Although our 2005 and 2006 CDOs were in compliance with their CDO tests as of December 31, 2009, the compliance margin, particularly with respect to the 2005 CDO, was thin and relatively small declines in performance and credit metrics could cause those CDOs to fall out of compliance in the future. We cannot be certain that the CDO tests will continue to be satisfied, and that we will continue to receive cash flows relating to our CDOs in the future. If the cash flow from both our 2005 and 2006 CDOs is redirected, our business, financial condition, and results of operations and our ability to continue as a going concern would be materially and adversely affected.

Apart from over-collateralization and interest coverage tests, the operative documents for the CDOs provide for certain events of default, the occurrence of which would entitle a senior class or classes of notes payable to accelerate the notes payable of such CDO and, depending upon the circumstances, require a liquidation of the collateral under then-current market conditions, which could result in higher levels of losses on the collateral and the notes payable of such CDO than might otherwise occur.

Additionally, we could, in certain instances, be removed as the collateral manager of our CDOs, which could result in a loss of the collateral management fees, which are remitted to us by our CDOs. If we were removed as collateral manager or as special servicer of our CDOs, a different collateral manager or special servicer appointed by the holders of the senior class or classes of notes may manage the CDO or service the notes in a manner that is not in our best interests as holder of the equity and subordinated classes of CDO securities.

Our CDOs could continue to generate taxable income for us despite the fact that if in the future we are not receiving cash distributions on our equity and subordinated note holdings from these CDOs. Should this occur, taxable income would continue to be recognized on each underlying investment in the relevant CDO. We would continue to be required to distribute 90% of our REIT taxable income (determined with regard to the dividends paid deduction and excluding net capital gain) from these transactions to continue to qualify as a REIT, despite the fact that we are not receiving cash distributions on our equity and subordinated note holdings from these CDOs.

The reinvestment periods for our CDOs will expire in 2010, 2011 and 2012.

The period during which we are permitted to reinvest principal payments on the underlying assets into qualifying replacement collateral for one of our CDOs will expire in July 2010 and will expire for our other two CDOs in July 2011 and August 2012, respectively. In the past, our ability to reinvest has been instrumental in maintaining compliance with the over-collateralization and interest coverage tests for our CDOs. Following the conclusion of the reinvestment period in one of our CDOs, our ability to maintain compliance with such tests for that CDO will be negatively impacted.

Potential rating agency downgrades may adversely affect our ability to reinvest CDO proceeds.

To date, rating agency downgrades and impairments of our loan investments and CMBS investments have not impeded our right to reinvest CDO proceeds as provided in the operative CDO documents. However,

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there can be no assurance that our right to reinvest CDO proceeds will not be impaired by future rating agency downgrades or investment impairments and, in such event, the cash flows that otherwise would have been payable to us, as the holder of certain junior and senior tranches of notes payable issued by our CDOs, may, depending on circumstances, instead be redirected to pay principal and interest on the most senior tranches of notes payable issued by our CDOs, which are owned by third parties. As a result, such downgrades could have a material adverse effect on our liquidity, results of operations and business.

Our mortgage and mezzanine loans contain cross-default provisions.

Certain of our mortgage and mezzanine loan agreements contain cross-default provisions whereby a default under one agreement could result in a default and acceleration of indebtedness under other agreements. If a cross-default were to occur, we may not be able to pay our debts or access capital from external sources in order to refinance our debts. If some or all of our debt obligations default and it causes a default under other indebtedness, our business, financial condition and results of operations would be materially and adversely affected and our ability to continue as a going concern would be affected.

If we are unable to generate sufficient funds or obtain financing for future capital commitments, we may not be able to repay indebtedness or fund our other liquidity needs, which could have a material adverse effect on us.

At December 31, 2009, we had future funding commitments of approximately $27.7 million related to real estate debt investments we held. Additionally, with respect to our owned real estate investments, our leases and debt agreements typically require us as landlord and borrower to maintain our properties in good operating condition, which often involves capital expenditures. Our ability to fund future capital commitments and capital expenditures will depend, to a certain extent, on general economic, financial, competitive and other factors that may be beyond our control. We cannot be certain that our business will generate sufficient cash flow from operations, that we will be able to raise funds in the capital markets or that future borrowings will be available to us in an amount sufficient, if at all, to enable to us to fund our liquidity needs. Our inability to fund future commitments or required capital expenditures on our owned real estate investments may cause borrowers, tenants or lenders to take legal action against us, which could have a material adverse effect on us. For more information on our contractual commitments, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Contractual Obligations” and the notes to the consolidated financial statements in this Annual Report on Form 10-K.

We presently have virtually no additional borrowing capacity.

We currently do not have a corporate credit facility to draw against for liquidity purposes and substantially all of our assets are pledged as collateral for our secured borrowings. As a result, we must fund future funding commitments and capital expenditures with existing liquidity, including unrestricted cash and cash in our CDOs, or future liquidity resulting from asset sales, which will have a significant impact on our liquidity position. If we are unable to meet future funding commitments or fund required capital expenditures, our borrowers or tenants may take legal action against us, which could have a material adverse effect.

We have incurred substantial impairments of our assets and may incur significant loan loss reserves/impairments in the future.

Due to a variety of factors, including current adverse market conditions affecting the real estate market, we have recorded substantial loan loss provisions. For the year ended December 31, 2009 and 2008, we recorded approximately $517.8 million and $97.9 million, respectively, in loan loss provisions and impairment losses related to our investments. Our debt investments and real estate investments may suffer additional loan loss provisions/impairments in the future causing us to recognize significant losses. If we are unsuccessful in renegotiating, selling or otherwise resolving assets that are currently nonperforming or that we expect will become nonperforming, we may experience loss of principal or reduced income available for distributions. Investors and lenders alike could lose confidence in the quality and value of our assets. These impairments, or the perception that these impairments may occur, can depress our stock price, harm our liquidity and materially adversely impact our results of operations. We may be forced to sell substantial assets at a time when the market is depressed in order to support or enhance our liquidity. Despite our need to sell substantial

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assets, we may be unable to make such sales on favorable terms or at all, further materially damaging our liquidity and operations. If we are unable to maintain adequate liquidity as a result of these impairments or otherwise, our ability to continue as a going concern would be affected and you could lose some or all of your investment.

Our reserves for loan losses may prove inadequate, which could have a material adverse effect on us.

We maintain and regularly evaluate financial reserves to protect against potential future losses. Our reserves reflect management’s judgment of the probability and severity of losses. We cannot be certain that our judgment will prove to be correct and that reserves will be adequate over time to protect against potential future losses because of unanticipated adverse changes in the economy or events adversely affecting specific assets, borrowers, industries in which our borrowers operate or markets in which our borrowers or their properties are located. We must evaluate existing conditions on our debt investments to make determinations to take loan loss reserves on these specific investments. If our reserves for credit losses prove inadequate, we could suffer losses which would have a material adverse effect on our financial performance, the market price of our common stock and our ability to make distributions to our stockholders.

Higher loan loss reserves are expected if economic conditions do not improve.

If the decline in the U.S. and global economies do not stabilize and reverse, we will likely continue to experience loan loss reserves, potential defaults and asset impairment charges in 2010. Borrowers may also be less able to pay principal and interest on loans if the economy continues to weaken and they continue to experience financial stress. Declining real property values also would increase loan-to-value ratios on our loans and, therefore, weaken our collateral coverage and increase the likelihood of higher loan loss reserves. Any sustained period of increased defaults and foreclosures would adversely affect our interest income, financial condition, business prospects and our cash flows.

Loan loss reserves are particularly difficult to estimate in a turbulent economic environment.

Our loan loss reserves are evaluated on a quarterly basis. Our determination of loan loss reserves requires us to make certain estimates and judgments, which are particularly difficult to determine during a recession where commercial real estate credit has been nearly shut off and commercial real estate transactions have dramatically decreased. Our estimates and judgments are based on a number of factors, including projected cash flows from the collateral securing our commercial real estate loans, loan structure, including the availability of reserves and recourse guarantees, likelihood of repayment in full at the maturity of a loan, potential for a refinancing market returning to commercial real estate in the future and expected market discount rates for varying property types. If our estimates and judgments are not correct, our results of operations and financial condition could be severely impacted.

The current weakness in the financial markets could adversely affect us or one or more of our lenders, which could result in increases in our borrowing costs, reduction in our liquidity and reductions in the value of the investments in our portfolio.

The continuing dislocations in the financial markets have adversely affected our counterparties providing funding for our loan or CMBS investments or real estate assets, and could cause such counterparties to be unwilling or unable to provide us with additional financing. This could potentially limit our ability to finance our investments and operations, increase our financing costs and reduce our liquidity. If one or more major market participants fails or withdraws from the market, it could negatively impact the marketability of all fixed income securities, and this could reduce the value of the securities in our portfolio, thus reducing our net book value. Furthermore, if our counterparties are unwilling to or unable to provide us with financing, we could be forced to sell our investments at a time when prices are depressed. If this were to occur, it could prevent us from complying with the REIT asset and income tests necessary to fulfill our REIT qualification requirements or could cause us not to qualify for an exemption from the Investment Company Act, and otherwise materially harm our results of operation and financial outlook.

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There can be no assurance that the actions of the U.S. government, Federal Reserve and other governmental and regulatory bodies for the purpose of stabilizing the financial markets, or market response to those actions, will achieve the intended effect and our business may not benefit from, and may be adversely impacted by, these actions and further government or market developments could adversely impact us.

Since mid-2007, and particularly during the second half of 2008, the financial services industry and securities markets generally were materially and adversely affected by significant declines in the values of nearly all asset classes and by a serious lack of liquidity. This was initially triggered by declines in the values of subprime mortgages, but spread to all mortgage and real estate asset classes, to leveraged bank loans and to nearly all assets classes, including equities. The global markets have been characterized by substantially increased volatility and short-selling and an overall loss of investor confidence, initially in the financial institutions, but more recently in companies in a number of other industries and in the broader markets. The decline in asset values has caused increases in margin calls for investors, requirements that derivatives counterparties post additional collateral and redemptions by mutual and hedge fund investors, all of which have creased the downward pressure on asset values and outflows of client funds across the financial services industry. In addition, the increased redemptions and unavailability of credit have required hedge funds and others to rapidly reduce leverage, which has increased volatility and further contributed to the decline of asset values.

In response to the recent unprecedented financial issues affecting the banking system and financial markets and going concern threats to investment banks and other financial institutions, the Emergency Economic Stabilization Act of 2008, or the EESA, was signed into law on October 3, 2008. The EESA provides the U.S. Secretary of Treasury with the authority to establish a Troubled Asset Relief Program, or TARP, to purchase from financial institutions up to $700 billion of residential or commercial mortgages and any securities, obligations, or other instruments that are based on, or related to, such mortgages, that in each case was originated or issued on or before March 14, 2008. The ESSA also provides for a program that would allow companies to insure their troubled assets. On February 17, 2009, President Obama signed the American Recovery and Reinvestment Act of 2009, or ARRA, a $787 billion stimulus bill for the purpose of stabilizing the economy by creating jobs among other things. As of February 12, 2010, the U.S. Treasury is managing or overseeing the following programs under TARP: the Capital Purchase Program, the Systemically Failing Institutions Program, the Auto Industry Financing Program and the Homeowner Affordability, the Legacy Public-Private Investment Program, and Stability Plan, which is partially financed by TARP.

These can be no assurance that the EESA, TARP or other programs will have a beneficial impact on the financial markets, including current extreme levels of volatility. In addition, the U.S. Government, Federal Reserve and other governmental and regulatory bodies have taken or are considering taking other actions to address the financial crisis. We cannot predict whether or when such actions may occur or what impact, if any, such actions could have on our business, results of operations and financial condition.

We are required to make a number of judgments in applying accounting policies and different estimates and assumptions in the application of these policies could result in changes to our reporting of financial condition and results of operations.

Material estimates that are particularly susceptible to significant change relate to the determination for loan losses, the effectiveness of derivatives and other hedging activities, the fair value of certain financial instruments (debt obligations, CMBS, loan assets, securities, derivatives, and privately held investments), CTL investments, deferred income tax assets or liabilities, share-based compensation, and accounting for acquisitions, including the fair value determinations and the analysis of goodwill impairment. While we have identified those accounting policies that are considered critical and have procedures in place to facilitate the associated judgments, different assumptions in the application of these policies could result in material changes to our reports of financial condition and results of operations.

We are dependent on key personnel whose continued service is not guaranteed.

We rely on a small number of persons who comprise our existing senior management team to implement our business and investment strategies. While we have entered into employment agreements with certain member of our senior management team, they may nevertheless cease to provide services to us at any time.

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The loss of services of any of our key management personnel, or our inability to recruit and retain qualified personnel in the future, could have an adverse effect on our business.

Quarterly results may fluctuate and may not be indicative of future quarterly performance.

Our quarterly operating results could fluctuate; therefore, you should not rely on past quarterly results to be indicative of our performance in future quarters. Factors that could cause quarterly operating results to fluctuate include, among others, variations in our investment origination volume, loan loss reserves or impairments, loan maturities, variations in the timing of prepayments, the degree to which we encounter competition in our markets and general economic conditions.

Maintenance of our Investment Company Act exclusions and exemptions imposes limits on our operations.

We believe that there are a number of exclusions and exemptions under the Investment Company Act that may be applicable to us and we have conducted and intend to continue to conduct our operations so as not to become regulated as an investment company under the Investment Company Act. We will either be excluded from the definition of investment company under Section 3(a)(1)(C) of the Investment Company Act, by owning or proposing to acquire “investment securities” having a value not exceeding 40% of the value of our total assets (exclusive of U.S. Government securities and cash items) on an unconsolidated basis, or exempted by qualifying for the exemptions from registration provided by Sections 3(c)(5)(C) and/or 3(c)(6) of the Investment Company Act. For example, Section 3(c)(5)(C) exempts from the definition of “investment company” any person who is “primarily engaged in the business of purchasing or otherwise acquiring mortgages and other liens on and interests in real estate.” Additionally, Section 3(c)(6) exempts from the definition of “investment company” any company primarily engaged, directly or through majority-owned subsidiaries, in the business of purchasing or otherwise acquiring mortgages and other liens on and interests in real estate. The assets that we have acquired and may acquire in the future, therefore, are limited by the provisions of the Investment Company Act and the exclusions and exemptions on which we rely. In addition, we could, among other things, be required either (a) to change the manner in which we conduct our operations to avoid being required to register as an investment company or (b) to register as an investment company, either of which could have an adverse effect on our business and our ability to pay dividends.

To maintain our qualification for an exclusion from registration under the Investment Company Act pursuant to Sections 3(c)(5)(C) and 3(c)(6) at least 55% of our portfolio, or the assets of our majority-owned subsidiaries, must be comprised of qualifying assets under Section 3(c)(5)(C) of the Investment Company Act, and 80% of our portfolio, or the assets of our majority-owned subsidiaries, must be comprised of qualifying assets and real estate-related assets under Section 3(c)(5)(C) of the Investment Company Act. In addition, we may not issue redeemable securities. To comply with the Section 3(c)(5)(C) exemption, we may from time to time buy RMBS and other qualifying assets. We generally expect that mortgage loans, junior (first loss) interests in whole pool CMBS, CTL and other real property investments, certain distressed debt securities and Tier 1 mezzanine loans to be qualifying assets under the Section 3(c)(5)(C) exemption from the Investment Company Act. Tier 1 mezzanine loans are loans granted to a mezzanine borrower that directly owns interests in the entity that owns the property being financed. The treatment of distressed debt securities as qualifying assets is, and will be, based on the characteristics of the particular type of loan, including its foreclosure rights. Junior (first loss) interests in CMBS pools may constitute qualifying assets under Section 3(c)(5)(C) provided that we have the unilateral right to foreclose, directly or indirectly, on the mortgages in the pool and that we may act as the controlling class or directing holder of the pool. Similarly, subordinate interests in whole loans may constitute qualifying assets under Section 3(c)(5)(C) provided that, among other things, approval rights in connection with any material decisions pertaining to the administration and servicing of the relevant mortgage loan and, in the event that the mortgage loan becomes non-performing, we have effective control over the remedies relating to the enforcement of the loan, including ultimate control of the foreclosure process. We generally do not treat non-Tier 1 mezzanine loans and preferred equity investments as qualifying assets. Although we monitor our portfolio periodically and prior to each origination or acquisition of a new asset or disposition of an existing asset, there can be no assurance that we will be able to maintain an exclusion or exemption from registration. Further, we may not be able to invest in sufficient qualifying and/or real estate-related assets and future revision or interpretations of the Investment Company Act may cause us to lose our exclusion or exemption or force us to re-evaluate our portfolio and our business strategy. Such

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changes may prevent us from operating our business successfully. To the extent that the staff of the SEC provides more specific guidance regarding the treatment of assets as qualifying assets or real estate-related assets, we may be required to adjust our investment strategy accordingly. Any additional guidance from the staff of the SEC could provide additional flexibility to us, or it could further inhibit our ability to pursue the investment strategy we have chosen.

In consultation with legal and tax advisors, we periodically evaluate our assets, and also evaluate prior to an acquisition or origination the structure of each prospective investment or asset, to determine whether we avoid coming within the definition of investment company in Section 3(a)(1)(C) and/or whether we believe the investment will be a qualifying asset for purposes of maintaining the exemptions found in Sections 3(c)(5)(C) and/or 3(c)(6) from registration under the Investment Company Act. We consult with counsel to verify such determination as appropriate. If we are obligated to register as an investment company, we would have to comply with a variety of substantive requirements under the Investment Company Act, including limitations on capital structure, restrictions on specified investments prohibitions on transactions with affiliates, changes in the composition of our board of directors and compliance with reporting, record keeping, voting, proxy disclosure and other rules and regulations that would significantly change our operations.

Rapid changes in the values of our CMBS and other real estate related investments may make it more difficult for us to maintain our qualification as a REIT or exemption from the Investment Company Act.

If the market value or income potential of our CMBS and other real estate-related investments declines as a result of increased interest rates, prepayment rates or other factors, we may need to increase our real estate investments and income and/or liquidate our non-qualifying assets in order to maintain our REIT qualification or exemption from the Investment Company Act. If the decline in real estate asset values and/or income occurs quickly, this may be especially difficult to accomplish. This difficulty may be exacerbated by the illiquid nature of many of our non-real estate assets. We may have to make investment decisions that we otherwise would not make absent the REIT and Investment Company Act considerations.

We may incur losses as a result of ineffective risk management processes and strategies.

We seek to monitor and control our risk exposure through a risk and control framework encompassing a variety of separate but complementary financial, credit, operational, compliance and legal reporting systems, internal controls, management review processes and other mechanisms. While we employ a broad and diversified set of risk monitoring and risk mitigation techniques, those techniques and the judgments that accompany their application cannot anticipate every economic and financial outcome or the specifics and timing of such outcomes. Thus, we may, in the course of our activities, incur losses. Recent market conditions have involved unprecedented dislocations and highlight the limitations inherent in using historical data to manage risk.

The models that we use to assess and control our risk exposures reflect assumptions about the degrees of correlation or lack thereof among prices of various asset classes or other market indicators. In times of market stress or other unforeseen circumstances, previously uncorrelated indicators may become correlated, or conversely previously correlated indicators may move in different directions. These types of market movements have at times limited the effectiveness of our hedging strategies and have caused us to incur significant losses, and they may do so in the future. These changes in correlation can be exacerbated where other market participants are using risk models with assumptions or algorithms that are similar to ours. In these and other cases, it may be difficult to reduce our risk positions due to the activity of other market participants or widespread market dislocations, including circumstances where asset values are declining significantly or no market exists for certain assets. To the extent that we make investments that do not have an established liquid trading market or are otherwise subject to restrictions on sale or hedging, we may not be able to reduce our positions and therefore reduce our risk associated with such positions.

We may experience reductions in portfolio income which would reduce our ability to make distributions over time.

Due to our status as a REIT, we are required to distribute at least 90% of our REIT taxable income, if any, to stockholders. We may experience declines in the size of the investment portfolio over time. A

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reduction in the size of our portfolio would also result in reduced income available for distribution and thereby lessen our ability to make distributions to our stockholders.

If we fail to achieve adequate operating cash flow, our ability to make distributions will be adversely affected.

As a REIT, we must distribute annually at least 90% of our REIT taxable income, if any, to our stockholders, determined without regard to the deduction for dividends paid and excluding net capital gain. Our ability to make and sustain cash distributions is based on many factors, including the return on our investments, operating expense levels and certain restrictions imposed by Maryland law. Some of the factors are beyond our control and a change in any such factor could affect our ability to pay future dividends. No assurance can be given as to our ability to pay distributions to our stockholders.

The competitive pressures we face as a result of operating in a highly competitive market could have a material adverse effect on our business, financial condition, liquidity and results of operations.

The current state of the global credit markets has resulted in a lack of liquidity and significant volatility in the types of asset classes that we have historically invested. These disruptions are currently and are expected to continue to limit our ability and our competitors’ ability to execute on historical investment strategies. Upon the return of liquidity to the credit markets, we expect to continue to encounter significant competition in seeking investments. We have significant competition with respect to our acquisition and origination of assets with many other companies, including other REITs, insurance companies, commercial banks, private investment funds, hedge funds, specialty finance companies and other investors. Some competitors may have a lower cost of funds and access to funding sources that are not available to us. In addition, some of our competitors may have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of investments and establish more relationships than us. The competitive pressures we face, if not effectively managed, may have a material adverse effect on our business, financial condition, liquidity and results of operations.

Also, as a result of this competition, we may not be able to take advantage of attractive origination and investment opportunities and therefore may not be able to identify and pursue opportunities that are consistent with our objectives. Competition may limit the number of suitable investment opportunities offered to us. It may also result in higher prices, lower yields and a narrower spread of yields over our borrowing costs, making it more difficult for us to acquire new investments on attractive terms. In addition, competition for desirable investments could delay the investment in desirable assets, which may in turn reduce our earnings per share and negatively affect our ability to declare distributions to our stockholders.

We may change our investment and operational policies without stockholder consent.

We may change our investment and operational policies, including our policies with respect to investments, acquisitions, growth, operations, indebtedness, capitalization and distributions, at any time without the consent of our stockholders, which could result in our making investments that are different from, and possibly riskier than, the types of investments described in this filing. A change in our investment strategy may increase our exposure to interest rate risk, default risk and real estate market fluctuations, all of which could adversely affect our ability to make distributions.

Terrorist attacks and other acts of violence or war may affect the market for our common stock, the industry in which we conduct our operations and our profitability.

Terrorist attacks may harm our results of operations and the stockholder’s investment. We cannot assure the stockholders that there will not be further terrorist attacks against the U.S. or U.S. businesses. These attacks or armed conflicts may directly impact the property underlying our asset-based securities or the securities markets in general. Losses resulting from these types of events are uninsurable.

More generally, any of these events could cause consumer confidence and spending to decrease or result in increased volatility in the U.S. and worldwide financial markets and economy. Adverse economic conditions could harm the value of our properties, the property underlying our asset-backed securities or the securities markets in general which could harm our operating results and revenues and may result in the volatility of the value of our securities.

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We are highly dependent on information systems and third parties, and systems failures could significantly disrupt our business, which may, in turn, negatively affect the market price of our common stock and our ability to make distributions to our stockholders.

Our business is highly dependent on communications and information systems, some of which are provided by third parties. Any failure or interruption of our systems could cause delays or other problems, which could have a material adverse effect on our operating results and negatively affect the market price of our common stock and our ability to make distributions to our stockholders.

Lack of diversification in number of investments increases our dependence on individual investments.

If we acquire larger loans or property interests, our portfolio will be concentrated in a smaller number of assets, increasing the risk of loss to stockholders if a default or other problem arises. Alternatively, if through loan repayments, loan resolutions or property sales we reduce the aggregate amount of our debt investment portfolio or our property investment portfolio, and number of investments in either or each, our portfolio may become concentrated in larger assets, thereby reducing the benefits of diversification by geography, property type, tenancy or other measures.

Risk Relating to Our Capital Structure and Access to Liquidity

The recent downturn in the credit markets has increased the cost of borrowing and has made financing difficult to obtain, which has negatively impacted our business, and may have a material adverse effect on us.

Beginning in 2007 and continuing during 2008, 2009 and 2010 to date, the credit and capital markets have been materially impacted. The commercial real estate and mortgage, the asset-backed, corporate and other credit and equity markets have experienced accelerated default rates and declining values. Volatility and risk premiums in most credit and equity markets have increased dramatically while liquidity has decreased. Increasing concerns regarding the U.S. and world economic outlook, such as large asset write-downs at banks, volatile oil prices, declining business and consumer confidence and increased unemployment, are compounding these issues and risk premiums in most capital markets remain near historical all-time highs. The factors described above have resulted in substantially reduced commercial mortgage loan originations and securitizations, and are precipitating more generalized credit market dislocations and a significant contraction in available credit. As a result, most financial industry participants, including commercial real estate lenders and investors, are finding it difficult to obtain cost-effective debt capital to finance new investment activity or to refinance maturing debt.

Due to these conditions, the commercial real estate finance market has experienced higher volatility, reduced liquidity and accelerating default rates. Credit has become more expensive and difficult to obtain for us and our competitors. The cost of financing as well as overall market-demanded risk premiums in commercial lending have increased. Most lenders are imposing more stringent restrictions on the terms of credit and there is a general reduction in the amount of credit available in the markets in which we conduct business. The negative impact on the tightening of the credit markets, further declines in real estate values in the U.S. and continuing credit and liquidity concerns have had a material adverse effect on us. Additionally, there is no assurance that the increased financing costs, financing with increasingly restrictive terms or the increase in risk premiums that are demanded by investors will not have a material impact on our future profitability measures.

Our CDO financing agreements may limit our ability to make investments.

Each CDO financing that we engage in contains certain eligibility criteria with respect to the collateral that we seek to acquire and sell to the CDO issuer. If the collateral does not meet the eligibility criteria for eligible collateral as set forth in the transaction documents of such CDO transaction, we may not be able to acquire and sell such collateral to the CDO issuer. The inability of the collateral to meet eligibility requirements with respect to our CDOs may limit our ability to execute our business plan. In the event that an investment that we believe is favorable to our company does not meet eligibility requirements for our CDOs, we may be unable to obtain alternative financing for such investment.

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We may not be able to issue CDO securities on attractive terms or at all, which may require us to seek more costly financing for our investments or to liquidate assets.

Conditions in the capital markets have made the issuance of a CDO unavailable to us. In recent years, we have relied, to a substantial extent, on CDO financings to obtain match funded financing for our investments. Unless and 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, if available. If such other forms of long-term financing are unavailable, it may be necessary to fund our investments using shorter-term debt financing, in which case we would not meet our objective of match funding for substantially all of our investments. There can be no assurance as to whether or 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.

If we issue senior securities we will be exposed to additional restrictive covenants and limitations on our operating flexibility, which could adversely affect our ability to pay dividends.

If we decide to issue senior securities in the future, it is likely that they will be governed by an indenture or other instrument containing covenants restricting our operating flexibility. Holders of senior securities may be granted specific rights, including but not limited to: the right to hold a perfected security interest in certain of our assets, the right to accelerate payments due under the indenture, rights to restrict dividend payments and rights to require approval to sell assets. Additionally, any convertible or exchangeable securities that we issue in the future may have rights, preferences and privileges more favorable than those of our common stock. We, and indirectly our stockholders, will bear the cost of issuing and servicing such securities.

We may not be able to access financing sources on favorable terms, or at all, which could adversely affect our ability to execute our business plan and our ability to distribute dividends.

We have financed our assets through a variety of means, including mortgages, mezzanine loans, repurchase agreements, secured and unsecured credit facilities, CDOs, other structured financings and junior subordinated debentures. We have also financed our investments in the past through the issuance of trust preferred securities. Our ability to execute this strategy depends on various conditions in the markets for financing in this manner which are beyond our control, including lack of liquidity and wider credit spreads. We cannot be certain that these markets, especially the structured finance markets, will provide an efficient source of long-term financing for our assets. Our ability to finance through CDOs is subject to a level of investor demand which has almost entirely been curtailed. If our strategy is not viable, we will have to attempt to find alternative forms of long-term financing for our assets, such as secured revolving credit facilities and repurchase facilities, if available. This could subject us to more recourse indebtedness and the risk that debt service on less efficient forms of financing would require a larger portion of our cash flows, to service our debt thereby reducing cash available for distribution to our stockholders, funds available for operations as well as for future business opportunities.

In addition, we depend upon the availability of adequate financing sources and capital for our operations. As a REIT, we are required to distribute at least 90% of our REIT taxable income, if any, determined without regard to the deduction for dividends paid and excluding net capital gain, to our stockholders and are therefore not able to retain our earnings for new investments. We cannot be certain that any, or sufficient, funding or capital will be available to us in the future on terms that are acceptable to us.

Furthermore, if the minimum dividend distribution required to maintain our REIT qualification becomes large relative to our cash flow due to our taxable income exceeding our cash flow from operations, then we could be forced to borrow funds, sell assets or raise capital on unfavorable terms, if we are able to at all, in order to maintain our REIT qualification. In the event that we cannot obtain sufficient funding on acceptable terms, there may be a negative impact on the market price of our common shares and our ability to distribute dividends.

Interest rate fluctuations could reduce our ability to generate income on our investments.

The yield on our investments in real estate securities and loans is sensitive to changes in prevailing interest rates and changes in prepayment rates. Changes in interest rates can affect our net interest income, which is the difference between the interest income we earn on our interest-earning investments and the

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interest expense we incur in financing these investments. We tend to price loans at a spread to either United States Treasury obligations, swaps or LIBOR. A decrease in these indexes will lower the yield on our investments, except to the extent certain of our loans contain floors below which the interest rate cannot decline. Conversely, if these indexes rise materially, borrowers may be unable to meet their debt service requirements and borrow the higher-leverage loans that we target. For more information on interest rate risk, see Item 7A. “Quantitative and Qualitative Disclosure About Market Risk” in this Annual Report on Form 10-K.

In a period of rising interest rates, our interest expense could increase while the interest we earn on our fixed-rate investments would not change, which would adversely affect our profitability.

Our operating results depend in large part on differences between the income from our investments, net of financing costs. In most cases, for any period during which our investments are not match-funded, the income from such debt investments will respond more slowly to interest rate fluctuations than the cost of our borrowings. Consequently, changes in interest rates, particularly short-term interest rates, may significantly influence our net income. Increases in these rates will tend to decrease our net income and market value of our investments. Interest rate fluctuations resulting in our interest expense exceeding our interest income would result in operating losses for us and may limit or eliminate our ability to make distributions to our stockholders. For more information on interest rate risk, see Item 7A. “Quantitative and Qualitative Disclosure About Market Risk” in this Annual Report on Form 10-K.

If credit spreads widen before we obtain long-term financing for our assets, the value of our assets may suffer.

We price our assets based on our assumptions about future credit spreads for financing of those assets. We have obtained, and may obtain in the future, longer term financing for our assets using structured financing techniques. Such issuances entail interest rates set at a spread over a certain benchmark, such as the yield on United States Treasury obligations, swaps or LIBOR. If the spread that investors are paying on our current structured finance vehicles and will pay on future structured finance vehicles we may engage in over the benchmark widens and the rates we are charging or will charge on our securitized assets are not increased accordingly, our income may be reduced or we could suffer losses, which could affect our ability to make distributions to our stockholders.

Risks Related to Our Investments

Some of our portfolio investments may be recorded at fair value, as a result, there will be uncertainty as to the value of these investments.

Changes in the market values of our investments in securities available for sale will be directly charged or credited to stockholders’ equity. As a result, a decline in values may reduce the book value of our assets. Moreover, if the decline in value of a security is other-than-temporary, such decline will reduce earnings. Any such charges may result in volatility in our reported earnings and may adversely affect the market price of our common stock. Some of our portfolio investments may be in the form of securities, including CMBS, that are not publicly traded. The fair value of securities and other investments that are not publicly traded may not be readily determinable. We value these investments quarterly. Because such valuations are inherently uncertain, may fluctuate over short periods of time and may be based on estimates, our determinations of fair value may differ materially from the values that would have been used if a ready market for these securities existed. The value of our common stock could be adversely affected if our determinations regarding the fair value of these investments were materially higher than the values that we ultimately realize upon their disposal.

We may not realize gains or income from our investments.

We seek to generate both current income and capital appreciation. However, our investments may not appreciate in value and, in fact, may decline in value, and the debt securities we invest in may default on interest and/or principal payments. Accordingly, we may not be able to realize gains or income from our investments. Any gains that we do realize may not be sufficient to offset any other losses we experience. Any income that we realize may not be sufficient to offset our expenses.

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We may be adversely affected by unfavorable economic changes in geographic areas where our properties are concentrated.

Adverse conditions in the areas where our properties or the properties underlying our investments are located (including business layoffs or downsizing, industry slowdowns, changing demographics and other factors) and local real estate conditions (such as oversupply of, or reduced demand for, office, industrial or retail properties) may have an adverse effect on the value of our properties. A material decline in the demand or the ability of tenants to pay rent for office, industrial or retail space in these geographic areas may result in a material decline in our cash available for distribution.

Joint investments could be adversely affected by our lack of sole decision-making authority and reliance upon a co-venturer’s financial condition.

We co-invest with third parties through partnerships, joint ventures, co-tenancies or other entities, acquiring non-controlling interests in, or sharing responsibility for managing the affairs of, a property, partnership, joint venture, co-tenancy or other entity. Therefore, we will not be in a position to exercise sole decision-making authority regarding that property, partnership, joint venture or other entity. Investments in partnerships, joint ventures, or other entities may involve risks not present were a third party not involved, including the possibility that our partners, co-tenants or co-venturers might become bankrupt or otherwise fail to fund their share of required capital contributions. Additionally, our partners or co-venturers might at any time have economic or other business interests or goals which are inconsistent with our business interests or goals. These investments may also have the potential risk of impasses on decisions such as a sale, because neither we nor the partner, co-tenant or co-venturer would have full control over the partnership or joint venture. Consequently, actions by such partner, co-tenant or co-venturer might result in subjecting properties owned by the partnership or joint venture to additional risk. In addition, we may in specific circumstances be liable for the actions of our third-party partners, co-tenants or co-venturers.

Some of our loans are participation interests in loans, or co-lender arrangements, in which we share the rights, obligations and benefits of the loan with other lenders. We may need the consent of these parties to exercise our rights under such loans, including rights with respect to amendment of loan documentation, enforcement proceedings in the event of default and the institution of, and control over, foreclosure proceedings. Similarly, a majority of the participants may be able to take actions to which we object but to which we will be bound if our participation interest represents a minority interest. We may be adversely affected by this lack of complete control.

We may in the future enter, into joint venture agreements that contain terms in favor of our partners that may have an adverse effect on the value of our investments in the joint ventures. For example, we may be entitled under a particular joint venture agreement to an economic share in the profits of the joint venture that is smaller than our ownership percentage in the joint venture, our partner may be entitled to a specified portion of the profits of the joint venture before we are entitled to any portion of such profits and our partner may have rights to buy our interest in the joint venture, to force us to buy the partner’s interest in the joint venture or to compel the sale of the property owned by such joint venture. These rights may permit our partner in a particular joint venture to obtain a greater benefit from the value or profits of the joint venture than us, which may have an adverse effect on the value of our investment in the joint venture and on our financial condition and results of operations.

Liability relating to environmental matters may impact the value of the properties that we may acquire or underlying our investments.

Under various U.S. federal, state and local laws, an owner or operator of real property may become liable for the costs of removal of certain hazardous substances released on its property. These laws often impose liability without regard to whether the owner or operator knew of, or, was responsible for, the release of such hazardous substances.

There may be environmental problems associated with our properties which we were unaware of at the time of acquisition. The presence of hazardous substances may adversely affect an owner’s ability to sell real estate or borrow using real estate as collateral. To the extent that an owner of a property underlying one of our debt investments becomes liable for removal costs, the ability of the owner to make debt payments to us

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may be reduced. This, in turn, may adversely affect the value of the relevant mortgage asset held by us and our ability to make distributions to stockholders.

The presence of hazardous substances, if any, on our properties may adversely affect our ability to sell an affected property and we may incur substantial remediation costs, thus harming our financial condition. In addition, although our leases, if any, will generally require our tenants to operate in compliance with all applicable laws and to indemnify us against any environmental liabilities arising from a tenant’s activities on the property, we nonetheless would be subject to strict liability by virtue of our ownership interest for environmental liabilities created by such tenants, and we cannot ensure the stockholders that any tenants we might have would satisfy their indemnification obligations under the applicable sales agreement or lease. The discovery of material environmental liabilities attached to such properties could have a material adverse effect on our results of operations and financial condition and our ability to make distributions to our stockholders.

Hedging instruments often are not traded on regulated exchanges, guaranteed by an exchange or its clearing house, or regulated by any U.S. or foreign governmental authorities and involve risks and costs.

The cost of using hedging instruments increases as the period covered by the instrument increases and during periods of rising and volatile interest rates. We may increase our hedging activity and thus increase our hedging costs during periods when interest rates are volatile or rising and hedging costs have increased.

In addition, hedging instruments involve risk since they often are not traded on regulated exchanges, guaranteed by an exchange or its clearing house, or regulated by any U.S. or foreign governmental authorities. Consequently, there are no requirements with respect to record keeping, financial responsibility or segregation of customer funds and positions. Furthermore, the enforceability of agreements underlying derivative transactions may depend on compliance with applicable statutory and commodity and other regulatory requirements and, depending on the identity of the counterparty, applicable international requirements. The business failure of a hedging counterparty with whom we enter into a hedging transaction will most likely result in a default. Default by a party with whom we enter into a hedging transaction may result in the loss of unrealized profits and force us to cover our resale commitments, if any, at the then current market price. Although generally we will seek to reserve the right to terminate our hedging positions, it may not always be possible to dispose of or close out a hedging position without the consent of the hedging counterparty, and we may not be able to enter into an offsetting contract in order to cover our risk. We cannot be assured that a liquid secondary market will exist for hedging instruments purchased or sold, and we may be required to maintain a position until exercise or expiration, which could result in losses.

We may enter into derivative contracts that could expose us to contingent liabilities in the future.

Subject to maintaining our qualification as a REIT, part of our investment strategy involves entering into derivative contracts that could require us to fund cash payments in the future under certain circumstances, e.g., the early termination of the derivative agreement caused by an event of default or other early termination event, or the decision by a counterparty to request margin securities it is contractually owed under the terms of the derivative contract. The amount due would be equal to the unrealized loss of the open swap positions with the respective counterparty and could also include other fees and charges. These economic losses will be reflected in our financial results of operations, and our ability to fund these obligations will depend on the liquidity of our assets and access to capital at the time, and the need to fund these obligations could adversely impact our financial condition.

Risks Relating Primarily to Gramercy Realty

A significant portion of our properties are leased to financial institutions, making us more economically vulnerable in the event of a downturn in the banking industry.

A significant portion of our revenue is derived from leases to financial institutions. Individual banks, as well as the banking industry in general, may be adversely affected by negative economic and market conditions throughout the United States or in the local economies in which regional or community banks operate, including negative conditions caused by the recent disruptions in the financial markets. In addition, changes in trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System, may have an adverse impact on banks’ loan portfolios and

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allowances for loan losses. As a result, we may experience higher rates of lease default or terminations in the event of a downturn in the banking industry than we would if our tenant base was more diversified.

Certain tenants represent a significant portion of the revenue generated by our Gramercy Realty business and failure of these tenants to perform their obligations or renew their leases upon expiration may adversely affect our cash flow and ability to pay distributions to our stockholders.

As of December 31, 2009, Bank of America and Wachovia Bank represented approximately 41.7% and 15.7%, respectively, of Gramercy Realty’s portfolio base rental income and occupied approximately 44.2% and 17.7%, respectively, of our total rentable square feet. The default, financial distress or insolvency of Bank of America or Wachovia Bank, or the failure of any of these parties to renew their leases with us upon expiration, could cause interruptions in the receipt of lease revenue from these tenants and/or result in vacancies, which would reduce our revenue and increase operating costs until the affected properties are leased, and could decrease the ultimate value of the affected properties upon sale. We may be unable to lease the vacant property at a comparable lease rate or at all, which could have a material adverse impact on our operating results and financial condition as well as our ability to make distributions to stockholders.

Certain of our leases permit our tenants to terminate their leases, in whole or in part, prior to their stated lease expiration dates, sometimes with little or no termination fee being paid to us.

Certain of our leases, including our two large portfolio leases with Bank of America, which we refer to as the BBD 1 and BBD 2 Portfolios, our large portfolio lease with Wachovia Bank, which we refer to as the WBBD Portfolio, and our Dana Portfolio lease with Bank of America, permit our tenants to terminate their lease as to all or, in most cases, a portion of the leased premises prior to their stated lease expiration dates. Most such terminations can be effectuated by our tenants with little or no termination fee being paid to us. When tenants exercise early termination rights, our cash flow and earnings will be adversely affected to the extent that we are unable to generate an equivalent amount of net rental income by leasing the vacated space to new third party tenants. Our tenants have noticed us that they will vacate 357,234 square feet of leased premises in 2010, and are contractually permitted to vacate an additional 23,536 square feet during 2010. The potential terminations constitute approximately 1.7% of the currently leased premises in our Gramercy Realty portfolio.

Our cash flow will be reduced when Bank of America, as tenant under our Dana Portfolio lease, ceases making base rental payments in January 2011 and when significant rent step-downs occur in 2010 under the terms of a lease agreement with Regions Financial.

Our Dana Portfolio consists of 13 office buildings and two parking facilities containing approximately 3.8 million square feet that we primarily lease to Bank of America pursuant to a lease that we acquired in the American Financial merger. Under the terms of that lease, which was originally entered into by Bank of America, as tenant, and Dana Commercial Credit Corporation, as landlord, as part of a larger bond-net lease transaction, Bank of America is required to make annual base rental payments of approximately $40.4 million in January 2010, and annual base rental payments of approximately $3.0 million in January 2011 and no annual base rental payments from 2012 through lease expiration in June 2022. The full 2010 rental payment of approximately $40.4 million was received in December 2009. Starting in January 2011, our cash flow will be reduced by Bank of America’s reduction in annual base rent under the Dana Portfolio lease to the extent that we are unable to generate an equivalent amount of net rent by leasing space vacated by Bank of America within the Dana Portfolio to new third party tenants. Additionally, under terms of the lease agreement with Regions Financial, rent for approximately 570,000 square feet will step down by approximately $5.1 million annually, beginning in July 2010.

Rising operating expenses relating to our properties could reduce our cash flow and funds available for future distributions.

Our properties are subject to operating risks common to real estate in general, any or all of which may negatively affect us. If the properties do not generate revenue sufficient to meet expenses, including debt service, tenant improvements, leasing commissions and other capital expenditures, our cash flow will be negatively impacted and we may have to utilize our existing liquidity to cover these expenses or risk forfeiture of the assets if we default on any associated debt obligations.

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With limited exceptions, we acquire properties on an “as is” basis and, therefore, the value of these properties may decline if we discover problems with the properties after we acquire them.

We often acquire properties on an “as is” basis. We may receive limited representations, warranties and indemnities from the sellers and, in certain cases, we may be required to indemnify the sellers for certain matters, including environmental matters, in connection with our acquisition of such properties. In addition, we may purchase properties that have known or suspected environmental conditions, on the condition that the seller agrees, depending on the terms of the relevant purchase and sale contract, to either (i) investigate or remediate the environmental conditions, (ii) deduct the mutually agreed cost of remediation from the purchase price or (iii) indemnify us for the costs of investigating or remediating the environmental conditions, which indemnity may be limited. If we discover issues or problems related to the physical condition of a property, zoning, compliance with ordinances and regulations or other significant problems after we acquire the property, we typically have no recourse against the seller and the value of the property may be less than the amount we paid for such property. We may incur substantial costs in remediating or repairing a property that we acquire or in ensuring its compliance with governmental regulations. These capital expenditures would reduce cash available for distribution to our stockholders. In addition, we may be unable to rent these properties on terms favorable to us, or at all.

The bankruptcy or insolvency of our tenants under their leases or delays by our tenants in making rental payments could seriously harm our operating results and financial condition.

Any bankruptcy filings by or relating to one of our tenants could bar us from collecting pre-bankruptcy debts from that tenant or its property, unless we receive an order permitting us to do so from the bankruptcy court. A tenant bankruptcy could delay our efforts to collect past due balances under the relevant leases, and could ultimately preclude full collection of these sums. If a lease is rejected by a tenant in bankruptcy, we would have only a general unsecured claim for damages. Any unsecured claim we hold against a bankrupt entity may be paid only to the extent that funds are available and only in the same percentage as is paid to all other holders of unsecured claims. We may recover substantially less than the full value of any unsecured claims, which would harm our financial condition.

Many of our tenants are banks that are not eligible to be debtors under the federal bankruptcy code, but would be subject to the liquidation and insolvency provisions of applicable banking laws and regulations. If the FDIC were appointed as receiver of a banking tenant because of a tenant’s insolvency, we would become an unsecured creditor of the tenant and be entitled to share with the other unsecured non-depositor creditors in the tenant’s assets on an equal basis after payment to the depositors of their claims. The FDIC has broad powers to reject any contract (including a lease) of a failed depository institution that the FDIC deems burdensome if the FDIC determines that such rejection is necessary to promise the orderly administration of the institution’s affairs. By federal statute, a landlord under a lease rejected by the FDIC is not entitled to claim any damages with respect to the disaffirmation, other than rent through the effective date of the disaffirmation. The amount paid on claims in respect of the lease would depend on, among other factors, the amount of assets of the insolvent tenant available for unsecured claims. We may recover substantially less than the full value of any unsecured claims, which could have a material adverse effect on our operating results and financial condition, as well as our ability to pay dividends to stockholders at historical levels or at all.

We have in the past acquired a substantial number of vacant bank branches, which are specialty-use properties and therefore may be more difficult to lease to non-banks.

Bank branches are specialty-use properties that are outfitted with vaults, teller counters and other customary installations and equipment that require significant capital expenditures. Our revenue from and the value of the bank branches in our portfolio may be affected by a number of factors, including:

• demand from financial institutions to lease or purchase properties that are configured to operate as bank branches

• demand from non-banking institutions to make capital expenditures to modify the specialty-use properties to suit their needs; and

• a downturn in the banking industry generally and, in particular, among smaller community banks.

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These factors may have a material adverse effect on our operating results and financial condition, as well as our ability to pay dividends to stockholders, if financial institutions do not increase the number of bank branches they operate, do not find the locations of our bank branches desirable, or elect to make capital expenditures to materially modify other properties rather than pay higher lease or acquisition prices for properties already configured as bank branches. The sale or lease of these properties to entities other than financial institutions may be difficult due to the added cost and time of refitting the properties, which we do not expect to undertake.

Certain of our mortgage loans that we assumed in connection with the American Financial merger impose “cash traps” when the financial performance of the property or the portfolio of properties securing such loans fails to meet certain pre-determined financial metrics, which if enforced could adversely affect our financial condition and operating results.

If the provisions relating to “cash traps” in our mortgage loans are triggered as a result of the failure of the mortgaged properties to meet certain financial performance metrics, we may be required to fund excess cash flow into reserve accounts with our mortgage lenders until compliance with the required metrics is achieved and, in such event, our liquidity will be negatively impacted and this could have a material adverse effect on our results of operations and financial condition.

We structure many of our real property acquisitions using complex structures often based on forecasted results for the acquisitions, and if the acquired properties underperform forecasted results, our financial condition and operating results may be harmed.

We may acquire some of our properties under complex structures that we tailor to meet the specific needs of the tenants and/or sellers. For instance, we may enter into transactions under which a portion of the properties are vacant or will be vacant following the completion of the acquisition. If we fail to accurately forecast the leasing of such properties following our acquisition, our operating results and financial condition, as well as our ability to pay dividends to stockholders, may be adversely impacted.

Our properties may contain or develop harmful mold, which could lead to liability for adverse health effects and costs of remediating the problem.

When excessive moisture accumulates in buildings or on building materials, mold growth may occur, particularly if the moisture problem remains undiscovered or is not addressed over a period of time. Some molds may produce airborne toxins or irritants. Concern about indoor exposure to mold has been increasing as exposure to mold may cause a variety of adverse health effects and symptoms, including allergic or other reactions. As a result, the presence of significant mold at any of our properties could require us to undertake a costly remediation program to contain or remove the mold from the affected property. In addition, the presence of significant mold could expose us to liability from our tenants, employees of our tenants and others if property damage or health concerns arise.

Our properties may contain asbestos which could lead to liability for adverse health effects and costs of remediating asbestos.

Certain laws and regulations govern the removal, encapsulation or disturbance of asbestos-containing materials, or ACMs, when those materials are in poor condition or in the event of building renovation or demolition, impose certain worker protection and notification requirements, and govern emissions of and exposure to asbestos fibers in the air. These laws may also impose liability for a release of ACMs and may enable third parties to seek recovery against us for personal injury associated with ACMs. There are or may be ACMs at certain of our properties. We have either developed and implemented or are in the process of developing and implementing operations and maintenance programs that establish operating procedures with respect to ACMs.

In March 2005, GAAP clarified that the term conditional asset retirement obligation as a legal obligation to perform an asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the control of the entity. The obligation to perform the asset retirement activity is unconditional even though uncertainty exists about the timing and (or) method of

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settlement. Thus, the timing and (or) method of settlement may be conditional on a future event. Accordingly, an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably estimated. The fair value of a liability for the conditional asset retirement obligation is recognized when incurred — generally upon acquisition, construction, or development and (or) through the normal operation of the asset.

To comply with GAAP we assessed the cost associated with our legal obligation to remediate asbestos in our properties known to contain asbestos. We believe that the majority of the costs associated with our remediation of asbestos have been identified and recorded in compliance with GAAP, however other obligations associated with asbestos in our properties may exist. Other obligations associated with asbestos in our properties will be recorded in our consolidated statement of operations in the future when/if the cost is incurred.

Compliance with the Americans with Disabilities Act and fire, safety and other regulations may require us to make unintended expenditures that adversely impact our ability to pay dividends to stockholders at historical levels or at all.

All of our properties are required to comply with the Americans with Disabilities Act, or the ADA. The ADA has separate compliance requirements for “public accommodations” and “commercial facilities,” but generally requires that buildings be made accessible to people with disabilities. Compliance with the ADA requirements could require removal of access barriers and non-compliance could result in imposition of fines by the U.S. government or an award of damages to private litigants or both. While the tenants to whom we lease properties are obligated by law to comply with the ADA provisions with respect to their operations, we could be required to expend our own funds to achieve such compliance should our tenants fail to do so. In addition, we (and not our tenants) are generally required to comply with ADA provisions within the parking lots, access ways and other common areas of the properties we own and to operate our properties in compliance with fire and safety regulations, building codes and other land use regulations, as they may be adopted by governmental agencies and bodies and become applicable to our properties. We may be required to make substantial capital expenditures to comply with those requirements and these expenditures could have a material adverse effect on our ability to pay dividends to stockholders at historical levels or at all.

An uninsured loss or a loss that exceeds the policies on our properties could subject us to lost capital or revenue on those properties.

Under the terms and conditions of the leases currently in force on our properties, tenants generally are required to indemnify and hold us harmless from liabilities resulting from injury to persons, air, water, land or property, on or off the premises, due to activities conducted on the properties, except for claims arising from the negligence or intentional misconduct of us or our agents. Additionally, tenants are generally required, at the tenants’ expense, to obtain and keep in full force during the term of the lease, liability and property damage insurance policies issued by companies holding general policyholder ratings of at least “A” as set forth in the most current issue of Best’s Insurance Guide. Insurance policies for property damage are generally in amounts not less than the full replacement cost of the improvements less slab, foundations, supports and other customarily excluded improvements and insure against all perils of fire, extended coverage, vandalism, malicious mischief and special extended perils (“all risk,” as that term is used in the insurance industry). Insurance policies are generally obtained by the tenant providing general liability coverage varying between $1.0 million and $10.0 million depending on the facts and circumstances surrounding the tenant and the industry in which it operates. These policies include liability coverage for bodily injury and property damage arising out of the ownership, use, occupancy or maintenance of the properties and all of their appurtenant areas.

In addition to the indemnities and required insurance policies identified above, many of our properties are also covered by flood and earthquake insurance policies obtained by and paid for by the tenants as part of their risk management programs. Additionally, we have obtained blanket liability and property damage insurance policies to protect us and our properties against loss should the indemnities and insurance policies provided by the tenants fail to restore the properties to their condition prior to a loss. All of these policies may involve substantial deductibles and certain exclusions. In certain areas, we may have to obtain earthquake and flood insurance on specific properties as required by our lenders or by law. We have also obtained

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terrorism insurance on some of our larger office buildings, but this insurance is subject to exclusions for loss or damage caused by nuclear substances, pollutants, contaminants and biological and chemical weapons. Should a loss occur that is uninsured or in an amount exceeding the combined aggregate limits for the policies noted above, or in the event of a loss that is subject to a substantial deductible under an insurance policy, we could lose all or part of our capital invested in, and anticipated revenue from, one or more of the properties, which could have a material adverse effect on our operating results and financial condition, as well as our ability to pay dividends to stockholders at historical levels or at all.

Our real estate investments are subject to risks particular to real property.

We own both assets secured by real estate and real estate directly. Real estate investments are subject to risks particular to real property, including:

• acts of God, including earthquakes floods and other natural disasters, which may result in uninsured losses;

• acts of war or terrorism, including the consequences of terrorist attacks;

• adverse changes in national and local economic and market conditions, including the credit and securitization markets;

• changes in governmental laws and regulations, fiscal policies and zoning ordinances and the related costs of compliance with laws and regulations, fiscal policies and ordinances;

• the perceptions of prospective tenants of the attractiveness of the properties;

• costs of remediation and liabilities associated with environmental conditions; and

• the potential for uninsured or under-insured property losses.

If any of these or similar events occur, it may reduce our return from an affected property or investment and reduce or eliminate our ability to make distributions to stockholders.

Our real estate investments may be illiquid, which could restrict our ability to respond rapidly to changes in economic conditions.

The real estate and real estate-related assets in which we invest are generally illiquid. In addition, the instruments that we purchase in connection with privately negotiated transactions are not registered under the relevant securities laws, resulting in a prohibition against their transfer, sale, pledge or other disposition except in a transaction that is exempt from the registration requirements of, or is otherwise in accordance with, those laws. As a result, our ability to sell under-performing assets in our portfolio or respond to changes in economic and other conditions may be relatively limited.

CTL and real estate investments may generate losses.

The value of our investments and the income from our real estate investments may be significantly adversely affected by a number of factors, including:

• national, state and local economic climates;

• real estate conditions, such as an oversupply of or a reduction in demand for real estate space in the area;

• the perceptions of tenants and prospective tenants of the convenience, attractiveness and safety of our properties;

• competition from comparable properties;

• the occupancy rate of our properties;

• the ability to collect on a timely basis all rent from tenants;

• the effects of any bankruptcies or insolvencies of major tenants;

• the expense of re-leasing space;

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• changes in interest rates and in the availability, cost and terms of mortgage funding;

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

• cost of compliance with the American with Disabilities Act of 1990;

• adverse changes in governmental rules and fiscal policies;

• civil unrest;

• acts of nature, including earthquakes, hurricanes and other natural disasters (which may result in uninsured losses);

• acts of terrorism or war and;

• adverse changes in zoning laws; and other factors which are beyond our control.

We may experience losses if the creditworthiness of our tenants deteriorates and they are unable to meet their obligations under our leases.

We own the properties leased to the tenants of our CTL and real estate investments and we receive rents from the tenants during the terms of our leases. A tenant’s ability to pay rent is determined by the creditworthiness of the tenant. If a tenant’s credit deteriorates, the tenant may default on its obligations under our lease and the tenant may also become bankrupt. The bankruptcy or insolvency of our tenants or other failure to pay is likely to adversely affect the income produced by our CTL and real estate investments. If a tenant defaults, we may experience delays and incur substantial costs in enforcing our rights as landlord. If a tenant files for bankruptcy, we may not be able to evict the tenant solely because of such bankruptcy or failure to pay. A court, however, may authorize a tenant to reject and terminate its lease with us. In such a case, our claim against the tenant for unpaid, future rent would be subject to a statutory cap that might be substantially less than the remaining rent owed under the lease. In addition, certain amounts paid to us within 90 days prior to the tenant’s bankruptcy filing could be required to be returned to the tenant’s bankruptcy estate. In any event, it is highly unlikely that a bankrupt or insolvent tenant would pay in full amounts it owes us under a lease. In other circumstances, where a tenant’s financial condition has become impaired, we may agree to partially or wholly terminate the lease in advance of the termination date in consideration for a lease termination fee that is likely less than the agreed rental amount. Without regard to the manner in which the lease termination occurs, we are likely to incur additional costs in the form of tenant improvements and leasing commissions in our efforts to lease the space to a new tenant. In any of the foregoing circumstances, our financial performance, the market prices of our securities and our ability to pay dividends could be materially adversely affected.

We may not be able to relet or renew leases at the properties held by us on terms favorable to us.

We are subject to risks that upon expiration or earlier termination of the leases for space located at our properties the space may not be relet or, if relet, the terms of the renewal or reletting (including the costs of required renovations or concessions to tenants) may be less favorable that current lease terms. Any of these situations may result in extended periods where there is a significant decline in revenues or no revenues generated by a property. If we are unable to relet or renew leases for all or substantially all of the spaces at these properties, if the rental rates upon such renewal or reletting are significantly lower than expected, or if our reserves for these purposes prove inadequate, we will experience a reduction in net income and may be required to reduce or eliminate distributions to our stockholders.

Lease defaults or terminations or landlord-tenant disputes may adversely reduce our income from our leased property portfolio.

Lease defaults or terminations by one or more of our significant tenants may reduce our revenues unless a default in cured or a suitable replacement tenant is found promptly. In addition, disputes may arise between the landlord and tenant that result in the tenant withholding rent payments, possibly for an extended period. These disputes may lead to litigation or other legal procedures to secure payment of the rent withheld or to evict the tenant. Any of these situations may result in extended periods during which there is a significant decline in revenues or no revenues generated by the property. If this were to occur, it could adversely affect our results of operations.

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Risks Relating Primarily to Gramercy Finance

Our borrowers may increasingly be unable to achieve their business plans due to the economic environment and strain on commercial real estate, which may cause stress in our commercial real estate loan portfolio.

Many of our commercial real estate loans were made to borrowers who had a business plan to improve the collateral property. The current economic environment has created a number of obstacles to borrowers attempting to achieve their business plans, including lower occupancy rates and lower lease rates across all property types, which continues to be exacerbated by high unemployment and overall financial uncertainty. If borrowers are unable achieve their business plans, the related commercial real estate loans could go into default and severely impact our operating results and cash flows.

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

We believe the risk associated with our business is more severe during periods of economic slowdown or recession, such as we are experiencing, if these periods are accompanied by declining real estate values. Declining real estate values will likely reduce our level of new mortgage loan originations, since borrowers often use increases in the value of their existing properties to support the purchase or investment in additional properties. Borrowers may also be less able to pay principal and interest on our loans if the real estate economy weakens. Further, declining real estate values significantly increase the likelihood that we will incur losses on our loans in the event of default because the value of our collateral may be insufficient to recover the carrying value of the loan. A reduction in capital markets liquidity may cause difficulties for borrowers seeking to refinance existing loans at or prior to maturity, even in instances of satisfactory property cash flow and collateral value. 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 originate, sell and securitize loans, which would significantly harm our revenues, results of operations, financial condition, business prospects and our ability to make distributions to our stockholders.

Markets have experienced, and may continue to experience, periods of high volatility accompanied by reduced liquidity.

Financial markets are susceptible to severe events evidenced by rapid depreciation in asset values accompanied by a reduction in asset liquidity. Under these extreme conditions, hedging and other risk management strategies may not be as effective at mitigating investment portfolio losses as they would be under more normal market conditions. Severe market events have historically been difficult to predict, however, and we could realize significant losses if unprecedented extreme market events were to occur, such as the recent conditions in the global financial markets and global economy.

Many of our commercial real estate loans are funded with interest reserves and our borrowers may be unable to replenish those interest reserves once they are depleted.

Given the transitional nature of many of our commercial real estate loans, we required borrowers to pre-fund reserves to cover interest and operating expenses until the property cash flows were projected to increase sufficiently to cover debt service costs. We also generally required the borrower to replenish reserves if they became deficient due to underperformance or if the borrower wanted to exercise extension options under the loan. Despite low interest rates, revenues on the properties underlying any commercial real estate loan investments will likely decrease in the current economic environment, making it more difficult for borrowers to meet their payment obligations to us. We expect that in the future some of our borrowers may have difficulty servicing our debt and will not have sufficient capital to replenish reserves, which could have a significant impact on our operating results and cash flow.

We currently have certain loans that permit interest to be accrued until the loans’ maturity or refinancing.

We currently have several loans that provide for interest accrual, in whole or in part, through loan maturity or refinancing. For loans of this type, often referred to as PIK loans, the time period between interest accrual and collection (as additional loan principal) may extend for 12 months or longer, depending on the term of the PIK loan.

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Loan repayments are unlikely in the current market environment.

In the past, a source of liquidity for us was the voluntary repayment of loans. Because the commercial real estate asset-backed markets remain closed, and banks and life insurance companies have drastically curtailed new lending activity, real estate owners are having difficulty refinancing their assets at maturity. If borrowers are not able to refinance loans at their maturity, the loans could go into default and the liquidity that we would receive from such repayments will not be available. Furthermore, without a functioning commercial real estate finance market, borrowers that are performing on their loans will almost certainly extend such loans if they have that right, which will further delay our ability to access liquidity through repayments.

The loans we invest in and the commercial mortgage loans underlying the CMBS we invest in are subject to risks of delinquency, foreclosure and loss.

Commercial mortgage loans are secured by commercial property and are subject to risks of delinquency, foreclosure and loss. CMBS evidence interests in or are secured by a single commercial mortgage loan or a pool of commercial mortgage loans. These risks of loss are greater than similar risks associated with loans made on the security of single-family residential property. The ability of a borrower to pay principal and interest on 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 a number of conditions beyond our control, including:

• 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 expense or limit rents that may be charged;

• any need to address environmental contamination at the property;

• the occurrence of any uninsured casualty 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.

Any of these factors could have an adverse affect on the ability of the borrower to make payments of principal and interest in a timely fashion, or at all, on the mortgage loans in which we invest and could adversely affect the cash flows we intend to receive from these investments.

In the event of any default under a mortgage loan held directly by us, we will bear the risk of loss of principal to the extent of any deficiency between the value of the collateral and the principal and accrued interest on the mortgage loan, which could have a material adverse effect on our cash flow from operations and our ability to make distributions to our stockholders. In the event of the bankruptcy of a mortgage loan borrower, the mortgage loan to the borrower will be deemed to be secured only to the extent of the value of the underlying collateral at the time of bankruptcy (as determined by the bankruptcy court), and the lien

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securing the mortgage loan will be subject to the avoidance powers of the bankruptcy trustee or debtor-in-possession to the extent the lien is unenforceable under state law. Foreclosure of a mortgage loan can be an expensive and lengthy process which could have a substantial negative effect on our anticipated return on the foreclosed mortgage loan.

The subordinate interests in whole loans in which we invest may be subject to additional risks relating to the privately negotiated structure and terms of the transaction, which may result in losses to us.

A subordinate interest in a whole loan is a mortgage loan typically (i) secured by a whole loan on a single large commercial property or group of related properties and (ii) subordinated to a senior interest secured by the same whole loan on the same collateral. As a result, if a borrower defaults, there may not be sufficient funds remaining for subordinate interest owners after payment to the senior interest owners. Subordinate interests reflect similar credit risks to comparably rated CMBS. However, since each transaction is privately negotiated, subordinate interests can vary in their structural characteristics and risks. For example, the rights of holders of subordinate interests to control the process following a borrower default may be limited in certain investments. We cannot predict the terms of each subordinate investment. Further, subordinate interests typically are secured by a single property, and so reflect the increased risks associated with a single property compared to a pool of properties. Subordinate interests also are less liquid than CMBS, thus we may be unable to dispose of underperforming or non-performing investments. The higher risks associated with our subordinate position in these investments could subject us to increased risk of losses.

Investments in mezzanine loans involve greater risks of loss than senior loans.

Investments in mezzanine loans are secured by a pledge of the ownership interests in the entity that directly or indirectly owns the property. These types of investments involve a higher degree of risk than a senior mortgage loan because the investment may become unsecured as a result of foreclosure by the senior lender. Frequently, senior loans mature simultaneously and unless extended, the investments in the mezzanine loans may be severely impaired. In the event of a bankruptcy of the entity providing the pledge of its ownership interests as security, we may not have full recourse to the assets of the property owning entity, or the assets of the entity may not be sufficient to satisfy our mezzanine loan. If a borrower defaults on our mezzanine loan or debt senior to our loan, or in the event of a borrower bankruptcy, our mezzanine loan will be satisfied only after the senior debt is paid in full. As a result, we may not recover some or all of our investment, which could result in losses. In addition, mezzanine loans may have higher loan to value ratios than conventional mortgage loans, resulting in less equity in the property and increasing the risk of loss of principal.

We evaluate the collectability of both interest and principal of each of our loans, if circumstances warrant, to determine whether they are impaired. A loan is impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due according to the existing contractual terms. When a loan is impaired, the amount of the loss provision is calculated by comparing the carrying amount of the investment to the value determined by discounting the expected future cash flows at the loan’s effective interest rate or, as a practical expedient, to the value of the collateral if the loan is collateral dependent. We cannot be certain that our estimates of collectible amounts will not change over time or that they will be representative of the amounts we actually collect, including amounts we would collect if we chose to sell these investments before their maturity. If we collect less than our estimates, we will record charges which could be material.

Investment in non-conforming and non-investment grade loans may involve increased risk of loss.

We have acquired or originated, and may continue to acquire or originate in the future, certain loans that do not conform to conventional loan criteria applied by traditional lenders and are not rated or are rated as non-investment grade (for example, for investments rated by Moody’s Investors Service, ratings lower than Baa3, and for Standard & Poor’s, BBB- or below). The non-investment grade ratings for these loans typically result from the overall leverage of the loans, the lack of a strong operating history for the properties underlying the loans, the borrowers’ credit history, the properties’ underlying cash flow or other factors. As a result, these loans have a higher risk of default and loss than conventional loans. Any loss we incur may reduce distributions to our stockholders. There are no limits on the percentage of unrated or non-investment grade assets we may hold in our portfolio.

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Bridge loans involve a greater risk of loss than traditional mortgage loans.

We provide bridge loans secured by first lien mortgages on a property to borrowers who are typically seeking short-term capital to be used in an acquisition or renovation of real estate. The borrower has usually identified an undervalued asset that has been under-managed or is located in a recovering market. If the market in which the asset is located fails to recover according to the borrower’s projections, or if the borrower fails to improve the quality of the asset’s management or the value of the asset, the borrower may not receive a sufficient return on the asset to satisfy the bridge loan, and we may not recover some or all of our investment.

In addition, owners usually borrow funds under a conventional mortgage loan to repay a bridge loan. We may therefore be dependent on a borrower’s ability to obtain permanent financing to repay our bridge loan, which could depend on market conditions and other factors. Bridge loans are also subject to risks of borrower defaults, bankruptcies, fraud, losses and special hazard losses that are not covered by standard hazard insurance. In the event of any default under bridge loans held by us, we bear the risk of loss of principal and non-payment of interest and fees to the extent of any deficiency between the value of the mortgage collateral and the principal amount of the bridge loan. To the extent we suffer such losses with respect to our investments in bridge loans, the value of our company and the price of our common stock may be adversely affected.

Preferred equity investments involve a greater risk of loss than traditional debt financing.

Preferred equity investments are subordinate to debt financing and are not secured. Should the issuer default on our investment, we would only be able to proceed against the entity that issued the preferred equity in accordance with the terms of the preferred security, and not any property owned by the entity. Furthermore, in the event of bankruptcy or foreclosure, we would only be able to recoup our investment after any lenders to the entity are paid. As a result, we may not recover some or all of our investment, which could result in losses.

We may make investments in assets with lower credit quality, which will increase our risk of losses.

Substantially all of our securities investments have explicit ratings assigned by at least one of the three leading nationally-recognized statistical rating agencies. However, we may invest in unrated securities or participate in unrated or distressed mortgage loans. An economic downturn, for example, could cause a decline in the price of lower credit quality investments and securities because the ability of the obligors of mortgages, including mortgages underlying CMBS, to make principal and interest payments may be impaired. If this were to occur, existing credit support in the securitization structure may be insufficient to protect us against loss of our principal on these investments and securities. We have not established and do not currently plan to establish any investment criteria to limit our exposure to these risks for future investments.

Our investments in subordinate loans and subordinated CMBS are subject to losses.

We acquire subordinated loans and may invest in subordinated CMBS. In the event a borrower defaults on a loan and lacks sufficient assets to satisfy our loan, we may suffer a loss of principal or interest. In the event a borrower declares bankruptcy, we may not have full recourse to the assets of the borrower, or the assets of the borrower may not be sufficient to satisfy the loan. In addition, certain of our loans may be subordinate to other debt of the borrower. If a borrower defaults on our loan or on debt senior to our loan, or in the event of a borrower bankruptcy, our loan will be satisfied only after the senior debt is paid in full. Where debt senior to our loan exists, the presence of intercreditor arrangements may limit our ability to amend our loan documents, assign our loans, accept prepayments, exercise our remedies (through “standstill periods”) and control decisions made in bankruptcy proceedings relating to borrowers.

In general, losses on a mortgage loan included in a securitization will be borne first by the equity holder of the property, then by a cash reserve fund or letter of credit, if any, and then by the “first loss” subordinated security holder. In the event of default and the exhaustion of any equity support, reserve fund, letter of credit and any classes of securities junior to those in which we invest, we will not be able to recover all of our investment in the securities we purchase. Likewise, we may not be able to recover some or all of our investment in certain subordinated loans in which we obtain interests. In addition, if the underlying mortgage

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portfolio has been overvalued by the originator, or if the value subsequently declines and, as a result, less collateral is available to satisfy interest and principal payments due on the related CMBS, the securities in which we invest may effectively become the “first loss” position behind the more senior securities, which may result in significant losses to us.

An economic slowdown or recession, such as we are experiencing, could increase the risk of loss on our investments in subordinated CMBS. The prices of lower credit-quality securities, such as the subordinated CMBS in which we may invest, are very sensitive to adverse economic downturns or individual property developments. An economic downturn or a projection of an economic downturn could cause a decline in the price of lower credit quality securities because the ability of obligors of mortgages underlying CMBS to make principal and interest payments may be impaired. In such event, existing credit support to a securitized structure may be insufficient to protect us against loss of our principal on these securities.

Our due diligence may not reveal all of a borrower’s liabilities and may not reveal other weaknesses in its business.

Before making a loan to a borrower, we assess the strength and skills of such entity’s management and other factors that we believe are material to the performance of the investment. In making the assessment and otherwise conducting customary due diligence, we rely on the resources available to us and, in some cases, an investigation by third parties. This process is particularly subjective with respect to newly organized entities because there may be little or no information publicly available about the entities. There can be no assurance that our due diligence processes will uncover all relevant facts or that any investment will be successful.

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 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 (including from a trust vehicle used to facilitate a structured financing of the assets through CDOs) or replace them with substitute loans. In addition, we may elect to repurchase loans from our CDOs, although we are not required to do so. 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 balance sheet, and our ability to borrow against such assets is limited. Any significant repurchases or indemnification payments could materially and adversely affect our financial condition and operating results and our ability to make distributions to our stockholders.

We are subject to the risk that provisions of our loan agreements may be unenforceable.

Our rights and obligations with respect to our loans are governed by written loan agreements and related documentation. It is possible that a court could determine that one or more provisions of a loan agreement are unenforceable, such as a loan prepayment provision or the provisions governing our security interest in the underlying collateral. If this were to happen with respect to a material asset or group of assets we could be adversely affected.

The CMBS market has been severely impacted by the current economic turbulence, which has had a negative impact on the CMBS that we own.

Because the CMBS markets remain illiquid and other participants in the commercial real estate lending have drastically curtailed new lending activity, real estate owners are having difficulty refinancing their assets. Property values have also decreased over the past year because of scarcity of financing, which, when it is available, has terms generally at much lower leverage and higher cost than available in prior years. Uncertainty regarding future economic conditions and higher returning investment opportunities available in other asset classes have also negatively impacted commercial real estate values. These conditions, together with wide-spread downgrades of CMBS by the rating agencies, significantly higher risk premiums required by investors and uncertainty surrounding commercial real estate generally, have had a negative impact on CMBS and have significantly decreased the current market value of most of the CMBS that we own.

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Recent market conditions and the risk of continued market deterioration have caused and may continue to cause uncertainty in valuing our real estate securities.

The continued market volatility and the lack of liquidity has made the valuation process pertaining to certain of our assets extremely difficult, particularly our CMBS assets for which there is very little market activity. Historically, our estimate of the value of these investments was primarily based on active new issuance and the secondary trading market of such securities as compiled and reported by securities dealers and independent pricing agencies. The current market environment is absent new issuances and there has been reduced secondary trading of CMBS. Therefore, our estimate of fair value may require significant judgment and consideration of other indicators of value such as current interest rates, relevant market indices, broker quotes, expected cash flows and other relevant market and security-specific data as appropriate. The amount that we could obtain if we were forced to liquidate our securities portfolio into the current market could be materially different than management’s best estimate of fair value.

Credit ratings assigned to our CMBS investments are subject to ongoing evaluation and we cannot assure you that the ratings currently assigned to our investments will not be downgraded or that they accurately reflect the risks associated with those investments.

Some of the CMBS securities in which we invest are rated by S&P, Moody’s and/or Fitch. Rating agencies rate these investments based upon their assessment of the perceived safety of the receipt of principal and interest payments from the issuers of such debt securities. Credit ratings assigned by the rating agencies may not fully reflect the true risks of an investment in such securities. Also, rating agencies may fail to make timely adjustments to credit ratings based on recently available data or changes in economic outlook or may otherwise fail to make changes in credit ratings in response to subsequent events, so that our investments may in fact be better or worse than the ratings indicate. We try to reduce the impact of the risk that a credit rating may not accurately reflect the risks associated with a particular debt security by not relying solely on credit ratings as the indicator of the quality of an investment. We make our acquisition decisions after factoring in other information, such as the discounted value of a CMBS security’s projected future cash flows, and the value of the real estate collateral underlying the mortgage loans owned by the issuing Real Estate Mortgage Investment Conduit, or REMIC, trust. However, our assessment of the quality of a CMBS investment may also prove to be inaccurate and we may incur credit losses in excess of our initial expectations.

Credit rating agencies may also change their methods of evaluating credit risk and determining ratings on securities backed by real estate loans and securities. These changes have increased in frequency over the past year and in the future may occur quickly and often. Downgrades of CMBS could result in subsequent downgrades in the CDO liabilities issued by our CDOs. The commercial real estate mortgage finance, real estate and capital markets’ ability to understand and absorb these changes, and the impact to the securitization market in general, are difficult to predict, and such downgrades could have a material adverse effect on our business, financial condition, liquidity and results of operations.

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

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, and only if we are in compliance with certain collateral quality tests as set forth in the operative documents for each of our CDOs. The reinvestment period on our 2005 CDO will end in July 2010. 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 securities and may cause us to reduce the life of our CDOs and accelerate the amortization of certain fees and expenses.

Our investments in debt securities are subject to specific risks relating to the particular issuer of the securities and to the general risks of investing in subordinated real estate securities.

Our investments in debt securities involve special risks. REITs generally are required to invest substantially in real estate or real estate-related assets and are subject to the inherent risks associated with real

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estate-related investments discussed in this filing. Our investments in debt are subject to the risks described above with respect to mortgage loans and CMBS and similar risks, including:

• risks of delinquency and foreclosure, and risks of loss in the event thereof;

• the dependence upon the successful operation of and net income from real property;

• risks generally incident to interests in real property; and

• risks that may be presented by the type and use of a particular commercial property.

Debt securities may be unsecured and may also be subordinated to other obligations of the issuer. We may also invest in debt securities that are rated below investment grade. As a result, investments in debt securities are also subject to risks of:

• limited liquidity in the secondary trading market;

• substantial market price volatility resulting from changes in prevailing interest rates or credit spreads;

• subordination to the prior claims of banks and other senior lenders to the issuer;

• the operation of mandatory sinking fund or call/redemption provisions during periods of declining interest rates that could cause the issuer to reinvest premature redemption proceeds in lower yielding assets;

• the possibility that earnings of the debt security issuer may be insufficient to meet its debt service; and

• the declining creditworthiness and potential for insolvency of the issuer of such debt securities during periods of rising interest rates and economic downturn.

These risks may adversely affect the value of outstanding debt securities and the ability of the issuers thereof to repay principal and interest.

Our mortgage loans, mezzanine loans, participation interests in mortgage and mezzanine loans, real estate securities and preferred equity investments have been and may continue to be adversely affected by widening credit spreads, and if spreads continue to widen, the value of our loan and securities portfolios would decline further.

Our investments in commercial real estate loans and real estate securities are subject to changes in credit spreads. When credit spreads widen, the economic value of our existing loans decrease. If a lender were to originate a similar loan today, such loan would carry a greater credit spread than the existing loan. Even though a loan may be performing in accordance with its loan agreement and the underlying collateral has not changed, the economic value of the loan may be negatively impacted by the incremental interest foregone from the widened credit spread. The economic value of our commercial real estate loan portfolio and our real estate securities portfolio has been significantly impacted, and may continue to be significantly impacted, by credit spread widening.

Our hedging transactions may limit our gains or result in losses.

Subject to maintaining our qualification as a REIT, we use a variety of derivative instruments that are considered conventional “plain vanilla” derivatives, including interest rate swaps, caps, collars and floors, in our risk management strategy to limit the effects of changes in interest rates on our operations. The value of our derivatives may fluctuate over time in response to changing market conditions, and will tend to change inversely with the value of the risk in our liabilities that we intend to hedge. Hedges are sometimes ineffective because the correlation between changes in value of the underlying investment and the derivative instrument is less than was expected when the hedging transaction was undertaken. Our hedging transactions, which are intended to limit losses, may actually limit gains and increase our exposure to losses. The use of derivatives to hedge our liabilities carries certain risks, including the risk that losses on a hedge position will reduce the cash available for distribution to stockholders and that these losses may exceed the amount invested in such instruments. A hedge may not be effective in eliminating all of the risks inherent in any particular position and

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could result in higher interest rates than we would otherwise have. In addition, there will be various market risks against which we may not be able to hedge effectively. Moreover, no hedging activity can completely insulate us from the risks associated with changes in interest rates, and our qualification as a REIT may limit our ability to effectively hedge our interest rate exposure. Our profitability may be adversely affected during any period as a result of the use of derivatives. Also, mark-to-market adjustments on our hedging transactions may require us to post additional collateral or make a cash deposit that reduces our available liquidity.

Certain of our assets may be subject to purchase rights or rights of first offer in favor of SL Green, which could reduce their marketability or value.

Our agreements with SL Green in connection with our commercial property investments in 885 Third Avenue and Two Herald Square contain a buy-sell provision that can be triggered by us in the event we and SL Green are unable to agree upon a major decision that would materially impair the value of the assets. Such major decisions involve the sale or refinancing of the assets, any extensions or modifications to the leases with the tenant therein or any material capital expenditures.

These rights may make it more difficult to sell such assets because third parties may not want to incur the expenses and/or efforts to bid on these assets when they perceive that SL Green may acquire them at the lower of the terms proposed by the third party or par value. As a result, we may not receive the same value on the sale of such assets as we might receive from an independent third party submitting an offer through a competitive bidding process.

Risks Related to Our Organization and Structure

Maryland takeover statutes may prevent a change of control of our company, which could depress our stock price.

Under Maryland law, certain “business combinations” between a Maryland corporation and an interested stockholder or an affiliate of an interested stockholder are prohibited for five years after the most recent date on which the interested stockholder becomes an interested stockholder. These business combinations include a merger, consolidation, share exchange, or asset transfers or issuance or reclassification of equity securities. An interested stockholder is defined as:

• any person who beneficially owns 10% or more of the voting power of the corporation’s shares; or

• an affiliate or associate of the corporation who, at any time within the two-year period prior to the date in question, was the beneficial owner of 10% or more of the voting power of the then outstanding voting stock of the corporation.

A person is not an interested stockholder under the statute if our board of directors approves in advance the transaction by which he otherwise would have become an interested stockholder.

After the five-year prohibition, any business combination between the Maryland corporation and an interested stockholder generally must be recommended by our board of directors of the corporation and approved by the affirmative vote of at least:

• 80% of the votes entitled to be cast by holders of outstanding shares of voting stock of the corporation; and

• two-thirds of the votes entitled to be cast by holders of voting stock of the corporation other than shares held by the interested stockholder with whom or with whose affiliate the business combination is to be effected or by the interested stockholder’s affiliates or associates, voting together as a single group.

The business combination statute may discourage others from trying to acquire control of us and increase the difficulty of consummating any offer, including potential acquisitions that might involve a premium price for our common stock or otherwise be in the best interest of our stockholders.

We have opted out of these provisions of the Maryland General Corporation Law, or the MGCL, with respect to its business combination provisions and its control share provisions by resolution of our board of directors and a provision in our bylaws, respectively. However, in the future our board of directors may

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reverse its decision by resolution and elect to opt in to the MGCL’s business combination provisions, or amend our bylaws and elect to opt in to the MGCL’s control share provisions.

Additionally, Title 8, Subtitle 3 of the MGCL permits our board of directors, without stockholder approval and regardless of what is provided in our charter or bylaws, to implement takeover defenses, some of which we do not have. These provisions may have the effect of inhibiting a third party from making us an acquisition proposal or of delaying, deferring or preventing a change in our control under circumstances that otherwise could provide the stockholders with an opportunity to realize a premium over the then-current market price.

Our authorized but unissued preferred stock may prevent a change in our control which could be in the stockholders’ best interests.

Our charter authorizes us to issue additional authorized but unissued shares of our common stock or preferred stock. Any such issuance could dilute our existing stockholders’ interests. In addition, our board of directors may classify or reclassify any unissued shares of preferred stock and may set the preferences, rights and other terms of the classified or reclassified shares. As a result, our board of directors may establish a series of preferred stock that could delay or prevent a transaction or a change in control that might be in the best interest of our stockholders.

Our staggered board of directors and other provisions of our charter and bylaws may prevent a change in our control.

Our board of directors is divided into three classes of directors. The current terms of the directors expire in 2010, 2011 and 2012. Directors of each class are chosen for three-year terms upon the expiration of their current terms, and each year one class of directors is elected by the stockholders. The staggered terms of our directors may reduce the possibility of a tender offer or an attempt at a change in control, even though a tender offer or change in control might be in the best interest of our stockholders. In addition, our charter and bylaws also contain other provisions that may delay or prevent a transaction or a change in control that might be in the best interest of our stockholders.

Changes in market conditions could adversely affect the market price of our common stock.

As with other publicly traded equity securities, the value of our common stock depends on various market conditions which may change from time to time. Among the market conditions that may affect the value of our common stock are the following:

• the general reputation of REITs and the attractiveness of our equity securities in comparison to other equity securities, including securities issued by other real estate-based companies;

• our financial performance; and

• general stock and bond market conditions.

The market value of our common stock is based primarily upon the market’s perception of our growth potential and our current and potential future earnings and cash distributions. Consequently, our common stock may trade at prices that are higher or lower than our net asset value per share of common stock. If our future earnings or cash dividends are less than expected, it is likely that the market price of our common stock will diminish.

An increase in market interest rates may have an adverse effect on the market price of our common stock.

One of the factors that investors may consider in deciding whether to buy or sell shares of our common stock is our distribution rate as a percentage of our share price relative to market interest rates. If the market price of our common stock is based primarily on the earnings and return that we derive from our investments and income with respect to our investments and our related distributions to stockholders, and not from the market value of the investments themselves, then interest rate fluctuations and capital market conditions will likely affect the market price of our common stock. For instance, if market rates rise without an increase in our distribution rate, the market price of our common stock could decrease as potential investors may require

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a higher distribution yield on our common stock or seek other securities paying higher distributions or interest. In addition, rising interest rates would result in increased interest expense on our variable rate debt, thereby adversely affecting cash flow and our ability to service our indebtedness and pay distributions.

We may not pay the dividends on our outstanding Series A preferred stock on April 15, 2010, which would be the sixth consecutive quarter in which the dividends payable to the Series A preferred stock are in arrears. Should this occur, the holders would be entitled, under the articles supplementary of the Series A preferred stock, to elect one additional director to our board of directors at the next annual meeting of stockholders or at any special meeting called for such purpose, until full dividends accrued on the Series A preferred stocks have been paid in full or declared and set apart for payment.

We currently have 4,600,000 shares of the Series A preferred stock outstanding. Our board of directors has elected not to pay the Series A preferred stock dividends since the fourth quarter of 2008. Pursuant to the articles supplementary of the Series A preferred stock, if and when six or more quarterly dividends (whether or not consecutive) payable on the Series A preferred stock are in arrears, the holders of the Series A preferred stock, voting together as a single class, will be entitled to elect one additional director to our board of directors at any annual meeting of stockholders or any properly called special meeting for such purpose, until all arrears in dividends on the Series A preferred stock then outstanding have been paid and full dividends thereon for the current quarterly dividend period have been paid or declared and set apart for payment. In the event we are unable to pay the dividends on the Series A preferred stock on April 15, 2010, we may be required to add one additional member to our board of directors if and when the holders of the Series A preferred stock exercise their right to elect one additional director.

Risks Related to Our Taxation as a REIT

Our failure to qualify as a REIT would result in higher taxes and reduced cash available for stockholders.

We intend to continue to operate in a manner so as to qualify as a REIT for U.S. federal income tax purposes. Our continued qualification as a REIT depends on our satisfaction of certain asset, income, organizational, distribution and stockholder ownership requirements on a continuing basis. Our ability to satisfy some of the asset tests depends upon the fair market values of our assets, some of which are not able to be precisely determined and for which we will not obtain independent appraisals. If we were to fail to qualify as a REIT in any taxable year, and certain statutory relief provisions were not available, we would be subject to U.S. federal income tax, including any applicable alternative minimum tax, on our taxable income at regular corporate rates, and distributions to stockholders would not be deductible by us in computing our taxable income. Any such corporate tax liability could be substantial and would reduce the amount of cash available for distribution. Unless entitled to relief under certain Internal Revenue Code provisions, we also would be disqualified from taxation as a REIT for the four taxable years following the year during which we ceased to qualify as a REIT.

REIT distribution requirements could adversely affect our liquidity.

In order to qualify as a REIT, each year we must distribute to our stockholders at least 90% of our REIT taxable income, if any, determined without regard to the dividends paid deduction, and not including any net capital gain. To the extent that we satisfy this distribution requirement, but distribute less than 100% of our net taxable income, we will be subject to U.S. federal corporate income tax on our undistributed net taxable income. In addition, we will be subject to a 4% nondeductible excise tax if the actual amount that we pay out to our stockholders in a calendar year is less than a minimum amount specified under U.S. federal tax laws.

When necessary, we intend to continue to make distributions to our stockholders to comply with the REIT distribution requirements and avoid corporate income tax and/or excise tax. However, differences in timing between the recognition of taxable income and the actual receipt of cash could require us to sell assets or borrow funds on a short-term or long-term basis to meet the 90% distribution requirement or avoid corporate income or excise tax. We may own assets that generate mismatches between taxable income and available cash. These assets may include (a) securities that have been financed through financing structures which require some or all of available cash flows to be used to service borrowings, (b) loans or CMBS we hold that have been issued at a discount and require the accrual of taxable economic interest in advance of

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receipt in cash and (c) distressed debt on which we may be required to accrue taxable interest income even though the borrower is unable to make current debt service payments in cash. As a result, the requirement to distribute a substantial portion of our net taxable income could cause us to: (a) sell assets in adverse market conditions, (b) borrow on unfavorable terms or (c) distribute amounts that would otherwise be invested in future acquisitions, capital expenditures or repayment of debt to comply with REIT requirements.

Further, amounts distributed will not be available to fund investment activities. We expect to fund our investments by raising equity capital and through borrowings from financial institutions and the debt capital markets. If we fail to obtain debt or equity capital in the future, it could limit our ability to grow, which could have a material adverse effect on the value of our common stock.

Complying with REIT requirements may limit our ability to hedge effectively.

The existing REIT provisions of the Internal Revenue Code may limit our ability to hedge our operations. Except to the extent provided by Treasury regulations, (i) for transactions entered into on or prior to July 30, 2008, any income from a hedging transaction we enter into in the normal course of our business primarily to manage risk of interest rate or price changes or currency fluctuations with respect to borrowings made or to be made, or ordinary obligations incurred or to be incurred, to acquire or carry real estate assets, including gain from the sale or disposition of such a transaction, will not constitute gross income for purposes of the 95% gross income test (and will generally constitute non-qualifying income for purposes of the 75% gross income test) and (ii) for transactions entered into after July 30, 2008, any income from a hedging transaction where the instrument hedges interest rate risk on liabilities used to carry or acquire real estate or hedges risk of currency fluctuations with respect to any item of income or gain that would be qualifying income under the 75% or 95% gross income tests will be excluded from gross income for purposes of the 75% and 95% gross income tests. To qualify under either (i) or (ii) of the preceding sentence, the hedging transaction must be clearly identified as specified in Treasury regulations before the close of the day on which it was acquired, originated or entered into. To the extent that we enter into other types of hedging transactions, the income from those transactions is likely to be treated as non-qualifying income for purposes of both of the gross income tests. In addition, we must limit our aggregate income from non-qualified hedging transactions, from our provision of services and from other non-qualifying sources, to less than 5% of our annual gross income (determined without regard to gross income from qualified hedging transactions). As a result, we may have to limit our use of certain hedging techniques or implement those hedges through TRSs. This could result in greater risks associated with changes in interest rates than we would otherwise want to incur or could increase the cost of our hedging activities. If we fail to satisfy the 75% or 95% limitations, we could lose our REIT qualification for U.S. federal income tax purposes, unless our failure was due to reasonable cause and not due to willful neglect, and we meet certain other technical requirements. Even if our failure was due to reasonable cause, we might incur a penalty tax.

We may in the future choose to pay dividends in our own stock, in which case you may be required to pay income taxes in excess of the cash dividends you receive.

We may in the future distribute taxable dividends that are payable in cash and shares of our common stock at the election of each stockholder. Under IRS Revenue Procedure 2010 – 12, up to 90% of any such taxable dividend for 2010 and 2011 could be payable in our stock. Taxable stockholders receiving such dividends will be required to include the full amount of the dividend as ordinary income to the extent of our current and accumulated earnings and profits for United States federal income tax purposes. As a result, a U.S. stockholder may be required to pay income taxes with respect to such dividends in excess of the cash dividends received. If a U.S. stockholder sells the stock it receives as a dividend in order to pay this tax, the sales proceeds may be less than the amount included in income with respect to the dividend, depending on the market price of our stock at the time of the sale. Furthermore, with respect to non-U.S. stockholders, we may be required to withhold U.S. tax with respect to such dividends, including in respect of all or a portion of such dividend that is payable in stock. In addition, if a significant number of our stockholders determine to sell shares of our common stock in order to pay taxes owed on dividends, it may put downward pressure on the trading price of our common stock.

Further, while Revenue Procedure 2010 – 12 applies only to taxable dividends payable in cash or stock in 2010 and 2011, it is unclear whether and to what extent we will be able to pay taxable dividends in cash and

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stock in later years. Moreover, various aspects of such a taxable cash/stock dividend are uncertain and have not yet been addressed by the IRS. No assurance can be given that the IRS will not impose additional requirements in the future with respect to taxable cash/stock dividends, including on a retroactive basis, or assert that the requirements for such taxable cash/stock dividends have not been met.

The stock ownership limit imposed by the Internal Revenue Code for REITs and our charter may inhibit market activity in our stock and may restrict our business combination opportunities.

In order for us to maintain our qualification as a REIT under the Internal Revenue Code, not more than 50% in value of our outstanding stock may be owned, directly or indirectly, by five or fewer individuals (as defined in the Internal Revenue Code to include certain entities) at any time during the last half of each taxable year. Our charter, with certain exceptions, authorizes our directors to take such actions as are necessary and desirable to preserve our qualification as a REIT. Unless exempted by our board of directors, no person may own more than 9.8% of the aggregate value of the outstanding shares of our stock. Our board of directors may not grant such an exemption to any proposed transferee whose ownership of in excess of 9.8% of the value of our outstanding shares would result in the termination of our status as a REIT. Our board of directors has waived this provision in connection with SL Green’s purchase of our shares. We have also granted waivers to two other purchasers in connection with their purchase of our shares in a previous private placement. These ownership limits could delay or prevent a transaction or a change in our control that might be in the best interest of our stockholders.

The tax on prohibited transactions will limit our ability to engage in transactions, including certain methods of securitizing loans and selling our loans and real estate properties, that may be treated as sales for U.S. federal income tax purposes. In addition, as we have succeeded to any potential tax liability of American Financial in the merger, we may be subject to this tax on certain of its past dispositions. If the Internal Revenue Service were to successfully characterize those past dispositions as prohibited transactions, the resulting tax liability could have a material adverse effect on our results of operations.

A REIT’s gain from prohibited transactions is subject to a 100% tax. In general, prohibited transactions are sales or other dispositions of property, other than foreclosure property, but including mortgage loans and real estate, held primarily for sale to customers in the ordinary course of business.

We might be subject to this tax if we were to sell or securitize loans or dispose of loans or real estate in a manner that was treated as a sale of the loans or real estate for U.S. federal income tax purposes. Therefore, in order to avoid the prohibited transactions tax, we may choose not to engage in certain sales of loans or real estate and may limit the structures we utilize for our securitization transactions even though such sales or structures might otherwise be beneficial to us. It may be possible to reduce the impact of the prohibited transaction tax by engaging in securitization transactions treated as sales and loan and real estate dispositions through one or more of our TRSs, subject to certain limitations. Generally, to the extent that we engage in securitizations treated as sales or dispose of loans or real estate through one or more TRSs, the income associated with such activities would be subject to full corporate income tax at standard rates.

Prior to our merger with American Financial, American Financial disposed of properties that it deemed to be inconsistent with the investment parameters for its portfolio or for other reasons it deemed appropriate. If American Financial believed that a sale of a property would likely be subject to the prohibited transaction tax if sold by the parent REIT, it disposed of that property through its TRS, in which case the gain from the sale was subject to corporate income tax at standard rates but not the 100% prohibited transaction tax. We intend to continue to sell real estate in a manner similar to American Financial. If the Internal Revenue Service were to successfully characterize American Financial’s past dispositions (including the dispositions through its TRS) as prohibited transactions, we, as successor to American Financial’s tax liabilities and property disposition procedures, could be subject to a 100% tax on the gain from those dispositions, and the resulting tax liability could have a material adverse effect on our results of operations. In addition, we may be liable for the 100% prohibited transaction tax if the Internal Revenue Service were to successfully challenge our future dispositions of loans and real estate.

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The “taxable mortgage pool” rules may limit the manner in which we effect future securitizations and may subject us to U.S. federal income tax and increase the tax liability of our stockholders.

Certain of our current and future securitizations, such as our CDOs, could be considered to result in the creation of taxable mortgage pools for U.S. federal income tax purposes. As a REIT, so long as we or another private subsidiary REIT own 100% of the equity interests in a taxable mortgage pool, our qualification as a REIT would not be adversely affected by the characterization of the securitization as a taxable mortgage pool. We would generally be precluded, however, from holding equity interests in such securitizations through our operating partnership (unless held through a private subsidiary REIT), selling to outside investors equity interests in such securitizations or from selling any debt securities issued in connection with such securitizations that might be considered to be equity interests for tax purposes. These limitations will preclude us from using certain techniques to maximize our returns from securitization transactions.

Furthermore, we are taxable at the highest corporate income tax rate on a portion of the income arising from a taxable mortgage pool that is allocable to the percentage of our shares held by “disqualified organizations,” which are generally certain cooperatives, governmental entities and tax-exempt organizations that are exempt from unrelated business taxable income. We expect that disqualified organizations will own our shares from time to time.

In addition, if we realize excess inclusion income and allocate it to stockholders, this income cannot be offset by net operating losses of our stockholders. If the stockholder is a tax-exempt entity and not a disqualified organization, then this income would be fully taxable as unrelated business taxable income under Section 512 of the Internal Revenue Code. If the stockholder is a foreign person, it would be subject to U.S. federal income tax withholding on this. Nominees or other broker/dealers who hold our stock on behalf of disqualified organizations are subject to tax at the highest corporate income tax rate on a portion of our excess inclusion income allocable to the stock held on behalf of disqualified organizations. If the stockholder is a REIT, a regulated investment company, or RIC, common trust fund, or other pass-through entity, its allocable share of our excess inclusion income could be considered excess inclusion income of such entity and such entity will be subject to tax at the highest corporate tax rate on any excess inclusion income allocated to their owners that are disqualified organizations. Accordingly, such investors should be aware that a portion of our income may be considered excess inclusion income. Finally, if we fail to qualify as a REIT, our taxable mortgage pool securitizations will be treated as separate taxable corporations for U.S. federal income tax purposes.

We may be unable to generate sufficient revenue from operations to pay our operating expenses and to pay distributions to our stockholders.

As a REIT, we are generally required to distribute at least 90% of our REIT taxable income, if any, determined without regard to the dividends paid deduction and not including net capital gains, each year to our stockholders. To qualify for the tax benefits accorded to REITs, we have and intend to continue to make distributions to our stockholders in amounts such that we distribute all or substantially all our net taxable income each year, subject to certain adjustments. However, our ability to make distributions may be adversely affected by the risk factors described in this Annual Report on Form 10-K. In the event of a downturn in our operating results and financial performance or unanticipated declines in the value of our asset portfolio, we may be unable to declare or pay quarterly distributions or make distributions to our stockholders. The timing and amount of distributions are in the sole discretion of our board of directors, which considers, among other factors, our earnings, financial condition, debt service obligations and applicable debt covenants, REIT qualification requirements and other tax considerations and capital expenditure requirements as our board may deem relevant from time to time.

Although our use of TRSs may be able to partially mitigate the impact of meeting the requirements necessary to maintain our qualification as a REIT, our ownership of and relationship with our TRSs will be limited and a failure to comply with the limits would jeopardize our REIT qualification and may result in the application of a 100% excise tax.

A REIT may own up to 100% of the stock of one or more TRSs. A TRS generally may hold assets and earn income that would not be qualifying assets or income if held or earned directly by a REIT. Both the subsidiary and the REIT must jointly elect to treat the subsidiary as a TRS. A corporation of which a TRS

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directly or indirectly owns more than 35% of the voting power or value of the stock will automatically be treated as a TRS. Overall, no more than 25% (20% for tax years commencing before January 1, 2009) of the value of a REIT’s assets may consist of stock or securities of one or more TRSs. In addition, the TRS rules limit the deductibility of interest paid or accrued by a TRS to its parent REIT to assure that the TRS is subject to an appropriate level of corporate taxation. The rules also impose a 100% excise tax on certain transactions between a TRS and its parent REIT that are not conducted on an arm’s-length basis.

Our TRSs, including GKK Trading Corp., GIT Trading Corp. and American Financial TRS, Inc., will pay U.S. federal, state and local income tax on their taxable income, and their after-tax net income will be available for distribution to us but will not be required to be distributed to us. We anticipate that the aggregate value of TRS securities owned by us will be less than 25% of the value of our total assets (including such TRS securities). Furthermore, we will monitor the value of our respective investments in our TRSs for the purpose of ensuring compliance with the rule that no more than 25% (20% for tax years commencing before January 1, 2009) of the value of a REIT’s assets may consist of TRS securities (which is applied at the end of each calendar quarter). In addition, we will scrutinize all of our transactions with our TRSs for the purpose of ensuring that they are entered into on arm’s-length terms in order to avoid incurring the 100% excise tax described above. The value of the securities that we hold in our TRSs may not be subject to precise valuation. Accordingly, there can be no complete assurance that we will be able to comply with the 25% (20% for tax years commencing before January 1, 2009) limitation discussed above or avoid application of the 100% excise tax discussed above.

While we believe that American Financial qualified as a REIT prior to the merger, there is no guaranty the Internal Revenue Service will not successfully challenge such characterization. In the event American Financial did not qualify as a REIT, we as successor to American Financial’s tax liabilities could be subject to significant corporate tax on American Financial’s income prior to the merger. If such a tax were imposed, it could have a material adverse effect on our results of operations.

A corporation which qualifies as a REIT is entitled to a deduction for dividends that it pays and, therefore, will not be subject to U.S. federal corporate income tax to the extent such corporation’s net income is currently distributed to its stockholders. However, should the corporation cease to qualify as a REIT it would no longer be entitled to a deduction for dividends paid and would therefore be required to pay U.S. federal corporate level tax on its net income regardless of any dividends paid.

While we believe that American Financial qualified as a REIT prior to the merger, should the Internal Revenue Service successfully challenge such characterization, American Financial would not have been eligible to deduct any dividends paid to its stockholders and it would have been subject to full U.S. federal corporate taxes on its net income. As successor to American Financial’s tax liabilities, we would be liable for any such tax imposed. If such taxes were imposed, it could have a material adverse effect on our results of operations.

Cautionary Note Regarding Forward-Looking Information

This report contains “forward-looking statements” within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. You can identify forward-looking statements by the use of forward-looking expressions such as “may,” “will,” “should,” “expect,” “believe,” “anticipate,” “estimate,” “intend,” “plan,” “project,” “continue,” or any negative or other variations on such expressions. Forward-looking statements include information concerning possible or assumed future results of our operations, including any forecasts, projections, plans and objectives for future operations. Although we believe that our plans, intentions and expectations as reflected in or suggested by those forward-looking statements are reasonable, we can give no assurance that the plans, intentions or expectations will be achieved. We have listed below some important risks, uncertainties and contingencies which could cause our actual results, performance or achievements to be materially different from the forward-looking statements we make in this report. These risks, uncertainties and contingencies include, but are not limited to, the following:

• reduction in cash flows received from our investments, in particular our CDOs and our Gramercy Realty portfolio;

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• the success or failure of our efforts to implement our current business strategy;

• economic conditions generally and in the commercial finance and real estate markets and the banking industry specifically;

• the performance and financial condition of borrowers, tenants, and corporate customers;

• the actions of our competitors and our ability to respond to those actions;

• the cost and availability of our financings, which depends in part on our asset quality, the nature of our relationships with our lenders and other capital providers, our business prospects and outlook and general market conditions;

• the availability, terms and deployment of short-term and long-term capital;

• availability of, and ability to retain, qualified personnel;

• availability of investment opportunities on real estate assets and real estate-related and other securities;

• the resolution of our non-performing and sub-performing assets and any losses we might recognize in connection with such investments;

• our ability to renegotiate the terms of the Goldman Mortgage Loan and the senior and Goldman Mezzanine Loan;

• our ability to comply with financial covenants in our debt instruments, but specifically in our loan agreement with PB Capital Corporation;

• our ability to satisfy all covenants in our CDOs;

• the adequacy of our cash reserves, working capital and other forms of liquidity;

• changes to our management and board of directors;

• unanticipated increases in financing and other costs, including a rise in interest rates;

• our ability to maintain compliance with over-collateralization and interest coverage tests in our CDOs;

• the timing of cash flows, if any, from our investments;

• our ability to lease-up assumed leasehold interests above the leasehold liability obligation;

• demand for office space;

• risks of real estate acquisitions;

• our ability to maintain our current relationships with financial institutions and to establish new relationships with additional financial institutions;

• our ability to identify and complete additional property acquisitions;

• our ability to profitably dispose of non-core assets;

• risks of structured finance investments;

• changes in governmental regulations, tax rates and similar matters;

• legislative and regulatory changes (including changes to laws governing the taxation of REITs or the exemptions from registration as an investment company);

• environmental and/or safety requirements;

• our ability to satisfy complex rules in order for us to qualify as a REIT, for federal income tax purposes and qualify for our exemption under the Investment Company Act, our operating partnership’s ability to satisfy the rules in order for it to qualify as a partnership for federal income

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tax purposes, and the ability of certain of our subsidiaries to qualify as REITs and certain of our subsidiaries to qualify as taxable REIT subsidiaries for federal income tax purposes, and our ability and the ability of our subsidiaries to operate effectively within the limitations imposed by these rules;

• the continuing threat of terrorist attacks on the national, regional and local economies; and

• other factors discussed under Item IA Risk Factors of this Annual Report on Form 10-K for the year ended December 31, 2009 and those factors that may be contained in any filing we make with the SEC, including Part II, Item 1A of the Quarterly Reports on Form 10-Q.

We assume no obligation to update publicly any forward-looking statements, whether as a result of new information, future events, or otherwise. In evaluating forward-looking statements, you should consider these risks and uncertainties, together with the other risks described from time-to-time in our reports and documents which are filed with the SEC, and you should not place undue reliance on those statements.

The risks included here are not exhaustive. Other sections of this report may include additional factors that could adversely affect our business and financial performance. Moreover, we operate in a very competitive and rapidly changing environment. New risk factors emerge from time to time and it is not possible for management to predict all such risk factors, nor can it assess the impact of all such risk factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results.

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SPECIAL NOTE REGARDING EXHIBITS

In reviewing the agreements included as exhibits to this Annual Report on Form 10-K, please remember they are included to provide you with information regarding their terms and are not intended to provide any other factual or disclosure information about our company or the other parties to the agreements. The agreements contain representations and warranties by each of the parties to the applicable agreement. These representations and warranties have been made solely for the benefit of the other parties to the applicable agreement and:

• should not in all instances be treated as categorical statements of fact, but rather as a way of allocating the risk tone of the parties if those statements provide to be inaccurate;

• have been qualified by disclosures that were made to the other party in connection with the negotiation of the applicable agreement, which disclosures are not necessarily reflected in the agreement;

• may apply standards of materiality in a way that is different from what may be viewed as material to you or other investors; and

• were made only as of the date of the applicable agreement or such other date or dates as may be specified in the agreement and are subject to more recent developments.

Accordingly, these representations and warranties may not describe the actual state of affairs as of the date they were made or at any other time. Additional information about our company may be found elsewhere in this Annual Report on Form 10-K and our other public filings, which are available without charge through the SEC’s website at http://www.sec.gov. See “Item 1. Business — Corporate Governance and Internet Address; Where Readers Can Find Additional Information.”

ITEM 1B. UNRESOLVED STAFF COMMENTS

As part of a periodic review by the Division of Corporation Finance of the SEC of our Annual Report on Form 10-K for the year ended December 31, 2008, Form 10-Q for the quarters ended March 31, 2009, June 30, 2009 and September 30, 2009, and the definitive Proxy Statement on Schedule 14A filed on April 30, 2009, we received and responded to comments from the Staff of the SEC, or Staff. However, to date, the Staff has not provided their conclusion to our responses.

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ITEM 2. PROPERTIES

Our corporate headquarters are located in midtown Manhattan at 420 Lexington Avenue, New York, New York 10170. We also have regional offices located in Jenkintown, Pennsylvania, St. Louis, Missouri and Charlotte, North Carolina. We can be contacted at (212) 297-1000. We maintain a website at www.gkk.com.

As of December 31, 2009, Gramercy Finance held interests in two credit tenant net lease investments, or CTL investments, two interests in joint ventures holding fee positions on properties subject to long-term ground leases and a 100% fee interest in a property subject to a long-term ground lease.

As of December 31, 2009, Gramercy Realty’s portfolio consisted of 967 properties, including 637 bank branches, 324 office buildings and six land parcels, of which 54 bank branches were partially owned through unconsolidated joint ventures. Gramercy Realty’s consolidated properties aggregated approximately 25.6 million rentable square feet and its unconsolidated properties aggregated approximately 0.3 million rentable square feet. As of December 31, 2009, the occupancy of Gramercy Realty’s consolidated properties was 85.9% and the occupancy for its unconsolidated properties was 100%. The weighted average remaining term of the leases in Gramercy Realty’s consolidated portfolio was 9.3 years. Approximately 79.6% of its contractual rent was derived from leases with financial institution tenants. The two largest tenants are Bank of America and Wachovia Bank and for the year ended December 31, 2009, they represented approximately 41.7% and 15.7%, respectively, of the rental income of Gramercy Realty’s consolidated portfolio and occupied approximately 44.2% and 17.7%, respectively, of Gramercy Realty’s total consolidated rentable square feet.

The following table presents the Gramercy Realty consolidated portfolio as of December 31, 2009:

Properties(1)	Number of Properties		Rentable Square Feet		Occupancy			Percentage of 2010 Contractual Rent			Percentage of Portfolio NOI
Branches		583		3,726,399		85.5	%		21.0	%		22.8	%
Office Buildings		324		21,847,249		85.9	%		79.0	%		77.2	%
Land		6		—		—			0.0	%		0.0	%
		913		25,573,648		85.9	%		100.0	%		100.0	%

(1) Excludes investments in unconsolidated joint ventures.

	Weighted Average Remaining Lease Term(2)		Percentage of 2010 Contractual Rent from Financial Institutions			Percentage of 2010 Contractual Rent from “A” Rated Tenants			Percentage of 2010 Contractual Rent from Net Leases
Total Properties(1)		9.3		79.6	%		68.4	%		74.7	%

(1) Citizens JV (54 properties totaling approximately 251,000 square feet) is not included in the consolidated properties.

(2) Based on 2010 Contractual Rent.

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Gramercy Realty owns properties in 36 states and Washington, D.C. Set forth below are the top ten states based on percent of consolidated portfolio net operating income:

States	Number of Properties(1)		Rentable Square Feet		Percentage of Portfolio Rentable Sq. Ft.			Occupancy			Percentage of Portfolio NOI
1 North Carolina		179		4,274,168		16.7	%		96.4	%		21.5	%
2 Florida		142		3,115,156		12.2	%		88.3	%		13.3	%
3 Virginia		45		2,759,133		10.8	%		81.5	%		12.2	%
4 Georgia		67		1,499,691		5.9	%		89.8	%		6.8	%
5 Pennsylvania		46		1,470,529		5.8	%		91.4	%		6.4	%
6 California		95		1,512,021		5.9	%		92.9	%		5.8	%
7 Maryland		7		1,041,138		4.1	%		63.0	%		4.4	%
8 Illinois		14		1,432,194		5.6	%		77.7	%		3.7	%
9 Delaware		2		378,723		1.5	%		100.0	%		3.0	%
10 Arizona		8		583,057		2.3	%		99.4	%		2.7	%
Total		605		18,065,810		70.8	%		88.2	%		79.8	%

(1) Land parcels are excluded from property totals.

Set forth below is information regarding lease expirations for Gramercy Realty’s consolidated properties as of December 31, 2009 (dollars in thousands):

Year of Lease Expiration(1)	Number of Expiring Leases		Total Square Feet under Expiring Leases		Percentage of Total Rentable Square Feet			2010 Contractual Rent under Expiring Leases		Percentage of 2010 Contractual Rent
Monthly		74		297,545		1.16	%	$	101		0.04	%
2010		199		1,661,193		6.50	%		16,756		6.46	%
2011		142		765,250		2.99	%		12,890		4.97	%
2012		111		876,643		3.43	%		16,151		6.22	%
2013		74		424,514		1.66	%		10,207		3.93	%
2014		57		524,972		2.05	%		10,206		3.93	%
2015		32		782,957		3.06	%		15,159		5.84	%
2016		35		366,243		1.43	%		6,427		2.48	%
2017		37		408,841		1.60	%		6,907		2.66	%
2018		13		58,236		0.23	%		1,713		0.66	%
2019		158		3,137,242		12.27	%		22,953		8.84	%
2020 and thereafter		458		12,655,639		49.49	%		140,079		53.97	%
Total		1,390		21,959,275		85.87	%	$	259,549		100.00	%

(1) Includes contractual termination rights, or shedding rights, but excludes contractual rent reductions (Dana and Regions portfolios). Excludes leases for parking, signs and antennae.

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Set forth below is general information as of December 31, 2009, relating to Gramercy Realty’s consolidated properties.

Portfolio / Property Description	Number of Properties		Rentable Square Feet		Occupancy(1)			Percentage of 2010 Contractual Rent			Primary Tenant		Occupancy by Primary Tenant(1)
BBD1		119		5,712,269		88.1	%		17.7	%		Bank of America		82.0	%
BBD2		149		4,543,177		86.2	%		11.3	%		Bank of America		72.6	%
DANA		15		3,837,375		84.5	%		20.9	%		Bank of America		63.5	%
PREFCO BoA		89		445,613		96.6	%		2.2	%		Bank of America		85.9	%
Charlotte Office Bldg		1		565,694		96.6	%		3.4	%		Bank of America		66.0	%
WBBD		68		4,395,689		86.6	%		9.2	%		Wachovia Bank		83.1	%
PREFCO Wachovia		78		964,419		100.0	%		4.7	%		Wachovia Bank		86.4	%
Jersey City Office Bldg		1		311,829		78.9	%		2.8	%		Citco Fund Services (USA), Inc.		33.5	%
Regions		56		1,310,812		58.6	%		2.7	%		Regions Bank		45.0	%
Philadelphia Office Bldg		1		365,624		99.7	%		3.1	%		General Services Administration (GSA)		46.7	%
Providence Office Bldg		1		224,089		99.4	%		2.9	%		Citizens Financial Group		42.5	%
Wilmington Office Bldg		1		263,058		100.0	%		2.0	%		Zurich Financial Services Group		100.0	%
PREFCO Key		30		140,590		100.0	%		1.3	%		KeyBank		100.0	%
Other Branches		278		1,331,536		80.7	%		11.5	%		Various
Other Offices		20		1,161,874		80.9	%		4.3	%		Various
Land		6		—		—			0.0	%
Total Portfolio		913		25,573,648		85.9	%		100.0	%

(1) Percentage based rentable on square feet. All square feet leased by tenant in respective portfolio or property is included, of which some leases might have different lease terms.

At December 31, 2009 and December 2008, we had no single property with a book value equal to or greater than 10% of our total assets. For the year ended December 31, 2009 and 2008, we had no single property with gross revenues equal to or greater than 10% of our total revenues. Our two largest tenants are Bank of America and Wachovia (now owned by Wells Fargo) and, as of December 31, 2009, they represented approximately 41.7% and 15.7%, respectively, of the rental income of our portfolio and occupied approximately 44.2% and 17.7%, respectively, of our total rentable square feet. No other Gramercy Realty tenant pays rent representing more than 5.0% of the rental income of our portfolio or occupies more than 5.0% of our total rentable area.

A detailed listing of our properties is presented in Item 8 — Schedule III Real Estate Investments.

Bank of America, N.A.

Significant leases with Bank of America include the multi-property portfolio leases that are referred to as the BBD1, BBD2, Dana and PREFCO BoA Portfolios, and an office property in Charlotte, North Carolina. In addition, Bank of America leases space in four other office properties and in seven branch properties.

As of December 31, 2009, the BBD1 Portfolio was comprised of 119 properties containing approximately 5.7 million square feet. Approximately 4.7 million square feet, or 81.8% of the BBD1 Portfolio, is leased to Bank of America for a term ending June 30, 2023. The base rent paid by Bank of America under the BBD1 Portfolio lease equals $8.74 per square foot, escalating to $8.87 per square foot in 2013 and $9.00 per square foot in 2018. In addition, Bank of America pays its proportionate share of property operating expenses, including capital items on an amortized basis. The BBD1 Portfolio lease currently permits Bank of America to reduce its leased premises by approximately 14,071 square feet, an additional 105,017 square feet commencing January 1, 2012, and by an additional 105,016 square feet commencing January 1, 2017, all

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upon 60 days prior notice and without payment of a termination fee. Bank of America has the right to renew the BBD1 Portfolio lease, in whole or in part, for up to six consecutive terms of five years each, ending not later than June 30, 2053. Bank of America Corporation has guaranteed the lessee’s obligations under the BBD1 Portfolio lease.

As of December 31, 2009, the BBD2 Portfolio was comprised of 149 properties containing approximately 4.5 million square feet. Approximately 2.3 million square feet, or 72.6% of the BBD2 Portfolio, is leased to Bank of America for a term ending September 30, 2019. The base rent paid by Bank of America under the BBD2 Portfolio lease equals $6.80 per square foot, escalating to $6.90 in 2009 and $7.00 per square foot in 2014. In addition, Bank of America pays its proportionate share of property operating expenses, including capital items on an amortized basis. The BBD2 Portfolio lease currently permits Bank of America to reduce its leased premises by approximately 50,990 square feet, of which all 50,990 square feet have been noticed, and by an additional 139,375 square feet commencing April 1, 2013, all upon 60 days prior notice and without payment of a termination fee. In addition, Bank of America may reduce its leased premises by up to 197,205 square feet, of which 193,483 square feet have been noticed, upon 56 weeks prior notice and the payment of a termination fee. Bank of America has the right to renew the BBD2 Portfolio lease, in whole or in part, for up to 17 consecutive terms of five years each for all banking center properties and for up to seven consecutive terms of five years each for all other properties. Bank of America Corporation has guaranteed the lessee’s obligations under the BBD2 Portfolio lease.

As of December 31, 2009, the Dana Portfolio consists of 13 office buildings and two parking facilities containing approximately 3.8 million square feet of which approximately 2.4 million square feet, or 63.5%, is currently leased to Bank of America. Under the Dana Portfolio lease, which was originally entered into by Bank of America, as tenant, and Dana Commercial Credit Corporation, as landlord, as part of a larger bond-net lease transaction, Bank of America is required to make annual base rental payments of approximately $40.4 million in January 2010, annual base rental payments of approximately $3.0 million in January 2011 and no annual base rental payments from January 2012 through lease expiration in June 2022. From January 2012 until the expiration of the initial term of the Dana Portfolio lease, Bank of America is only required to pay operating expenses, including capital items as incurred, on the space that it occupies. As permitted by the Dana Portfolio lease, Bank of America elected to surrender in June 2009, approximately 958,000 square feet, of which, to date, all but approximately 142,000 square feet has been vacated and surrendered. This surrender did not reduce the annual base rental otherwise required to be paid to us by Bank of America. Under the Dana Portfolio lease, in June 2015, Bank of America may vacate and surrender additional leased premises constituting 16% of the original Dana Portfolio purchase price value. If Bank of America fails to vacate space as otherwise permitted under the lease, it is obligated to pay additional rent as provided in the Dana Portfolio lease for the space it does not vacate.

As of December 31, 2009, the PREFCO BoA Portfolio is comprised of 89 branches containing approximately 445,613 square feet. Bank of America net leases 85.9% of the PREFCO BoA Portfolio, of which 6.6% expires on March 31, 2012 and 79.3% expires on September 30, 2023. Bank of America is required to make annual base rental payments of approximately $5.4 million throughout the remaining term. In addition, Bank of America operates and maintains each of the properties it leases under the PREFCO BoA Portfolio at Bank of America’s sole cost and expense. Bank of America has the right to renew the PREFCO BoA Portfolio lease, in whole or in part, for up to 30 years in consecutive terms of not less than five years (but not more than 10 years), ending not later than September 30, 2053.

In Charlotte, North Carolina, Bank of America leases 373,362 square feet, or 66.0% of the building area. Effective as of July 1, 2010, the square footage leased by Bank of America at this location will step down to 260,601 square feet or approximately 46.1% of the building area. The base rent paid by Bank of America at this location averages approximately $18.00 per square foot.

Wachovia Bank, National Association

Significant leases with Wachovia (now owned by Wells Fargo) include the multi-property portfolio leases that are referred to as the WBBD and PREFCO Wachovia Portfolios. In addition, Wachovia leases space in two other office properties and in three branch properties.

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As of December 31, 2009, the WBBD Portfolio is comprised of 68 commercial office properties containing approximately 4.4 million square feet. Approximately 3.6 million square feet, or 82.8% of the WBBD Portfolio, is leased to Wachovia for a term ending September 30, 2024. The base rent per square foot paid by Wachovia under the WBBD Portfolio lease equals $6.04 per square foot, escalating to $6.13 per square foot in 2014 and $6.22 per square foot in 2019. In addition, Wachovia pays its proportionate share of property operating expenses, including capital items on an amortized basis. The WBBD Portfolio lease currently permits Wachovia to reduce its leased premises by 9,743 square feet, by an additional 234,336 square feet commencing October 1, 2012, and by an additional 234,336 square feet commencing October 1, 2017, all upon nine months prior notice and without payment of a termination fee. Wachovia has the right to renew the WBBD Portfolio lease, in whole or in part, for up to six consecutive terms of five years each, ending not later than September 30, 2053. Wachovia Corporation has guaranteed the lessee’s obligations under the WBBD Portfolio lease.

As of December 31, 2009, the PREFCO Wachovia Portfolio is comprised of 78 properties containing 964,419 square feet. Wachovia net leases 86.4% of the PREFCO Wachovia Portfolio, of which 71.1% expires on August 31, 2010 and 15.3% expires on March 31, 2023. Wachovia pays approximately $597,000 per quarter for the leased space expiring on March 31, 2023. For the leased space expiring on August 31, 2010, Wachovia pays approximately $1.2 million for the quarters ending February 2010 and August 2010, and $6.5 million for the quarter ending May 2010. In addition, Wachovia operates and maintains the properties it leases at Wachovia’s sole cost and expense. Wachovia has the right to renew its leased properties, in whole or in part, for up to four consecutive terms of five years each and has elected to renew its leases for approximately 52.3% of the leased premises whose terms expire on August 31, 2010.

Leased Properties

Gramercy Realty entered into an agreement to sublease approximately 292,019 square feet in an office building in Jersey City, New Jersey, through September 2017. It also assumed certain management functions with respect to an additional 295,124 square feet of space in the same building that has been subleased to third-party tenants through this same term. In the event that any of these third-party tenants defaults on their lease obligations or fails to renew their lease upon expiration, Gramercy Realty has agreed to sublease this additional space through September of 2017. As of December 31, 2009, Gramercy Realty has assumed an additional 19,810 square feet due to lease non-renewals. Of the 311,829 square feet that Gramercy Realty currently subleases, it has in turn sublet 245,924 square feet.

Development Plans

As of December 31, 2009, we have no plans for the renovation, improvement or development of our properties other than in connection with its on-going repair and maintenance and tenant leasing programs.

ITEM 3. LEGAL PROCEEDINGS

As of December 31, 2009, we were not involved in any material litigation.

ITEM 4. RESERVED

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock began trading on the New York Stock Exchange, or the NYSE, on August 2, 2004 under the symbol “GKK.” On March 15, 2010, the reported closing sale price per share of common stock on the NYSE was $2.50 and there were approximately 235 holders of record of our common stock. The table below sets forth the quarterly high and low closing sales prices of our common stock on the NYSE for the year ended December 31, 2009 and 2008 and the distributions paid by us with respect to the periods indicated.

	2009						2008
Quarter Ended	High		Low		Dividends		High		Low		Dividends
March 31	$	1.68	$	0.43	$	—	$	24.00	$	15.54	$	0.63
June 30	$	3.20	$	0.98	$	—	$	22.36	$	11.59	$	0.63
September 30	$	2.97	$	1.23	$	—	$	11.89	$	2.48	$	—
December 31	$	3.34	$	2.15	$	—	$	2.66	$	0.70	$	—

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If dividends are declared in a quarter, those dividends will be paid during the subsequent quarter. Beginning with the third quarter of 2008, our board of directors elected to not pay a dividend on our common stock. Additionally our board of directors elected not to pay the Series A preferred stock dividend of $0.50781 per share beginning with the fourth quarter of 2008. The unpaid preferred stock dividend has been accrued for five quarters. Based on current estimates of our taxable loss, we expect that we will have no distribution requirements in order to maintain our REIT status for the 2009 tax year and we expect that we will continue to elect to retain capital for liquidity purposes until the requirement to make a cash distribution to satisfy our REIT requirements arise. We may elect to pay dividends on our common stock in cash or a combination of cash and shares of common stock as permitted under U.S. federal income tax laws governing REIT distribution requirements. However, in accordance with the provisions of our charter, we may not pay any dividends on our common stock until all accrued dividends and the dividend for the then current quarter on the Series A preferred stock are paid in full. We expect to continue our policy of generally distributing 100% of our taxable income through dividends, although there is no assurance as to future dividends because they depend on future earnings, capital requirements and financial condition. See Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Dividends” for additional information regarding our dividends.

For the year ended December 31, 2008, we declared dividends of $1.26 per share, of which $1.26 represented distributions of taxable earnings and profits.

Stock Performance Graph

This graph compares the performance of our shares with the Standard & Poor’s 500 Composite Index and the NAREIT Hybrid Index. This graph assumes $100 invested on January 1, 2005 and assumes the reinvestment of dividends.

COMPARISON OF 5-YEAR CUMULATIVE TOTAL RETURN
AMONG GRAMERCY CAPITAL CORP.,
S&P 50 COMPOSITE INDEX AND NAREIT HYBRID INDEX

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The following table summarizes information, as of December 31, 2009, relating to our equity compensation plans pursuant to which shares of our common stock or other equity securities may be granted from time to time.

Plan category	(a) Number of securities to be issued upon exercise of outstanding options, warrants and rights		(b) Weighted average exercise price of outstanding options, warrants and rights		(c) Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
Equity compensation plans approved by security holders(1)		1,516,394	$	16.70		1,151,127
Equity compensation plans not approved by security holders		N/A		N/A		N/A
Total		1,516,394	$	16.70		1,151,127

(1) Includes information related to our 2004 Equity Incentive Plan.

SALE OF UNREGISTERED SECURITIES

In November 2007, we sold, through a private placement pursuant to Section 4(2) of the Securities Act, 3,809,524 shares of our common stock at a price of $26.25 per share to an affiliate of Morgan Stanley Real Estate Special Situations Fund III, a global diversified fund managed by Morgan Stanley Real Estate, raising gross proceeds of approximately $100 million.

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ITEM 6. SELECTED FINANCIAL DATA

The following tables set forth our selected financial data and should be read in conjunction with our Financial Statements and notes thereto included in Item 8, “Financial Statements and Supplementary Data” and Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Form 10-K.

Operating Data (In thousands, except per share data)

	For the year ended December 31,
	2009			2008			2007			2006			2005
Total revenues	$	636,106		$	593,404		$	315,444		$	198,178		$	88,085
Property operating expenses		208,948			145,458			—			—			—
Interest expense		233,335			260,533			172,094			96,909			33,771
Management fees		7,787			30,299			22,671			16,668			9,600
Incentive fee		—			2,350			32,235			7,609			2,276
Depreciation and amortization		112,232			67,072			2,158			1,209			672
Management, general and administrative		35,390			17,577			13,534			11,957			6,976
Business acquisition costs		5,010			—			—			—			—
Impairment on loans held for sale and commercial mortgage backed securities		151,081			—			—			—			—
Provision for loan loss		517,784			97,853			9,398			1,430			1,030
Total expenses		1,271,567			621,142			252,090			135,782			54,325
Income (loss) from continuing operations before equity in income from unconsolidated joint ventures, provision for taxes and non-controlling interest		(635,461	)		(27,738	)		63,354			62,396			33,760
Equity in net income (loss) of unconsolidated joint ventures		8,436			9,088			4,944			(2,960	)		(1,489	)
Income (loss) from continuing operations before provision for taxes, gain on extinguishment of debt, and discontinued operations		(627,025	)		18,650			68,298			59,436			32,271
Gain from sale of unconsolidated joint venture interest		—			—			92,235			—			—
Gain on extinguishment of debt		119,305			77,234			3,806
Provision for taxes		(2,498	)		(83	)		(1,341	)		(1,808	)		(900	)
Net income (loss) from continuing operations		(510,218	)		58,501			162,998			57,628			31,371
Net income (loss) from discontinued operations		(10,181	)		1,187			(1,401	)		(1,726	)		—
Net income (loss)		(520,399	)		59,688			161,597			55,902			31,371
Net (income) loss attributable to non-controlling interest		770			(385	)		—			—			—
Net income (loss) attributable to Gramercy Capital Corp.		(519,629	)		59,303			161,597			55,902			31,371
Preferred stock dividends		(9,414	)		(9,344	)		(6,567	)		—			—
Net income (loss) available to common stockholders	$	(529,043	)	$	49,959		$	155,030		$	55,902		$	31,371
Net income (loss) per common share – Basic	$	(10.61	)	$	1.03		$	5.54		$	2.26		$	1.57
Net income (loss) per common share – Diluted	$	(10.61	)	$	1.03		$	5.28		$	2.15		$	1.51
Basic weighted average common shares outstanding		49,854			47,205			27,968			24,722			20,027
Diluted weighted average common shares and common share equivalents outstanding		49,854			47,330			29,379			26,009			20,781

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Balance Sheet Data (In thousands)

	Year ended December 31,
	2009		2008		2007		2006		2005
Total real estate investments, net	$	3,231,080	$	3,279,869	$	71,933	$	99,821	$	51,173
Loans and other lending investments, net		1,383,832		2,213,473		2,441,747		2,144,151		1,163,745
Commercial mortgage-backed securities		984,709		869,973		791,983		—		—
Assets held for sale, net		841		192,780		295,222		42,733		42,000
Investment in unconsolidated joint ventures		108,465		93,919		49,440		57,567		58,040
Total assets		6,765,437		7,818,098		4,205,078		2,766,113		1,469,810
Mortgage note payable		1,743,668		1,833,005		59,099		94,525		41,000
Mezzanine loans payable		553,522		580,462		—		—		—
Unsecured credit facility		—		172,301		—		15,000		—
Term loan, credit facility and repurchase facility		—		95,897		200,197		277,412		117,366
Collateralized debt obligations		2,705,534		2,608,065		2,735,145		1,714,250		810,500
Junior subordinated notes		52,500		—		—		—		—
Deferred interest debentures held by trusts that issued trust preferred securities		—		150,000		150,000		150,000		100,000
Total liablilites		6,197,919		6,785,665		3,456,343		2,305,453		1,097,406
Stockholders’ equity		567,518		1,032,433		748,735		460,660		372,404

Other Data (In thousands)

	For the year ended December 31,
	2009			2008			2007			2006			2005
Funds from operations(1)	$	(417,610	)	$	123,495		$	89,056		$	64,027		$	36,490
Cash flows provided by operating activities	$	86,960		$	171,755		$	59,574		$	145,707		$	2,160
Cash flows used in investing activities	$	131,121		$	(490,572	)	$	(1,229,382	)	$	(1,149,526	)	$	(868,101	)
Cash flows provided by financing activities	$	(216,564	)	$	162,519		$	1,443,620		$	943,557		$	897,423

(1) We present FFO because we consider it an important supplemental measure of our operating performance and believe that it is frequently used by securities analysts, investors and other interested parties in the evaluation of REITS. We also use FFO as one of several criteria to determine performance-based incentive compensation for members of our senior management, which may be payable in cash or equity awards. The revised White Paper on FFO approved by the Board of Governors of the National Association of Real Estate Investment Trusts, or NAREIT, in April 2002 defines FFO as net income (loss) (computed in accordance with GAAP), excluding gains (or losses) from items which are not a recurring part of our business, such as sales of properties, plus real estate-related depreciation and amortization and after adjustments for unconsolidated partnerships and joint ventures. We consider gains and losses on the sales of debt investments to be a normal part of our recurring operations and therefore include such gains and losses when arriving at FFO. FFO does not represent cash generated from operating activities in accordance with GAAP and should not be considered as an alternative to net income (determined in accordance with GAAP), as an indication of our financial performance, or to cash flow from operating activities (determined in accordance with GAAP) as a measure of our liquidity, nor is it entirely indicative of funds available to fund our cash needs, including our ability to make cash distributions. Our calculation of FFO may be different from the calculation used by other companies and, therefore, comparability may be limited.

A reconciliation of FFO to net income computed in accordance with GAAP is provided under the heading of “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Funds From Operations.”

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ITEM 7: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Amounts in thousands, except for share and per share data)

Overview

Gramercy Capital Corp. is a self-managed, integrated commercial real estate finance and property investment company. We were formed in April 2004 and commenced operations upon the completion of our initial public offering in August 2004. On April 1, 2008, we completed the acquisition of American Financial Realty Trust (NYSE: AFR), or American Financial, in a transaction with a total value of approximately $3.3 billion, including the assumption of approximately $1.3 billion of American Financial’s secured debt.

Our property investment business, which operates under the name Gramercy Realty, focuses on the acquisition and management of commercial properties leased primarily to regulated financial institutions and affiliated users throughout the United States. Our commercial real estate finance business, which operates under the name Gramercy Finance, focuses on the direct origination, acquisition and portfolio management of whole loans, bridge loans, subordinate interests in whole loans, mezzanine loans, preferred equity, commercial mortgage-backed securities, or CMBS, and other real estate related securities. Neither Gramercy Finance nor Gramercy Realty is a separate legal entity but are divisions through which our commercial real estate finance and property investment businesses are conducted.

We conduct substantially all of our operations through our operating partnership, GKK Capital LP, or our Operating Partnership. We are the sole general partner of our Operating Partnership. Prior to the internalization of our management in April 2009, we were externally managed and advised by GKK Manager LLC, or the Manager, then a wholly-owned subsidiary of SL Green Realty Corp. (NYSE: SLG), or SL Green which owned approximately 12.5% of the outstanding shares of our common stock as of December 31, 2009 and is our largest stockholder. On April 24, 2009, we completed the internalization of our management through the direct acquisition of the Manager from SL Green. As a result of the internalization, beginning in May 2009, management and incentive fees payable by us to the Manager ceased and we added 77 former employees of the Manager to our own staff. We expensed approximately $5.0 million for costs incurred in connection with our acquisition of the Manager.

We have elected to be taxed as a real estate investment trust, or REIT, under the Internal Revenue Code of 1986, as amended, or the Internal Revenue Code, and generally will not be subject to U.S. federal income taxes to the extent we distribute our taxable income, if any, to our stockholders. We have in the past established, and may in the future establish taxable REIT subsidiaries, or TRSs, to effect various taxable transactions. Those TRSs would incur U.S. federal, state and local taxes on the taxable income from their activities. Unless the context requires otherwise, all references to “we,” “our” and “us” mean Gramercy Capital Corp.

Since our inception, we have completed debt investment transactions in a variety of markets and secured by a variety of property types. Until the second half of 2007, the market for commercial real estate debt exhibited high relative returns and significant inflows of capital. However, due to continuing illiquidity in the credit markets and an overall slowing in macroeconomic conditions, the default levels for commercial real estate have risen. Beginning in the second quarter of 2007, the sub-prime residential lending and single family housing markets in the U.S. began to experience significant default rates, declining real estate values and increasing backlog of housing supply, and other lending markets experienced higher volatility and decreased liquidity resulting from the poor credit performance in the residential lending markets. Concerns in the residential sector of the capital markets quickly spread more broadly into the asset-backed, commercial real estate, corporate and other credit and equity markets. The factors described above have resulted in substantially reduced mortgage loan originations and securitizations, and caused more generalized credit market dislocations and a significant contraction in available credit. As a result, most financial industry participants, including commercial real estate lenders and investors, including us, continue to find it difficult to obtain cost-effective debt capital to finance new investment activity or to refinance maturing debt.

Credit spreads on commercial mortgages (i.e., the interest rate spread over given benchmarks such as LIBOR or U.S. Treasury securities) are significantly influenced by: (a) supply and demand for such mortgage loans; (b) perceived risk of the underlying real estate collateral cash flow; and (c) capital markets execution for the sale or financing of such commercial mortgage assets. The number of potential lenders in the market

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place and the amount of funds they are willing to devote to commercial mortgage assets will impact credit spreads. As liquidity increases, spreads on equivalent commercial mortgage loans will decrease. Conversely, a lack of liquidity results in credit spreads increasing. During periods of volatility, such as the markets we are currently experiencing, the number of lenders participating in the market may change at an accelerated pace. Further, many lenders depend on the capital markets to finance their portfolio of commercial loans. Lenders are forced to increase the credit spread at which they are willing to lend as liquidity in the capital market decreases. As liquidity declined, many warehouse lenders requested additional collateral or repayments with respect to their loans in order to maintain overcollateralization margins that are acceptable to them.

For existing loans, when credit spreads widen, the fair value of these loans decreases, even though a loan may be performing in accordance with its loan agreement and the underlying collateral has not changed. Accordingly, when a lender wishes to sell or finance the loan, the reduced value of the loan may reduce the total sale or borrowing proceeds that the lender will receive.

We believe the current environment of rapidly changing and evolving markets will provide increasing challenges to both our industry and our company. We continue to believe commercial real estate and commercial real estate lending can provide attractive risk-adjusted returns, however, it is being adversely affected by volatility in the credit and capital markets and due to these uncertainties, we are experiencing the following: (i) sharply lower loan originations and acquisitions, (ii) reduced access to capital, and increased cost of financing, (iii) reduced cash available for distribution to stockholders, particularly as our debt portfolio is reduced by scheduled maturities and prepayments and (iv) increased instances of defaults by borrowers and tenants.

During 2008, 2009 and to date in 2010, the global capital markets continued to experience tremendous volatility and a wide-ranging lack of liquidity. The impact of the global credit crisis on our sector has been acute. Transaction volume has declined significantly, credit spreads for forms of mortgage debt investments have reached all-time highs, and other forms of financing from the debt markets have been dramatically curtailed. Certain financial institutions still hold significant inventories of unsold loans and CMBS, creating a further overhang on the markets. We believe that the continuing dislocation in the debt capital markets, coupled with a recession in the U.S., has reduced property valuations and has adversely impacted commercial real estate fundamentals. These developments can impact and have impacted the performance of our existing portfolio of financial and real property assets. Among other things, such conditions have resulted in our recognizing significant amounts of loan loss reserves and impairments, narrowed our margin of compliance with debt and CDO covenants, depressed the price of our common stock and has effectively removed our ability to raise public capital. It has reduced our borrowers’ ability to repay their loans, and when combined with declining real estate values on our collateral for such loans, increased the likelihood that we will continue to take further loan loss reserves. Additionally, it has led to increased vacancies in our properties. Furthermore, the volatility in the capital markets has caused stress to all financial institutions and, our business is dependent upon these counterparties for, among other things, financing, rental payments on the majority of our owned properties and interest rate derivatives. It is difficult to predict when conditions in our business will improve. We expect that the adverse circumstances and trends in our business and securities will begin to improve only as the credit markets and overall economy improve. Continued disruption in the global credit markets or further deterioration in those markets may have a material adverse effect on our ability to repay or refinance our borrowings and our ability to grow and operate our business.

We have responded to these difficult conditions by sharply decreasing investment activity, to maintain our liquidity, extending debt maturities and restructuring certain of our debt facilities. In addition, beginning with the third quarter of 2008, our board of directors elected to not pay the dividend on our common stock. Our board of directors also elected not to pay the Series A preferred stock dividend of $0.50781 per share beginning with the fourth quarter of 2008. The unpaid preferred stock dividend has been accrued for five quarters. Based on current estimates of our taxable loss, we expect that we will have no distribution requirements in order to maintain our REIT status for the 2009 tax year and we expect that we will continue to elect to retain capital for liquidity purposes until the requirement to make a cash distribution to satisfy our REIT requirements arise. We may elect to pay dividends on our common stock in cash or a combination of cash and shares of common stock as permitted under U.S. federal income tax laws governing REIT distribution requirements. However, in accordance with the provisions of our charter, we may not pay any

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dividends on our common stock until all accrued dividends and the dividend for the then current quarter on the Series A preferred stock are paid in full.

We may need to modify our strategies, businesses or operations, and we may incur increased capital requirements and constraints to compete in a changed business environment. Given the volatile nature of the current market disruption and the uncertainties underlying efforts to mitigate or reverse the disruption, we may not timely anticipate or manage existing, new or additional risks, contingencies or developments, including regulatory developments and trends in new products and services, in the current or future environment. Our failure to do so could materially and adversely affect our business, financial condition, results of operations and prospects.

The recent credit crisis has put many borrowers and financial institutions, including many of our borrowers and tenants, under increasing amounts of financial and capital distress. This has led to an increased incidence of defaults under loans and leases and could lead to increased vacancy rates in office properties servicing these institutions.

Our commercial real estate finance business, which operates under the name Gramercy Finance, focuses on the direct origination, acquisition and portfolio management of whole loans, bridge loans, subordinate interests in whole loans, mezzanine loans, preferred equity, commercial mortgage-backed securities, or CMBS, and other real estate related securities. Our property investment business, which operates under the name Gramercy Realty, focuses on the acquisition and management of commercial properties leased primarily to regulated financial institutions and affiliated users throughout the United States. These institutions are for the most part deposit taking commercial banks, thrifts and credit unions, which we generally refer to as “banks.” Our portfolio of wholly-owned and jointly-owned bank branches and office buildings is leased to large banks such as Bank of America, N.A., or Bank of America, Wachovia Bank National Association (now owned by Wells Fargo & Company, or Wells Fargo), or Wachovia Bank, Regions Financial Corporation, or Regions Financial, and Citizens Financial Group, Inc., or Citizen Financial, and to mid-sized and community banks. Neither Gramercy Finance nor Gramercy Realty is a separate legal entity but are divisions of us through which our commercial real estate finance and property investment businesses are conducted.

The aggregate carrying values, allocated by product type and weighted average coupons of our loans, and other lending investments and CMBS investments as of December 31, 2009 and December 31, 2008, were as follows:

	Carrying Value(1)				Allocation by Investment Type						Fixed Rate Average Yield(2)						Floating Rate Average Spread over LIBOR(3)
	2009		2008		2009			2008			2009			2008			2009		2008
Whole loans, floating rate	$	830,617	$	1,222,991		60.2	%		55.3	%		—			—			454  bps		418  bps
Whole loans, fixed rate		122,846		189,946		8.9	%		8.6	%		6.9	%		7.2	%		—		—
Subordinate interests in whole loans, floating rate		76,331		80,608		5.5	%		3.6	%		—			—			246  bps		564  bps
Subordinate interests in whole loans, fixed rate		44,988		63,179		3.2	%		2.9	%		7.5	%		9.2	%		—		—
Mezzanine loans, floating rate		190,668		396,190		13.7	%		17.9	%		—			—			577  bps		654  bps
Mezzanine loans, fixed rate		85,898		248,558		6.2	%		11.2	%		8.1	%		10.2	%		—		—
Preferred equity, floating rate		28,228		—		2.0	%		—			—			—			1,064  bps		—
Preferred equity, fixed rate		4,256		12,001		0.3	%		0.5	%		7.2	%		10.2	%		—		—
Subtotal/Weighted average		1,383,832		2,213,473		100.0	%		100.0	%		7.4	%		9.0	%		476  bps		480  bps
CMBS, floating rate		67,876		70,893		6.9	%		8.1	%		—			—			254  bps		945  bps
CMBS, fixed rate		916,833		799,080		93.1	%		91.9	%		7.8	%		6.3	%		—		—
Subtotal/Weighted average		984,709		869,973		100.0	%		100.0	%		7.8	%		6.3	%		254  bps		945  bps
Total	$	2,368,541	$	3,083,446		100.0	%		100.0	%		7.7	%		7.3	%		463  bps		498  bps

(1) Loans and other lending investments and CMBS investments are presented net of unamortized fees, discounts, unfunded commitments, reserves for loan losses and other adjustments.

(2) Weighted average effective yield and weighted average effective spread calculations include loans

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classified as non-performing. The schedule includes non-performing loans classified as whole loans — floating rate of approximately $55,122 with an effective spread of 660 basis points and non-performing loans classified as mezzanine loans — floating rate of approximately $319 with an effective spread of 858 basis points.

(3) Spreads over an index other than 30 day-LIBOR have been adjusted to a LIBOR based equivalent. In some cases, LIBOR is floored, giving rise to higher current effective spreads.

All of our term CDO liabilities are in their reinvestment periods, which means when the underlying assets repay we are able to reinvest the proceeds (assuming we are in compliance with certain financial covenants in our CDOs) in new assets without having to repay the liabilities. Because credit spreads are currently much wider than when we issued these liabilities, we currently expect to earn a higher return on equity on capital redeployed in this market. Approximately $576,407, or 41.7%, of our loans have maturity dates in 2010. However, many of these loans contain extension options of at least six months (many subject to performance criteria) and we expect that substantially all loans that qualify will be extended, so it is difficult to estimate how much capital from initial maturities or early pre-payments may be recycled into higher earning investments.

The period during which we are permitted to reinvest principal payments on the underlying assets into qualifying replacement collateral for one of our CDOs will expire in July 2010 and will expire for our other two CDOs in July 2011 and August 2012, respectively. In the past, our ability to reinvest has been instrumental in maintaining compliance with the over-collateralization and interest coverage tests for our CDOs. Following the conclusion of the reinvestment period in one of our CDOs, our ability to maintain compliance with such tests for that CDO will be negatively impacted.

As of December 31, 2009, Gramercy Finance also held interests in two credit tenant net lease investments, or CTL investments, two interests in joint ventures holding fee positions on properties subject to long-term ground leases and a 100% fee interest in a property subject to a long-term ground lease.

As of December 31, 2009, Gramercy Realty owned a portfolio comprised of 637 bank branches, 324 office buildings and six land parcels, of which 54 bank branches were owned through an unconsolidated joint venture. Gramercy Realty’s consolidated properties aggregated approximately 25.6 million rentable square feet and its unconsolidated properties aggregated approximately 0.3 million rentable square feet. As of December 31, 2009, the occupancy of Gramercy Realty’s consolidated properties was 85.9% and the occupancy for its unconsolidated properties was 100%. Gramercy Realty’s two largest tenants are Bank of America and Wachovia Bank (now owned by Wells Fargo), and as of December 31, 2009, they represented approximately 41.7% and 15.7%, respectively, of the rental income of Gramercy Realty’s portfolio and occupied approximately 44.2% and 17.7%, respectively, of its total rentable square feet.

Summarized in the table below are our key property portfolio statistics as of December 31, 2009:

	Number of Properties				Rentable Square Feet				Occupancy
Portfolio(1)	December 31, 2009		December 31, 2008		December 31, 2009		December 31, 2008		December 31, 2009			December 31, 2008
Branches		583		624		3,726,399		4,006,066		85.5	%		84.5	%
Office Buildings		324		337		21,847,249		22,800,748		85.9	%		89.5	%
Land		6		8		—		—		—			—
Total		913		969		25,573,648		26,806,814		85.9	%		88.7	%

(1) Excludes investments in unconsolidated joint ventures.

Due to the nature of the business of Gramercy Realty’s tenant base, which places a high premium on serving its customers from a well established distribution network, we typically enter into long-term net leases with our financial institution tenants. As of December 31, 2009, the weighted average remaining term of our leases was 9.3 years and approximately 79.6% of our base revenue was derived from triple-net and bond-net leases. With in-house capabilities in acquisitions, asset management, property management and leasing, we are focused on maximizing the value of our portfolio through acquisitions and strategic sales and through effective and efficient property management and leasing operations.

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Gramercy Realty’s portfolio includes a group of 13 office buildings and two parking facilities containing approximately 3.8 million square feet, of which approximately 2.4 million square feet is leased to Bank of America, which collectively are referred to as the Dana Portfolio. Under the terms of that lease, which was originally entered into by Bank of America, as tenant, and Dana Commercial Credit Corporation, as landlord, as part of a larger bond-net lease transaction, Bank of America was required to make annual base rental payments of approximately $40,388 through January 2010, approximately $2,983 in January 2011, and no annual base rental payments thereafter through lease expiration in June 2022. In December 2009, Gramercy Realty received the full 2010 rental payment from Bank of America of approximately $40,388 from the Dana Portfolio. We have also received termination notices from Bank of America covering approximately 360,000 square feet of currently leased space, which terminations will become effective at various times prior to December 31, 2010. Additionally, under terms of the lease agreement with Regions Financial, rent for approximately 570,000 square feet will step down by approximately $5,100 annually, beginning in July 2010. As a result of these and other factors, beginning in 2010, Gramercy Realty’s cash flow after debt service and capital requirements will be significantly lower, and is expected to turn negative.

We rely on the credit and equity markets to finance and grow our business. Beginning in the second half of 2007 severe credit and liquidity issues in the sub-prime residential lending and single-family housing sectors negatively impacted the asset-backed and corporate fixed income markets, and the equity securities of financial institutions and real estate companies. As the severity of residential sector issues increased, nearly all securities markets experienced reduced liquidity and greater risk premiums as concerns about the outlook for the U.S. and world economic growth increased. These concerns continue and risk premiums in many capital and credit markets remain at or near all-time highs with liquidity extremely low compared to historical standards or virtually non-existent. As a result, most commercial real estate finance and financial services industry participants, including us, have reduced new investment activity until the capital and credit markets become more stable, the macroeconomic outlook becomes clearer and market liquidity increases. In this environment, we are focused on actively managing portfolio credit, generating and recycling liquidity from existing assets, leasing vacant space, extending debt maturities and reducing capital expenses.

Liquidity is a measurement of the ability to meet cash requirements, including ongoing commitments to repay borrowings, fund and maintain loans and other investments, pay dividends and other general business needs. In addition to cash on hand, our primary sources of funds for short-term liquidity (within the next 12 months) requirements, including working capital, distributions, if any, debt service and additional investments, if any, consists of (i) cash flow from operations; (ii) proceeds and management fees from our existing CDOs; (iii) proceeds from principal and interest payments and rents on our investments; (iv) proceeds from potential loan and asset sales; and, to a lesser extent, (v) new financings or additional securitization or CDO offerings and (vi) proceeds from additional common or preferred equity offerings. We believe these sources of financing will be sufficient to meet our short term liquidity requirements. Due to continued market turbulence, we do not anticipate having the ability in the near term to access new equity or debt capital through new warehouse lines, CDO issuances, term or credit facilities or trust preferred issuances, although we continue to explore capital raising options. In the event we are not able to successfully secure financing, we will rely primarily on cash on hand, cash flows from operations, principal, interest and lease payments on our investments and proceeds from asset and loan sales to satisfy our liquidity requirements. If we (i) are unable to renew, replace or expand our sources of financing, (ii) are unable to execute asset and loan sales in a timely manner or to receive anticipated proceeds from them or (iii) fully utilize available cash, it may have an adverse effect on our business, results of operations, ability to make distributions to our stockholders and to continue as a going concern.

The majority of our loan and other investments and CMBS are pledged as collateral for our CDO bonds and the income generated from these investments is used to fund interest obligations of our CDO bonds and the remaining income, if any, is retained by us. Our CDO bonds contain minimum interest coverage and asset over collateralization covenants that must be met in order for us to receive cash flow on the interests retained by us in the CDOs and to receive the subordinate collateral management fee earned. If we fail these covenants in some or all of the CDOs, all cash flows from the applicable CDO other than senior collateral management fees would be diverted to repay principal and interest on the most senior outstanding CDO bonds and we may not receive some or all residual payments or the subordinate collateral management fee until that CDO

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regained compliance with such tests. As of December 31, 2009, our 2005 and 2006 CDOs were in compliance with their interest coverage and asset over collateralization covenants, however their compliance margin was narrow, particularly with respect to our 2005 CDO, and relatively small declines in their collateral performance and credit metrics could cause either or both CDOs to fall out of compliance. Our 2007 CDO failed its overcollateralization test at the November 2009 and February 2010 distribution dates. All three CDOs were in covenant compliance as of December 31, 2008. The chart below is a summary of our CDO compliance tests as of the most recent distribution date (January 25, 2010 for our 2005 and 2006 CDO and February 15, 2010 for our 2007 CDO):

Cash Flow Triggers	CDO 2005			CDO 2006			CDO 2007
Over-collateralization(1)
Current		118.12	%		108.85	%		100.33	%
Limit		117.85	%		105.15	%		102.05	%
Compliance margin		0.27	%		3.70	%		-1.72	%
Pass/Fail		Pass			Pass			Fail
Interest Coverage(2)
Current		764.48	%		767.17	%		N/A
Limit		132.85	%		105.15	%		N/A
Compliance margin		631.85	%		662.02	%		N/A
Pass/Fail		Pass			Pass			N/A

(1) The overcollateralization ratio divides the total principal balance of all collateral in the CDO by the total bonds outstanding for the classes senior to those retained by us. To the extent an asset is considered a defaulted security, the asset’s principal balance is multiplied by the asset’s recovery rate which is determined by the rating agencies.

(2) The interest coverage ratio divides interest income by interest expense for the classes senior to those retained by us.

In the event of a breach of our CDO covenants that we could not cure in the near term, we would be required to fund our non-CDO expenses, with (i) cash on hand, (ii) income from any CDO not in default, (iii) income from our real property and unencumbered loan assets, (iv) sale of assets, and (v) or accessing the equity or debt capital markets, if available.

The following discussion related to our consolidated financial statements should be read in conjunction with the financial statements appearing in Item 8 of this Annual Report on Form 10-K.

Critical Accounting Policies

Our discussion and analysis of financial condition and results of operations is based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States, known as GAAP. These accounting principles require us to make some complex and subjective decisions and assessments. Our most critical accounting policies involve decisions and assessments, which could significantly affect our reported assets, liabilities and l contingencies, as well as our reported revenues and expenses. We believe that all of the decisions and assessments upon which our financial statements are based were reasonable at the time made based upon information available to us at that time. We evaluate these decisions and assessments on an ongoing basis. Actual results may differ from these estimates under different assumptions or conditions. We have identified our most critical accounting policies to be the following:

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Variable Interest Entities

Our ownership of the subordinated classes of CMBS from a single issuer may provide us with the right to control the foreclosure/workout process on the underlying loans. An investor that holds a variable interest in a qualifying special-purpose entity, (“QSPE”), does not consolidate that entity unless the investor has the unilateral ability to cause the entity to liquidate. GAAP provides the requirements for an entity to qualify as a QSPE. To maintain the QSPE exception, the special-purpose entity must initially meet the QSPE criteria and must continue to satisfy such criteria in subsequent periods. A special-purpose entity’s QSPE status can be affected in future periods by activities by its transferors or other involved parties, including the manner in which certain servicing activities are performed. To the extent that our CMBS investments were issued by a special-purpose entity that meets the QSPE requirements, we record those investments at the purchase price paid. To the extent the underlying special-purpose entities do not satisfy the QSPE requirements, we evaluate for consolidation the special-purpose entities that would be determined to be VIEs. We have analyzed the pooling and servicing agreements governing each of our controlling class CMBS investments and we believe that the terms of those agreements conform to industry standards and are consistent with the QSPE criteria.

In June 2009, the Financial Accounting Standards Board, or FASB, issued new guidance that eliminates the qualifying special purpose entity concept including the exemption under which we exclude certain CMBS investments from consolidation. Adoption of this guidance in January 2010 will not have a material impact on our Consolidated Financial Statements.

At December 31, 2009, we owned securities of three controlling class CMBS trusts with a carrying value of $28,968. The total par amounts of CMBS issued by the three CMBS trusts was $921,654. Using the fair value approach to calculate expected losses or residual returns, we have concluded that we would not be the primary beneficiary of any of the underlying special-purpose entities. At December 31, 2009, our maximum exposure to loss as a result of our investment in these QSPEs totaled $28,968, which equals the book value of these investments as of December 31, 2009.

The financing structures that we offer to the borrowers on certain of our real estate loans involve the creation of entities that could be deemed VIEs and therefore, could be subject to GAAP consolidation guidance. We have evaluated these entities and have concluded that none of such entities are VIEs that are subject to the consolidation.

Real Estate and CTL Investments

We record acquired real estate and CTL investments at cost. Costs directly related to the acquisition of such investments are capitalized. Certain improvements are capitalized when they are determined to increase the useful life of the building. Depreciation is computed using the straight-line method over the shorter of the estimated useful life of the capitalized item or 40 years for buildings, five to ten years for building equipment and fixtures, and the lesser of the useful life or the remaining lease term for tenant improvements and leasehold interests. Maintenance and repair expenditures are charged to expense as incurred.

In leasing office space, we may provide funding to the lessee through a tenant allowance. In accounting for tenant allowances, we determine whether the allowance represents funding for the construction of leasehold improvements and evaluate the ownership, for accounting purposes, of such improvements. If we are considered the owner of the leasehold improvements for accounting purposes, we capitalize the amount of the tenant allowance and depreciate it over the shorter of the useful life of the leasehold improvements or the lease term. If the tenant allowance represents a payment for a purpose other than funding leasehold improvements, or in the event we are not considered the owner of the improvements for accounting purposes, the allowance is considered to be a lease incentive and is recognized over the lease term as a reduction of rental revenue. Factors considered during this evaluation usually include (i) who holds legal title to the improvements, (ii) evidentiary requirements concerning the spending of the tenant allowance, and (iii) other controlling rights provided by the lease agreement (e.g. unilateral control of the tenant space during the build-out process). Determination of the accounting for a tenant allowance is made on a case-by-case basis, considering the facts and circumstances of the individual tenant lease.

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We also review the recoverability of the property’s carrying value when circumstances indicate a possible impairment of the value of a property. The review of recoverability is based on an estimate of the future undiscounted cash flows, excluding interest charges, expected to result from the property’s use and eventual disposition. These estimates consider factors such as expected future operating income, market and other applicable trends and residual value, as well as the effects of leasing demand, competition and other factors. If management determines impairment exists due to the inability to recover the carrying value of a property, an impairment loss is recorded to the extent that the carrying value exceeds the estimated fair value of the property for properties to be held and used and for assets held for sale, an impairment loss is recorded to the extent that the carrying value exceeds the fair value less estimated cost to dispose for assets held for sale. These assessments are recorded as an impairment loss in the Consolidated Statements of Income, resulting in an immediate negative adjustment to net income.

We allocate the purchase price of real estate to land, building and improvements, and intangibles, such as the value of above- and below-market leases and origination costs associated with the in-place leases. We depreciate the amount allocated to building and other intangible assets over their estimated useful lives, which generally range from three to 40 years. The values of the above- and below-market leases are amortized and recorded as either an increase (in the case of below-market leases) or a decrease (in the case of above-market leases) to rental income over the remaining term of the associated lease. The value associated with in-place leases is amortized over the expected term of the respective lease. If a tenant vacates its space prior to the contractual termination of the lease and no rental payments are being made on the lease, any unamortized balance of the related intangible will be written off. The tenant improvements and origination costs are amortized as an expense over the remaining life of the lease (or charged against earnings if the lease is terminated prior to its contractual expiration date). We assess fair value of the leases based on estimated cash flow projections that utilize appropriate discount and capitalization rates and available market information. Estimates of future cash flows are based on a number of factors including the historical operating results, known trends, and market/economic conditions that may affect the property.

Leasehold Interests

Leasehold interest liabilities are recorded based on the difference between the fair value of our estimate of the net present value of cash flows expected to be paid and earned from the subleases over the non-cancelable lease terms and any payments received in consideration for assuming the leasehold interests. Factors used in determining the net present value of cash flows include contractual rental amounts, costs of tenant improvements, costs of capital expenditures and amounts due under the corresponding operating lease assumed. Amounts allocated to leasehold interests, based on their respective fair values, are amortized on a straight-line basis over the remaining lease term.

Investments in Unconsolidated Joint Ventures

We account for our investments in unconsolidated joint ventures under the equity method of accounting since we exercise significant influence, but do not unilaterally control the entities, and we are not considered to be the primary beneficiary. In the joint ventures, the rights of the other investors are protective and participating. Unless we are determined to be the primary beneficiary, these rights preclude us from consolidating the investments. The investments are recorded initially at cost as an investment in unconsolidated joint ventures, and subsequently are adjusted for equity in net income (loss) and cash contributions and distributions. Any difference between the carrying amount of the investments on our balance sheet and the underlying equity in net assets is evaluated for impairment at each reporting period. None of the joint venture debt is recourse to us. As of December 31, 2009 and 2008, we had investments of $108,465 and $93,919 in unconsolidated joint ventures, respectively.

Assets Held for Sale

Real Estate and CTL Investments Held for Sale

Real estate investments or CTL investments to be disposed of are reported at the lower of carrying amount or estimated fair value, less cost to sell. Once an asset is classified as held for sale, depreciation expense is no longer recorded and current and prior periods are reclassified as “discontinued operations.” As of December 31, 2009 and 2008, we had real estate investments held for sale of $841 and $192,780, respectively.

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Loans and Other Lending Investments Held for Sale

Loans held for investment are intended to be held to maturity and, accordingly, are carried at cost, net of unamortized loan origination fees, discounts, repayments, sales of partial interests in loans, and unfunded commitments unless such loan or investment is deemed to be impaired. Loans held for sale are carried at the lower of cost or market value using available market information obtained through consultation with dealers or other originators of such investments. As of December 31, 2009 and 2008, we had no loans and other lending investments designated as held for sale.

Commercial Mortgage-Backed Securities

We designate our CMBS investments on the date of acquisition of the investment. Held to maturity investments are stated at cost plus any premiums or discounts which are amortized through the consolidated statements of income using the level yield method. CMBS securities that we do not hold for the purpose of selling in the near-term but may dispose of prior to maturity, are designated as available-for-sale and are carried at estimated fair value with the net unrealized gains or losses recorded as a component of accumulated other comprehensive income (loss) in stockholder’s equity. Unrealized losses that are, in the judgment of management, an other-than-temporary impairment are 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 computed by comparing the amortized cost of the investment to the present value of cash flows expected to be collected, discounted at the investment’s current yield, and is charged against 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 loss on the consolidated balance sheet. The determination of an other-than-temporary impairment is a subjective process, and different judgments and assumptions could affect the timing of loss realization. In November 2007, subsequent to financing our CMBS investments in our CDOs, we redesignated all of our available-for-sale CMBS investments with a book value of approximately $43,600 to held to maturity. As of December 31, 2009 and December 31, 2008, the unrealized loss on the redesignated CMBS investments included in other comprehensive income was $3,906 and $4,986, respectively.

We determine the fair value of CMBS based on the types of securities in which we have invested. For liquid, investment-grade securities, we consult with dealers of such securities to periodically obtain updated market pricing for the same or similar instruments. For non-investment grade securities, we actively monitor the performance of the underlying properties and loans and update our pricing model to reflect changes in projected cash flows. The value of the securities is derived by applying discount rates to such cash flows based on current market yields. The yields employed are obtained from our own experience in the market, advice from dealers and/or information obtained in consultation with other investors in similar instruments. Because fair value estimates when available may vary to some degree, we must make certain judgments and assumptions about the appropriate price to use to calculate the fair values for financial reporting purposes. Different judgments and assumptions could result in materially different presentations of value.

Pledged Government Securities

We maintain a portfolio of treasury securities that are pledged to provide principal and interest payments for mortgage debt previously collateralized by properties in our real estate portfolio. We do not intend to sell the securities and believe it is more likely than not that we will realize the full amortized cost basis of the security over their remaining life. These securities had a carrying value of $97,286, a fair value of $98,832 and unrealized gains of $1,545 at December 31, 2009, and have maturities that extend through November 2013.

Tenant and Other Receivables

Tenant and other receivables are primarily derived from the rental income that each tenant pays in accordance with the terms of its lease, which is recorded on a straight-line basis over the initial term of the lease. Since many leases provide for rental increases at specified intervals, straight-line basis accounting requires us to record a receivable, and include in revenues, unbilled rent receivables that will only be received if the tenant makes all rent payments required through the expiration of the initial term of the lease. Tenant

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and other receivables also include receivables related to tenant reimbursements for common area maintenance expenses and certain other recoverable expenses that are recognized as revenue in the period in which the related expenses are incurred.

Tenant and other receivables are recorded net of the allowances for doubtful accounts, which as of December 31, 2009 and December 31, 2008 were $8,172 and $6,361, respectively. We continually review receivables related to rent, tenant reimbursements and unbilled rent receivables and determine collectability by taking into consideration the tenant’s payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates and economic conditions in the area in which the property is located. In the event that the collectability of a receivable is in doubt, we increase the allowance for uncollectible accounts or record a direct write-off of the receivable in the consolidated statements of income.

Intangible Assets

We follow the purchase method of accounting for business combinations. We allocate the purchase price of acquired properties to tangible and identifiable intangible assets acquired based on their respective fair values. Tangible assets include land, buildings and improvements on an as-if-vacant basis. We utilize various estimates, processes and information to determine the as-if-vacant property value. Estimates of value are made using customary methods, including data from appraisals, comparable sales, discounted cash flow analysis and other methods. Identifiable intangible assets include amounts allocated to acquired leases for above- and below-market lease rates and the value of in-place leases.

Above-market, below-market and in-place lease values for properties acquired are recorded based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between the contractual amount to be paid pursuant to each in-place lease and management’s estimate of the fair market lease rate for each such in-place lease, measured over a period equal to the remaining non-cancelable term of the lease. The capitalized above-market lease values are amortized as a reduction of rental income over the remaining non-cancelable terms of the respective leases. The capitalized below-market lease values are amortized as an increase to rental income over the initial term and any fixed-rate renewal periods in the respective leases.

The aggregate value of intangible assets related to in-place leases is primarily the difference between the property valued with existing in-place leases adjusted to market rental rates and the property valued as-if-vacant. Factors considered by management in its analysis of the in-place lease intangibles include an estimate of carrying costs during the expected lease-up period for each property taking into account current market conditions and costs to execute similar leases. In estimating carrying costs, we include real estate taxes, insurance and other operating expenses and estimates of lost rentals at market rates during the anticipated lease-up period, which is expected to average six months. We also estimate costs to execute similar leases including leasing commissions, legal and other related expenses.

The value of in-place leases is amortized to expense over the initial term of the respective leases, which range primarily from one to 20 years. In no event does the amortization period for intangible assets exceed the remaining depreciable life of the building. If a tenant terminates its lease, the unamortized portion of the in-place lease value is charged to expense.

In making estimates of fair values for purposes of allocating purchase price, we utilize a number of sources, including independent appraisals that may be obtained in connection with the acquisition or financing of the respective property and other market data. We also consider information obtained about each property as a result of its pre-acquisition due diligence, as well as subsequent marketing and leasing activities, in estimating the fair value of the tangible and intangible assets acquired and intangible liabilities assumed.

Deferred Costs

Deferred costs include deferred financing costs which represent commitment fees, legal and other third party costs associated with obtaining commitments for financing which result in a closing of such financing. These costs are amortized over the terms of the respective agreements and the amortization is reflected in interest expense. Unamortized deferred financing costs are expensed when the associated debt is refinanced or repaid before maturity. Costs incurred in seeking financing transactions that do not close are expensed in the period in which it is determined that the financing will not close. Deferred costs also consist

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of fees and direct costs incurred to originate new investments and are amortized using the effective yield method over the related term of the investment.

We have deferred certain expenditures related to the leasing of certain properties. Direct costs of leasing including internally capitalized payroll costs associated with leasing activities are deferred and amortized over the terms of the underlying leases.

Other Assets

We make payments for certain expenses such as insurance and property taxes in advance of the period in which we receive the benefit. These payments are classified as prepaid expenses and amortized over the respective period of benefit relating to the contractual arrangement. We also escrow deposits related to pending acquisitions and financing arrangements, as required by a seller or lender, respectively. Costs prepaid in connection with securing financing for a property are reclassified into deferred costs at the time the transaction is completed.

Revenue Recognition

Real Estate and CTL Investments

Rental income from leases is recognized on a straight-line basis regardless of when payments are contractually due. Certain lease agreements also contain provisions that require tenants to reimburse us for real estate taxes, common area maintenance costs and the amortized cost of capital expenditures with interest. Such amounts are included in both revenues and operating expenses when we are the primary obligor for these expenses and assume the risks and rewards of a principal under these arrangements. Under leases where the tenant pays these expenses directly, such amounts are not included in revenues or expenses.

Deferred revenue represents rental revenue and management fees received prior to the date earned. Deferred revenue also includes rental payments received in excess of rental revenues recognized as a result of straight-line basis accounting.

Other income includes fees paid by tenants to terminate their leases, which are recognized when fees due are determinable, no further actions or services are required to be performed by us, and collectability is reasonably assured. In the event of early termination, the unrecoverable net book values of the assets or liabilities related to the terminated lease are recognized as depreciation and amortization expense in the period of termination.

We recognize sales of real estate properties only upon closing. Payments received from purchasers prior to closing are recorded as deposits. Profit on real estate sold is recognized using the full accrual method upon closing when the collectability of the sale price is reasonable assured and we are not obligated to perform significant activities after the sale. Profit may be deferred in whole or part until the sale meets the requirements of profit recognition on sale of real estate.

Finance Investments

Interest income on debt investments, which includes loan and CMBS investments, are recognized over the life of the investments using the effective interest method and recognized on the accrual basis. Fees received in connection with loan commitments are deferred until the loan is funded and are then recognized over the term of the loan using the effective interest method. Anticipated exit fees, whose collection is expected, are also recognized over the term of the loan as an adjustment to yield. Fees on commitments that expire unused are recognized at expiration. Fees received in exchange for the credit enhancement of another lender, either subordinate or senior to us, in the form of a guarantee are recognized over the term of that guarantee using the straight-line method.

Income recognition is generally suspended for debt investments at the earlier of the date at which payments become 90 days past due or when, in our opinion, 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.

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We designate loans as non-performing at such time as: (1) the loan becomes 90 days delinquent or (2) the loan has a maturity default. All non-performing loans are placed on non-accrual status and income is recognized only upon actual cash receipt. At December 31, 2009, we had three first mortgage loans with an aggregate carrying value of $55,122, four mezzanine loans with a carrying value of $319, one second lien loan with the carrying value of $0 and one third lien loan with a carrying value of $0, which were classified as non-performing loans. At December 31, 2008, we had three first mortgage loans with an aggregate carrying value of $164,809, one second lien loan with a carrying value of $0, and one third lien loan with a carrying value of $0, which were classified as non-performing loans.

We classify loans as sub-performing if they are not performing in material accordance with their terms, but they do not qualify as non-performing loans and the specific facts and circumstances of these loans may cause them to develop into non-performing loans should certain events occur in the normal passage of time, which we consider to be 90 days from the measurement date. At December 31, 2009, four first mortgage loans with a total carrying value of $160,212 were classified as sub-performing. At December 31, 2008, five first mortgage loans with a carrying value of $216,597 were classified as sub-performing.

For the years ended December 31, 2009, 2008 and 2007, we recognized $0, $1,256 and $3,985, respectively, in net gains from the sale of debt investments or commitments.

Reserve for Loan Losses

Specific valuation allowances are established for loan losses on loans in instances where it is deemed probable that we may be unable to collect all amounts of principal and interest due according to the contractual terms of the loan. The reserve is increased through the provision for loan losses on our Consolidated Statements of Operations and is decreased by charge-offs when losses are realized through sale, foreclosure, or when significant collection efforts have ceased.

We consider the present value of payments expected to be received, observable market prices, or the estimated fair value of the collateral (for loans that are dependent on the collateral for repayment), and compare it to the carrying value of the loan. The determination of the estimated fair value is based on the key characteristics of the collateral type, collateral location, quality and prospects of the sponsor, the amount and status of any senior debt, and other factors. We also include the evaluation of operating cash flow from the property during the projected holding period, and the estimated sales value of the collateral computed by applying an expected capitalization rate to the stabilized net operating income of the specific property, less selling costs, all of which are discounted at market discount rates. We also consider if the loans terms have been modified in a troubled debt restructuring. Because the determination of estimated value is based upon projections of future economic events, which are inherently subjective, amounts ultimately realized from loans and investments may differ materially from the carrying value at the balance sheet date.

If, upon completion of the valuation, the estimated fair value of the underlying collateral securing the loan is less than the net carrying value of the loan, an allowance is created with a corresponding charge to the provision for loan losses. The allowance for each loan is maintained at a level we believe is adequate to absorb losses. During the year ended December 31, 2009, we incurred charge-offs totaling $188,574 relating to realized losses on 16 loans. During the year ended December 31, 2008, we incurred a charge-off totaling $17,519 relating to two defaulted loans we foreclosed upon which had a carrying value of $31,760 and three additional loans, two of which were sold for a loss and the other was resolved for a negotiated payoff below par. We maintained a reserve for loan losses of $418,202 against 23 separate investments with a carrying value of $536,445 as of December 31, 2009 and a reserve for loan losses of $88,992 against 13 investments with a carrying value of $424,177 as of December 31, 2008.

Rent Expense

Rent expense is recognized on a straight-line basis regardless of when payments are due. Accrued expenses and other liabilities in the accompanying consolidated balance sheets as of December 31, 2009 and 2008 includes an accrual for rental expense recognized in excess of amounts due at that time. Rent expense related to leasehold interests is included in property operating expenses, and rent expense related to office rentals is included in management, general and administrative expense.

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Stock Based Compensation Plans

We have a stock-based compensation plan, described more fully in Note 15. We account for this plan using the fair value recognition provisions.

The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because our plan has characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in our opinion, the existing models do not necessarily provide a reliable single measure of the fair value of our stock options.

Prior to amending and restating our management agreement in October 2008, which was subsequently terminated in April 2009, employees of the Manager who provided services to us pursuant to the then-existing management agreement were characterized as our co-leased employees. Stock option awards granted to such persons under our 2004 Equity Incentive Plan were valued at the time of grant using the Black-Scholes option pricing model, which value was amortized over the option vesting period. Our amended management agreement that was executed in October 2008 resulted in the re-characterization of such employees of the Manager, and they were no longer classified as our co-leased employees. Consequently, we determined fair value of the stock options granted to such persons using a mark-to-market model, until April 2009 when we completed the internalization of management through the direct acquisition of the Manager. Stock option awards were re-valued at the date of the internalization and such value will be amortized over the remaining vesting period of the award for employees that remained with the Manager.

Compensation cost for stock options, if any, is recognized ratably over the vesting period of the award. Our policy is to grant options with an exercise price equal to the quoted closing market price of our stock on the business day preceding the grant date. Awards of stock or restricted stock are expensed as compensation on a current basis over the benefit period.

The fair value of each stock option granted is estimated on the date of grant for options issued to employees, and quarterly for options issued to non-employees, using the Black-Scholes option pricing model with the following weighted average assumptions for grants in 2009 and 2008.

	2009			2008
Dividend yield		14.0	%		9.0	%
Expected life of option		5.0 years			6.0 years
Risk-free interest rate		1.72	%		2.97	%
Expected stock price volatility		90.0	%		67.0	%

Incentive Distribution (Class B Limited Partner Interest)

Prior to our internalization, the Class B limited partner interests were entitled to receive an incentive return equal to 25% of the amount by which funds from operations, or FFO, plus certain accounting gains (as defined in the partnership agreement of our Operating Partnership) exceed the product of our weighted average stockholders equity (as defined in the partnership agreement of our Operating Partnership) multiplied by 9.5% (divided by four to adjust for quarterly calculations). We recorded any distributions on the Class B limited partner interests as an incentive distribution expense in the period when earned and when payment of such amounts became probable and reasonably estimable in accordance with our partnership agreement. These cash distributions reduced the amount of cash available for distribution to the common unit holders in our Operating Partnership and to our common stockholders. In October 2008, we entered into a letter agreement with the Class B limited partners to waive the incentive distribution that would have otherwise been earned for the period July 1, 2008 through December 31, 2008 and provide that the starting January 1, 2009, the incentive distribution could be paid, at our option, in cash or shares of common stock. In December 2008, we entered into a letter agreement with the Manager and SL Green, pursuant to which the Manager agreed to pay $2,750 in cash, and SL Green transferred to us, 1.9 million shares of our common stock, in full satisfaction of all potential obligations that the holders of the Class B limited partner interests may have had to our Operating Partnership, and our Operating Partnership may have to the holders, each in accordance with the amended operating partnership agreement of our Operating Partnership, in respect of the recalculation of the

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distribution amount to the holders at the end of the 2008 calendar year. In April 2009, we completed the internalization of our management through the direct acquisition of the Manager from SL Green. Accordingly, beginning in May 2009, management and incentive fees payable by us to the Manager ceased and Class B limited partner interests have been cancelled. No incentive distribution was earned for the year ended December 31, 2009. We incurred approximately $2,350 and $32,235 with respect to incentive distributions on such Class B limited partner interests for the year ended December 31, 2008 and 2007, respectively.

Derivative Instruments

In the normal course of business, we use a variety of derivative instruments to manage, or hedge, interest rate risk. We require that hedging derivative instruments be effective in reducing the interest rate risk exposure that they are designated to hedge. This effectiveness is essential for qualifying for hedge accounting. Instruments that meet these hedging criteria are formally designated as hedges at the inception of the derivative contract. We use a variety of commonly used derivative products that are considered “plain vanilla” derivatives. These derivatives typically include interest rate swaps, caps, collars and floors. We expressly prohibit the use of unconventional derivative instruments and using derivative instruments for trading or speculative purposes. Further, we have a policy of only entering into contracts with major financial institutions based upon their credit ratings and other factors.

To determine the fair value of derivative instruments, we use a variety of methods and assumptions that are based on market conditions and risks existing at each balance sheet date. For the majority of financial instruments including most derivatives, long-term investments and long-term debt, standard market conventions and techniques such as discounted cash flow analysis, option-pricing models, replacement cost and termination cost are used to determine fair value. All methods of assessing fair value result in a general approximation of value, and such value may never actually be realized.

In the normal course of business, we are exposed to the effect of interest rate changes and limit these risks by following established risk management policies and procedures including the use of derivatives. To address exposure to interest rates, we use derivatives primarily to hedge cash flow variability caused by interest rate fluctuations of our liabilities. Each of our CDOs maintain a minimum amount of allowable unhedged interest rate risk. Our 2005 CDO permits 20% of the net outstanding principal balance and our 2006 and 2007 CDOs permits 5% of the net outstanding principal balance.

We recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If a derivative is a hedge, depending on the nature of the hedge, changes in the fair value of the derivative will either be offset against the change in fair value of the hedged asset, liability or firm commitment through earnings, or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative’s change in fair value will be immediately recognized in earnings. Derivative accounting may increase or decrease reported net income and stockholders’ equity prospectively, depending on future levels of LIBOR, swap spreads and other variables affecting the fair values of derivative instruments and hedged items, but will have no effect on cash flows, provided the contract is carried through to full term.

All hedges held by us are deemed effective based upon the hedging objectives established by our corporate policy governing interest rate risk management. The effect of our derivative instruments on our financial statements is discussed more fully in Note 18 to the Consolidated Financial Statements.

Income Taxes

We elected to be taxed as a REIT, under Sections 856 through 860 of the Internal Revenue Code, beginning with our taxable year ended December 31, 2004. To qualify as a REIT, we must meet certain organizational and operational requirements, including a requirement to distribute at least 90% of our ordinary taxable income, if any, to stockholders. As a REIT, we generally will not be subject to U.S. federal income tax on taxable income that we distribute to our stockholders. If we fail to qualify as a REIT in any taxable year, we will then be subject to U.S. federal income taxes on our taxable income at regular corporate rates and we will not be permitted to qualify for treatment as a REIT for U.S. federal income tax purposes for four years following the year during which qualification is lost unless the Internal Revenue Service grants us relief under certain statutory provisions. Such an event could materially adversely affect our net income and net

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cash available for distributions to stockholders. However, we believe that we will be organized and operate in such a manner as to qualify for treatment as a REIT and we intend to operate in the foreseeable future in such a manner so that we will qualify as a REIT for U.S. federal income tax purposes. We may, however, be subject to certain state and local taxes. Our TRSs are subject to federal, state and local taxes.

For the years ended December 31, 2009, 2008 and 2007, we recorded $2,498, $83, and $1,341 of income tax expense, respectively. Tax expense for the years ended December 31, 2009 and 2008 is comprised entirely of state and local taxes. Included in tax expense for the year ended December 31, 2009 is an accrual for state income taxes on the gain on extinguishment of debt of $119,305. Under federal law, we are allowed to defer this gain until 2014; however, not all states follow this federal rule.

Results of Operations

Comparison of the year ended December 31, 2009 to the year ended December 31, 2008

Revenues

	2009		2008		$ Change
Rental revenue	$	326,660	$	230,346	$	96,314
Investment income		184,607		254,821		(70,214	)
Operating expense reimbursement		120,146		92,863		27,283
Gain on sales and other income		4,693		15,374		(10,681	)
Total revenues	$	636,106	$	593,404	$	42,702
Equity in net income of joint ventures	$	8,436	$	6,476	$	1,960
Gain on extinguishment of debt	$	119,305	$	77,234	$	42,071

Rental revenue for the year ended December 31, 2009 is primarily comprised of revenue earned on our portfolio of 911 properties owned by our Gramercy Realty division. The increase in rental revenue of $96,314 is primarily due to acquisition of American Financial. Accordingly, rental revenue of $230,346 for the year ended December 31, 2008 only includes rental revenue from the American Financial acquisition beginning in April 1, 2008, the closing date of the transaction. Additionally, we assumed new third party tenants that previously were sub-tenants of Bank of America, received as part of a space reduction required by their lease in connection with the Dana Portfolio and due to higher non-cash market lease amortization reflecting the impact of purchase price allocation adjustments finalized in the first quarter of 2009.

Investment income is generated on our whole loans, subordinate interests in whole loans, mezzanine loans, preferred equity interests and CMBS. For the year ended December 31, 2009, $83,346 was earned on fixed rate investments while the remaining $101,261 was earned on floating rate investments. The decrease of $70,214 over the prior period is primarily due to an increase in non-performing loans, the suspension of interest income accruals on certain payment-in-kind loans, a decrease in a size of our portfolio of loans and other leading instruments by approximately $714,905, and a decline in LIBOR interest rates in 2009 compared to 2008.

Operating expense reimbursement of $120,146 for the year ended December 31, 2009 is attributable to the portfolio of operating real estate acquired in the American Financial acquisition. Operating expense reimbursement is included in income beginning on the date of acquisition. Accordingly, operating expense reimbursement of $92,863 for the year ended December 31, 2008 only includes revenue from the American Financial acquisition beginning April 1, 2008, the closing date of the transaction.

Gains on sales and other income of $4,693 for the year ended December 31, 2009 is primarily composed of interest on restricted cash balances and other cash balances held by us. Gains on sales and other income of $15,374 for the year ended December 31, 2008 is primarily composed of interest on restricted cash balances in our three CDOs and from the sale of loans of approximately $502.

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The income on investments in unconsolidated joint ventures of $8,436 for the year ended December 31, 2009 represents our proportionate share of the income generated by our joint venture interests including $4,450 of real estate-related depreciation and amortization, which when added back, results in a contribution to Funds from Operations, or FFO, of $12,886. The income on investments in unconsolidated joint ventures of $6,476 for the year ended December 31, 2008 represents our proportionate share of income generated by our joint venture interests including $625 of real estate-related depreciation and amortization, which when added back, results in a contribution to FFO of $7,101. Our use of FFO as an important non-GAAP financial measure is discussed in more detail below.

Gain on extinguishment of debt of $119,305 for the year ended December 31, 2009 was primarily comprised of gains generated from the satisfaction of our facility with Keybank, National Association, or KeyBank, and the termination of our facility with Wachovia Capital Markets LLC, or Wachovia. In March 2009, we entered into an amendment and compromise agreement with KeyBank, to settle and satisfy the existing loan obligations under the $175,000 unsecured facility at a discount for a cash payment of $45,000, and a future maximum cash payment of up to $15,000 from 50% of all cash distributions received by us after May 2009 from certain junior tranches and preferred classes of securities under our CDOs. We recorded a net gain of $107,179 as a result of this agreement. In December 2009, we entered into a termination agreement with Wachovia, to settle and satisfy in full the pre-existing loan obligation of $44,542 under the secured term loan and credit facility. We made a one-time cash payment of $22,500 and executed and delivered to Wachovia a subordinate participation interest in our 50% interest in one of the four mezzanine loans formerly pledged under the credit facility. We recorded a gain on extinguishment of debt of $12,126 pursuant the termination agreement. During the year ended December 31, 2008, we repurchased at a discount, investment grade notes issued by our three CDOs, generating net gains on early extinguishment of debt of $77,234.

Expenses

	2009		2008		$ Change
Property operating expenses	$	208,948	$	145,458	$	63,490
Interest expense		233,335		260,533		(27,198	)
Depreciation and amortization		112,232		67,072		45,160
Management, general and administrative		40,400		17,577		22,823
Management fees		7,787		30,299		(22,512	)
Incentive fee		—		2,350		(2,350	)
Impairment on loans held for sale		151,081		—		151,081
Provision for loan loss		517,784		97,853		419,931
Provision for taxes		2,498		83		2,415
Total expenses	$	1,274,065	$	621,225	$	652,840

Property operating expenses for the year ended December 31, 2009 is comprised of expenses incurred on our portfolio of 911 properties owned by our Gramercy Realty division, which increased $63,490 from the $145,458 recorded in the year ended December 31, 2008 to $208,948 recorded in the year ended December 31, 2009. The increase is attributable to the American Financial acquisition which closed on April 1, 2008.

Interest expense was $233,335 for the year ended December 31, 2009 compared to $260,533 for the year ended December 31, 2008. The decrease of $27,198 is primarily attributed to reductions in the interest rate indexes, primarily LIBOR-based, charged on our variable rate debt over the year ended December 31, 2009 compared to the year ended December 31, 2008, as well as lower average principal balances outstanding over the same periods due to debt extinguishments, repayments using proceeds from additional cash repayments and sales of certain investments classified as held for sale that served as collateral for these borrowings. This decrease is partially offset by the assumption of $2,500,000 of debt in April 2008 as a result of the American Financial acquisition.

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We recorded depreciation and amortization expenses of $112,232 for the year ended December 31, 2009, compared to $67,072 for the year ended December 31, 2008. The increase of $45,160 is primarily due to higher amortization expense on in-place lease intangible assets reflecting the impact of purchase price allocation adjustments finalized in the first quarter of 2009 for the American Financial acquisition.

Management, general and administrative expenses were $40,400 for the year ended December 31, 2009, compared to $17,577 for the same period in 2008. The increase of $22,823 includes salaries, benefits and other administrative costs previously borne by SL Green prior to the internalization of our management, higher legal and professional fees related to loan enforcement and restructurings completed during 2009, costs incurred in connection with modifications sought with respect to our CDOs, and approximately $1,626 of fees and costs incurred in connection with the an exchange agreement with certain affiliates of Taberna Capital Management, LLC, or Taberna, pursuant to which a subsidiary of our Operating Partnership and Taberna agreed to exchange $97,500 of the junior subordinated notes for $97,533 face amount of bonds previously issued by our CDOs. In addition, management, general and administrative expenses for the year ended December 31, 2009 includes $5,010 of expense for costs incurred in connection with the internalization of the Manager. Acquisition costs were expensed in the period incurred.

Management fees of $7,787 were expensed for the year ended December 31, 2009. We recorded $30,299 for the year ended December 31, 2008. The decrease is due primarily to the internalization of the Manager, which took place on April 24, 2009. The internalization was completed through a direct acquisition of the Manager, which was previously then a wholly-owned subsidiary of SL Green. Upon completion of the internalization, all management fees and incentive management fees payable by us to the Manager were eliminated.

No incentive fees were earned for the year ended December 31, 2009. We recorded an incentive fee expense of $2,350 during the year ended December 31, 2008 in accordance with requirements of the partnership agreement of our Operating Partnership, which entitled owners of Class B limited partner interests in our Operating Partnership to an incentive return equal to 25% of the amount by which FFO plus certain accounting gains (as defined in the partnership agreement of our Operating Partnership) exceed the product of our weighted average stockholders equity (as defined in the partnership agreement of our Operating Partnership) multiplied by 9.5% (divided by four to adjust for quarterly calculations).

During the year ended December 31, 2009, we recorded impairment charges of $138,570 on 12 loans previously classified as held for sale and an other-than-temporary impairment of $12,511 due to an adverse change in expected cash flows related to credit losses for five CMBS investments. Impairment charges on loans were taken to reduce the carrying value of loans-held-for sale to their fair value based upon anticipated selling prices.

Provision for loan losses was $517,784 for the year ended December 31, 2009, compared to $97,853 for the year ended December 31, 2008, an increase of $419,931. The provision was based upon periodic credit reviews of our loan portfolio, and reflects the challenging economic conditions, severe illiquidity in the capital markets and a difficult operating environment.

Comparison of the year ended December 31, 2008 to the year ended December 31, 2007

Revenues

	2008		2007		$ Change
Rental revenue	$	230,346	$	2,935	$	227,411
Investment income		254,821		297,712		(42,891	)
Operating expense reimbursement		92,863		—		92,863
Gain on sales and other income		15,374		14,797		577
Total revenues	$	593,404	$	315,444	$	277,960
Equity in net income of joint ventures	$	6,476	$	4,944	$	1,532
Gain on extinguishment of debt	$	77,234	$	3,806	$	73,428
Gain from sale of unconsolidated joint venture interests	$	—	$	92,235	$	(92,235	)

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Rental revenue for the year ended December 31, 2008 is primarily comprised of revenue earned on our portfolio of 911 properties owned by our Gramercy Realty division. The increase in rental revenue of $227,411 is primarily due to acquisition of American Financial. Accordingly, rental revenue of $230,346 for the year ended December 31, 2008 only includes rental revenue from the American Financial acquisition beginning in April 1, 2008, the closing date of the transaction.

Investment income is generated on our whole loans, subordinate interests in whole loans, mezzanine loans, preferred equity interests and CMBS. For the year ended December 31, 2009, $95,606 was earned on fixed rate investments while the remaining $159,215 was earned on floating rate investments. The decrease of $42,891 over the prior period is primarily due to a decrease in size of our portfolio of loans and other lending instruments by approximately $344,382, a decline in LIBOR interest rates in 2008 and an increase in non-performing loans in 2008. The carrying value of non-performing loans was $164,809 and $29,058 for the year ended December 31, 2008 and 2007, respectively.

Operating expense reimbursement of $92,863 for the year ended December 31, 2008 is attributable to the portfolio of real estate acquired in the American Financial acquisition. Operating expense reimbursement is included in income beginning on the date of acquisition. Accordingly, operating expense reimbursement of $92,863 for the year ended December 31, 2008 only includes revenue from the American Financial acquisition beginning April 1, 2008, the closing date of the transaction.

Gains on sales and other income of $15,374 for the year ended December 31, 2008 is primarily composed of interest on restricted cash balances in our three CDOs and other cash balances held by us, offset by net losses from the sale of loans of approximately $502. Gains on sales and other income of $14,797 for the year ended December 31, 2007 is primarily composed of interest on restricted cash balances in our three CDOs and other cash balances held by us, and $3,985 in net gains from the sale of loans and securities.

The income on investments in unconsolidated joint ventures of $6,476 for the year ended December 31, 2008 represents our proportionate share of the income generated by our joint venture interests including $625 of real estate-related depreciation and amortization, which when added back, results in a contribution to FFO of $7,101. The income on investments in unconsolidated joint ventures, of $4,944 for the year ended December 31, 2007 represents our proportionate share of income generated by our joint venture interests including $4,802 of real estate-related depreciation and amortization, which when added back, results in a contribution to FFO of $9,746. Our use of FFO as an important non-GAAP financial measure is discussed in more detail below.

During the year ended December 31, 2008, we repurchased, at a discount, $127,300 of investment grade notes previously issued by our three CDOs, generating net gains on early extinguishment of debt of $77,234. During the year ended December 31, 2007, we repurchased $22,750 of investment grade notes of the 2006 Issuer at a discount, generating net gains of $3,806.

In August 2007, we sold our entire investment in our One Madison Avenue joint venture to SL Green for approximately $147,600 and realized a gain of $92,235.

Expenses

	2008		2007		$ Change
Property operating expenses	$	145,458	$	—	$	145,458
Interest expense		260,533		172,094		88,439
Depreciation and amortization		67,072		2,158		64,914
Management, general and administrative		17,577		13,534		4,043
Management fees		30,299		22,671		7,628
Incentive fee		2,350		32,235		(29,885	)
Provision for loan loss		97,853		9,398		88,455
Provision for taxes		83		1,341		(1,258	)
Total expenses	$	621,225	$	253,431	$	367,794

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Property operating expenses for the year ended December 31, 2008 of $145,458, were entirely attributable to the American Financial acquisition which closed on April 1, 2008. This amount includes ground rent and leasehold obligations, real estate and taxes, utilities, property and leasehold improvements, other property operating expenses and direct billable expenses.

Interest expense was $260,533 for the year ended December 31, 2008 compared to $172,094 for the year ended December 31, 2007. The increase of $88,439 is primarily attributed to $2,500,000 in additional debt incurred as a result of the American Financial acquisition and the issuance in August 2007, of $1,100,000 of CDOs.

We recorded depreciation and amortization expenses of $67,072 for the year ended December 31, 2008, versus $2,158 for the year ended December 31, 2007. The increase of $64,914 is attributed primarily to the increase in size of our real estate investments as a result of the American Financial acquisition.

Marketing, general and administrative expenses were $17,577 for the year ended 2008, versus $13,534 for the same period in 2007. The increase in marketing, general and administrative expenses was primarily attributable to the American Financial acquisition and increased legal costs incurred in connection with non-performing loans in 2008.

Management fees increased $7,628 for the year ended December 31, 2008 to $30,299 versus $22,671 for the same period in 2007 due primarily to an increase in our stockholder’s equity as a result of additional issuances of common equity during the second half of 2007, and, in connection with the American Financial acquisition on April 1, 2008, on which base management fees were calculated. In October 2008, we entered into the second amended and restated management agreement with the Manager which reduced the annual base management fee from 1.75% to 1.50% of our gross stockholders equity, and provided that, commencing July 2008, all fees in connection with collateral management agreements are remitted by the Manager to us. In October 2008, each of the asset servicing agreement and outsource agreement was terminated, effective as of September 30, 2008. Effective as of October 2008, we were obligated to reimburse the Manager for its costs incurred under a special servicing agreement between the Manager and an affiliate of SL Green. Pursuant to that agreement, the SL Green affiliate acted as the rated special servicer to our CDOs for a fee equal to two basis points per year on the carrying value of the specially serviced loans assigned to it. This arrangement was terminated in April 2009 in connection with the internalization of the Manager.

We recorded an incentive fee expense of $2,350 and $32,235 during the years ended December 31, 2008 and 2007, respectively in accordance with requirements of the partnership agreement of our Operating Partnership which entitles owners of Class B limited partner interests in our Operating Partnership to an incentive return equal to 25% of the amount by which FFO plus certain accounting gains (as defined in the partnership agreement of our Operating Partnership) exceed the product of our weighted average stockholders equity (as defined in the partnership agreement of our Operating Partnership) multiplied by 9.5% (divided by four to adjust for quarterly calculations). In October 2008, we entered into a letter agreement with the Class B limited partners to waive the incentive distribution that would have otherwise been earned for the period July 1, 2008 through December 31, 2008. In December 2008, we entered into a letter agreement with the Manager and SL Green pursuant to which the Manager agreed to pay $2,750 in cash and SL Green transferred 1.9 million shares of the our common stock to us, in full satisfaction of all potential obligations that the holders of the Class B Units of our Operating Partnership may have had to our Operating Partnership, and our Operating Partnership may have had to the holders, each in accordance with the amended operating partnership agreement of our Operating Partnership, in respect of the recalculation of the distribution amount to the holders at the end of the 2008 calendar year. The cash portion of the letter agreement consideration was recorded as a reduction in incentive distribution. These letter agreements reduced the overall incentive fee expense that would have been payable during December 31, 2008. For the year ended December 31, 2007, approximately $18,994 of incentive fees was related to the sale of our joint venture interest in One Madison Avenue to SL Green.

Provision for loan losses was $97,853 for the year ended December 31, 2008, compared to $9,398 for the year ended December 31, 2007. The provision was based upon an increase in non-performing loans, periodic credit reviews of our loan portfolio, and reflects the challenging economic conditions, severe illiquidity in the capital markets and a difficult operating environment.

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Provision for taxes was $83 for the year ended December 31, 2008, versus $1,341 for the year ended December 31, 2007.

Liquidity and Capital Resources

Liquidity is a measurement of the ability to meet cash requirements, including ongoing commitments to repay borrowings, fund and maintain loans and other investments, pay dividends and other general business needs. In addition to cash on hand, our primary sources of funds for short-term liquidity requirements, including working capital, distributions, if any, debt service and additional investments, if any, consist of: (i) cash flow from operations; (ii) proceeds and management fees from our existing CDOs; (iii) proceeds from principal and interest payments and rents on our investments; (iv) proceeds from potential loan and asset sales; and, to a lesser extent; (v) new financings or additional securitizations or CDO offerings; and (vi) proceeds from additional common or preferred equity offerings. We believe these sources of financing will be sufficient to meet our short-term liquidity requirements. Due to continued market turbulence, we do not anticipate having the ability in the near-term to access equity or debt capital through new warehouse lines, CDO issuances, term or credit facilities or trust preferred issuances, although we continue to explore capital raising options. In the event we are not able to successfully secure financing, we will rely primarily on cash on hand, cash flows from operations, principal, interest and lease payments on our investments, and proceeds from asset and loan sales to satisfy our liquidity requirements. If we (i) are unable to renew, replace or expand our sources of financing, (ii) are unable to execute asset and loan sales in a timely manner or to receive anticipated proceeds from them or (iii) fully utilize available cash, it may have an adverse effect on our business, results of operations, our ability to make distributions to our stockholders and to continue as a going concern.

Our ability to fund our short-term liquidity needs, including debt service and general operations (including employment related benefit expenses), through cash flow from operations can be evaluated through the consolidated statement of cash flows provided in our financial statements. However, our short-term liquidity requirements could be affected by a potential change in our dividend policy. Beginning with the third quarter of 2008 our board of directors elected not to pay a dividend on our common stock. Additionally our board of directors elected not to pay the Series A preferred stock dividend of $0.50781 per share beginning with the fourth quarter of 2008. As of December 31, 2009 and 2008 we accrued $9,317 and $2,325, respectively, for the Series A preferred stock dividends. Based on current estimates of our taxable loss, we expect that we will have no distribution requirements in order to maintain our REIT status for the 2009 tax year and we expect that we will continue to elect to retain capital for liquidity purposes until the requirement to make a cash distribution to satisfy our REIT requirements arise. We may elect to pay dividends to satisfy our REIT distribution requirements on our common stock in cash or a combination of cash and shares of our common stock as permitted under U.S. federal income tax laws. However, in accordance with the provisions of our charter, we may not pay any dividends on our common stock until all accrued dividends and the dividend for the then current quarter on the Series A preferred stock are paid in full.

Our ability to meet our long-term liquidity (beyond the next 12 months) and capital resource requirements will be subject to obtaining additional debt financing and equity capital. Our inability to renew, replace or expand our sources of financing on substantially similar terms, or any at all may have an adverse effect on our business and results of operations. Any indebtedness we incur will likely be subject to continuing or more restrictive covenants and we will likely be required to make continuing representations and warranties in connection with such debt.

Our current and future borrowings may require us, among other restrictive covenants, to keep uninvested cash on hand, to maintain a certain portion of our assets free from liens and to secure such borrowings with assets. These conditions could limit our ability to do further borrowings. We were in compliance with all such covenants as of December 31, 2009. If we are unable to make required payments under such borrowings, breach any representation or warranty in the loan documents or violate any covenant contained in a loan document, lenders may accelerate the maturity of our debt. If we are unable to retire our borrowings in such a situation, (i) we may need to prematurely sell the assets securing such debt, (ii) the lenders could accelerate the debt and foreclose on our assets pledged as collateral to such lenders, (iii) such lenders could force us into bankruptcy, (iv) such lenders could force us to take other actions to protect the value of their collateral and/or (v) our other debt financings could become immediately due and payable. Any such event would have a

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material adverse effect on our liquidity, the value of our common stock, our ability to make distributions to our stockholders and our ability to continue as a going concern.

Gramercy Realty’s office buildings include a group of 13 office buildings and two parking facilities containing approximately 3.8 million square feet, of which approximately 2.4 million square feet is leased to Bank of America, which collectively are referred to as the Dana Portfolio. Under the terms of the Dana Portfolio lease, which was originally entered into by Bank of America, as tenant, and Dana Commercial Credit Corporation, as landlord, as part of a larger bond-net lease transaction, Bank of America was required to make annual base rental payments of approximately $40.4 million through January 2010, approximately $3,000 in January 2011, and no annual base rental payments thereafter through lease expiration in June 2022. In December 2009, Gramercy Realty received the full 2010 rental payment from Bank of America of approximately $40,400 from the Dana Portfolio. We have also received termination notices from Bank of America covering approximately 360,000 square feet of currently leased space, which terminations will become effective at various times prior to December 31, 2010. Additionally, under the terms of the lease agreement with Regions Financial, rent for approximately 570,000 square feet will step down by approximately $5,100 annually, beginning in July 2010. As a result of these and other factors, beginning in 2010, Gramercy Realty’s operating cash flow will be significantly lower, and is anticipated to turn negative, unless we are able to generate an equivalent amount of net rent by leasing vacant space within the Gramercy Realty portfolio to new third party tenants.

The majority of our loan and other investments are pledged as collateral for our CDO bonds and the income generated from these investments is used to fund interest obligations of our CDO bonds and the remaining income, if any, is retained by us. Our CDO indentures contain minimum interest coverage and asset over collateralization covenants that must be met in order for us to receive cash flow on the CDO interests retained by us and to receive the subordinate collateral management fee earned. If some or all of our CDOs fail to comply with the covenants all cash flows from the applicable CDO other than senior collateral management fees would be diverted to repay principal and interest on the most senior outstanding CDO bonds and we may not receive some or all residual payments or the subordinate collateral management fee until that CDO regained compliance with such tests. As of December 31, 2009, our 2005 and 2006 CDOs and were in compliance with the interest coverage and asset over-collateralization covenants, however, the compliance margin, particularly with respect to our 2005 CDO, was narrow and relatively small declines in the CDO collateral performance and credit metrics could cause either or both to fall out of compliance. Our 2007 CDO failed the overcollateralization test at the November 2009 distribution date and February 2010 distribution date. All three CDOs were in compliance with all such covenants as of December 31, 2008.

To maintain our qualification as a REIT under the Internal Revenue Code, we must distribute annually at least 90% of our taxable income, if any. This distribution requirement limits our ability to retain earnings and thereby replenish or increase capital for operations. We may elect to pay dividends on our common stock in cash or a combination of cash and shares of common stock as permitted under U.S. federal income tax laws governing REIT distribution requirements. However, in accordance with the provisions of our charter, we may not pay any dividends on our common stock until all accrued dividends and the dividend for the then current quarter on the Series A Preferred Stock are paid in full.

Cash Flows

Net cash provided by operating activities decreased $84,795 to $86,960 for the year ended December 31, 2009 compared to cash provided of $171,755 for same period in 2008. Operating cash flow was generated primarily by net interest income from our commercial real estate finance segment and net rental income from our property investment segment. The decrease in operating cash flow for the year ended December 31, 2009 compared to the same period in 2008 was primarily due to a decrease in operating assets and liabilities of $92,644, The increased net loss of $578,934 is primarily attributable to non-cash impairment charges of $194,286 and a increase in the provision for loan loss of $419,931.

Net cash provided by investing activities for the year ended December 31, 2009 was $131,121 compared to net cash used by investing activities of $490,572 during the same period in 2008. The increase in cash provided by investing activities is primarily due to the American Financial acquisition of $586,900 and transaction costs relating to business combination of $108,199 in 2008.

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Net cash used by financing activities for the year December 31, 2009 was $216,564 as compared to net cash provided by financing activities of $162,519 during the same period in 2008. In connection with the acquisition of American Financial on April 1, 2008, we received proceeds from acquisition financing of $1,114,743, offset by repayments on mortgage notes of $801,913. For the year ended 2009, we repaid $111,559 on our mortgage notes. The decrease for the year ended 2009 as compared to the same period in 2008 is also offset by the dividends paid on preferred and common stock of $166,879 and proceeds of unsecured credit facility of $172,301 in 2008.

Capitalization

Our authorized capital stock consists of 125,000,000 shares, $0.001 par value, of which we have authorized the issuance of up to 100,000,000 shares of common stock, $0.001 par value per share, and 25,000,000 shares of preferred stock, par value $0.001 per share. As of December 31, 2009, 49,884,500 shares of common stock and 4,600,000 shares of preferred stock were issued and outstanding.

Preferred Stock

In April 2007, we issued 4,600,000 shares of our 8.125% Series A cumulative redeemable preferred stock (including the underwriters’ over-allotment option of 600,000 shares) with a mandatory liquidation preference of $25.00 per share. Holders of the Series A cumulative redeemable preferred shares are entitled to annual dividends of $2.03125 per share on a quarterly basis and dividends are cumulative, subject to certain provisions. On or after April 18, 2012, we may at our option redeem the Series A cumulative redeemable preferred stock at par for cash. Net proceeds (after deducting underwriting fees and expenses) from the offering were approximately $111,205.

Common Stock

In April 2008, we issued approximately 15,634,854 shares of common stock in connection with the American Financial acquisition. These shares had a value of approximately $378,672 on the date the merger agreement was executed. Also as a result of the American Financial acquisition, an affiliate of SL Green was granted 644,787 shares of common stock for services rendered, subject to a one-year vesting period. These shares had a value of approximately $11,213 on the date of issuance. Subsequent to the issuance, SL Green Operating Partnership, L.P. owned approximately 15.8% of the outstanding shares of our common stock.

In December 2008, we entered into a letter agreement with the Manager and SL Green pursuant to which the Manager agreed to pay $2,750 million in cash and SL Green transferred to us 1.9 million shares of our common stock, in full satisfaction of all potential obligations that the holders of the Class B limited partner interests may have had to our Operating Partnership, and our Operating Partnership may have had to the holders, each in accordance with the amended operating partnership agreement of our Operating Partnership, in respect of the recalculation of the distribution amount to the holders at the end of the 2008 calendar year. The shares of common stock were cancelled upon receipt by us. Subsequent to the letter agreement, SL Green Operating Partnership L.P. owned approximately 12.5% of the outstanding shares of our common stock.

Outperformance Plan

In June 2005, the compensation committee of the board of directors approved a long-term incentive compensation program, the 2005 Outperformance Plan. Participants in the 2005 Outperformance Plan, were to share in a “performance pool” if our total return to stockholders for the period from June 1, 2005 through May 31, 2008 exceeded a cumulative total return to stockholders of 30% during the measurement period over a base share price of $20.21 per share. We recorded the expense of the LTIP Units of our Operating Partnership, or the LTIP Units, award in accordance with GAAP. Compensation expense of $(2,348), was recorded for the years ended December 31, 2008, related to the 2005 Outperformance Plan. Based on our total return to stockholders as of the May 31, 2008 measurement period conclusion date, we did not meet the minimum 30% return threshold and accordingly, the plan participants automatically forfeited the LTIP Units that they had been granted and the 2005 Outperformance Plan expired as of that date. In October 2008, Marc Holliday, Gregory Hughes and Andrew Matthias resigned as executives of our company. In accordance with the 2005 Outperformance Plan, upon resignation, the LTIP Units were forfeited. In accordance with GAAP, we recorded a reduction of expense in connection to the forfeiture of the LTIP shares of $2,348, which is offset against management, general and administrative expenses.

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Deferred Stock Compensation Plan for Directors

Under our Independent Director’s Deferral Program, which commenced April 2005, our independent directors may elect to defer up to 100% of their annual retainer fee, chairman fees and meeting fees. Unless otherwise elected by a participant, fees deferred under the program shall be credited in the form of phantom stock units. The phantom stock units are convertible into an equal number of shares of common stock upon such directors’ termination of service from the Board of Directors or a change in control by us, as defined by the program. Phantom stock units are credited to each independent director quarterly using the closing price of our common stock on the applicable dividend record date for the respective quarter. Each participating independent director who elects to receive fees in the form of phantom stock units has the option to have their account credited for an equivalent amount of phantom stock units based on the dividend rate for each quarter or have dividends paid in cash.

As of December 31, 2009, there were approximately 272,652 phantom stock units outstanding, of which 264,652 units are vested.

Market Capitalization

At December 31, 2009, our CDOs and borrowings under our junior subordinated notes, and mortgage loans (including the Goldman Mortgage and Senior and Junior Mezzanine Loans). represented 95% of our consolidated market capitalization of $5.3 billion (based on a common stock price of $2.59 per share, the closing price of our common stock on the New York Stock Exchange on December 31, 2009). Market capitalization includes our consolidated debt and common and preferred stock.

Indebtedness

The table below summarizes secured and other debt at December 31, 2009 and December 31, 2008, including our junior subordinated debentures:

	December 31, 2009			December 31, 2008
Mortgage notes payable	$	1,743,668		$	1,833,005
Mezzanine notes payable		553,522			580,462
Unsecured credit facility		—			172,301
Term loan, credit facility and repurchase facility		—			95,897
Collateralized debt obligations		2,705,534			2,608,065
Junior subordinated notes		52,500			—
Junior subordinated debentures		—			150,000
Total	$	5,055,224		$	5,439,730
Cost of debt		LIBOR+2.31	%		LIBOR+2.54	%

Term Loan, Credit Facility and Repurchase Facility

The facility with Wachovia Capital Markets, LLC or one or more of its affiliates, or Wachovia, was initially established as a $250,000 facility in 2004, and was subsequently increased to $500,000 effective April 2005. In June 2007, the facility was modified further by reducing the credit spreads. In July 2008, the original facility was terminated and a new credit facility was executed to provide for a total credit availability of $215,680, comprised of a term loan equal to $115,680 and a revolving credit facility equal to $100,000 with a credit spread of 242.5 basis points. The term of the credit facility was two years and we could have extended the term for an additional twelve-month period if certain conditions were met. We had no accrued interest and borrowings of $72,254 on the repurchase facility at a weighted average spread to LIBOR of 2.68% as of December 31, 2008. In April 2009, we entered into an amendment with Wachovia, pursuant to which the maturity date of the credit facility was extended to March 31, 2011. The amendment also eliminated all financial covenants, eliminated Wachovia’s right to impose future margin calls, reduced the recourse guarantee to be no more than $10,000 and eliminated cross-default provisions with respect to our other indebtedness. We made a $13,000 deposit and provided other credit support to backstop letters of credit Wachovia issued in connection with our mortgage debt obligations of certain of our subsidiaries. We also

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agreed to attempt to divest of certain loan investments in the future in order to further deleverage the credit facility and to forego additional borrowing under the facility. In December 2009, we entered into a termination agreement with Wachovia, to settle and satisfy in full the pre-existing loan obligation of $44,542 under the secured term loan and credit facility. We made a one-time cash payment of $22,500 and executed and delivered to Wachovia a subordinate participation interest in our 50% interest in one of the four mezzanine loans formerly pledged under the credit agreement. Upon termination, all of the security interests and liens in favor of Wachovia under the credit agreement were released. We recorded a gain on extinguishment of debt of $12,126 pursuant the termination agreement.

Our subsidiaries also had entered into a repurchase facility with Goldman Sachs Mortgage Company, or Goldman. In October 2006, this facility was increased from $200,000 to $400,000 and its maturity date was extended until September 2009. In August 2008, the facility was amended to reduce the borrowing capacity to $200,000 and to provide for an extension of the maturity to December 2010, for a fee, provided that no event of default has occurred. The facility bore interest at spreads of 2.00% to 2.30% over one-month LIBOR. In April 2009, we entered into an amendment to the amended and restated master repurchase agreement and amended guaranty with Goldman, pursuant to which all financial covenants in the amended and restated master repurchase agreement and the amended guaranty were eliminated and certain other provisions of the amended and restated master repurchase agreement and the amended guaranty were amended or deleted, including, among other things, the elimination of the existing recourse liability and a relaxation of certain affirmative and negative covenants. We had no accrued interest and borrowings of $23,643 at a weighted average spread to LIBOR of 2.5% under this facility at December 31, 2008. In October, 2009, we repaid the borrowings in full and terminated the Goldman repurchase facility.

In January 2009, we closed a master repurchase facility with JP Morgan Chase Bank, N.A. or JP Morgan, in the amount of $9,500. The term of the facility was through July 23, 2010, the interest rate was 30-day LIBOR plus 175 basis points, the facility was recourse to us for 30% of this facility amount, and the facility was subject to normal mark-to-market provisions after March 2009. Proceeds under the facility, which was fully drawn at closing, were used to retire certain borrowings under the Wachovia credit facility. This facility was secured by a perfected security interest in a single debt investment. In March 2009, we terminated the JP Morgan master repurchase facility by making a cash payment of approximately $1,880 pursuant to the recourse guarantee and transferring the full ownership and control of, and responsibility for, this related loan collateral to JP Morgan. We recorded an impairment charge of $8,843 in connection with the collateral transfer.

Unsecured Credit Facility

In May 2006, we closed on a $100,000 senior unsecured revolving credit facility with KeyBank, with an initial term of three years and a one-year extension option. In June 2007, the facility was increased to $175,000. The facility was supported by a negative pledge of an identified asset base. In March 2009, we entered into an amendment and compromise agreement with KeyBank to settle and satisfy the loan obligations at a discount for a cash payment of $45,000 and a maximum amount of up to $15,000 from 50% of all payments from distributions after May 2009 from certain junior tranches and preferred classes of securities under our CDOs. The remaining balance of $85 in potential cash distribution is recorded in other liabilities on our balance sheet as of December 31, 2009 and was fully paid in January 2010. We recorded a gain on extinguishment of debt of $107,229 as a result of this agreement. We had accrued interest of $1,405 and borrowings of $172,301 as of December 31, 2008.

In connection with the acquisition of American Financial on April 1, 2008, our indirect wholly-owned subsidiaries, First States Investors DB I L.P., (formerly known as First States Investors DB I LLC) and First States Investors DB I B, L.P, and certain of their direct or indirect subsidiaries, collectively, (the “DB Loan Borrowers”), entered into an amendment and restatement of an assumed American Financial credit facility (the “DB Loan Agreement”) with Deutsche Bank AG, Cayman Islands Branch, or Deutsche Bank, as agent for certain lenders. As part of the amendment and restatement of the DB Loan Agreement, the available amount under the DB Loan Agreement was reduced from $400,000 to $100,000. In addition, amounts were paid to reduce the outstanding borrowings under the facility to $95,000. Originally, the DB Loan Agreement provided the DB Loan Borrowers with a one year facility that would have matured on March 31, 2009, and permitted subject to certain conditions, a six-month extension at the DB Loan Borrowers’ option. Advances

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made under the DB Loan bear interest at 3.00% plus the greater of (i) 3.50% or (ii) 30 day LIBOR. The DB Loan allows for prepayment in whole or in part on any payment date; provided, however, that any such prepayment shall be accompanied by all accrued interest on the portion of the DB Loan being prepaid. In September 2008, two of our CDOs purchased the DB Loan from the lender and simultaneously amended the maturity date to be March 2011, and subject to certain conditions, granted the DB Loan Borrowers two options to extend the DB Loan for one year each (i.e. to September 11, 2013 if both options are exercised). In connection with the acquisition of the DB Loan, and an unrelated sale of a property originally subject to the DB Loan, the outstanding principal balance of the DB Loan was reduced to $69,868. The loan is eliminated in the preparation of our consolidated financial statements. We recorded costs related to the purchase of approximately $800, which was expensed.

The obligations under the DB Loan Agreement now owned by two of our CDOs, are secured by equity pledges of the shares in certain DB Loan Borrowers and mortgages over the various properties owned by certain DB Loan Borrowers. The DB Loan is guaranteed by us. The DB Loan Agreement contains customary events of default, the occurrence of which could result in the acceleration of all amounts payable there under. The DB Loan, now owned by our CDOs, requires us to establish and fund certain reserve accounts to be used for the payment of taxes and insurance, rollover and replacement expenses, payment of tenant improvements and leasing commissions and the funding of debt service shortfalls.

Mortgage and Mezzanine Loans

Certain real estate assets are subject to mortgage and mezzanine liens. As of December 31, 2009, 968 (including 54 properties held by an unconsolidated joint venture) of our real estate assets were encumbered with mortgages and mezzanine debt with a cumulative outstanding balance of $2,297,190. Our mortgage notes payable typically require that specified loan-to-value and debt service coverage ratios be maintained with respect to the financed properties before we can exercise certain rights under the loan agreements relating to such properties. We are in compliance with these ratios as of December 31, 2009. If the specified criteria are not satisfied, in addition to other conditions that we may have to observe, our ability to release properties from the financing may be restricted and the lender may be able to “trap” portfolio cash flow until the required ratios are met on an ongoing basis.

Certain of our mortgage notes payable related to assets held for sale contain provisions that require us to compensate the lender for the early repayment of the loan. These charges will be separately classified in the statement of operations as yield maintenance fees within discontinued operations during the period in which the charges are incurred.

Goldman Mortgage Loan

On April 1, 2008, certain of our subsidiaries, collectively, the Goldman Loan Borrowers entered into a mortgage loan agreement, the Goldman Mortgage Loan, with Goldman Sachs Commercial Mortgage Capital, L.P., or GSCMC, Citicorp North America, Inc., or Citicorp, and SL Green in connection with a mortgage loan in the amount of $250,000, which is secured by certain properties owned or ground leased by the Goldman Loan Borrowers. The Goldman Mortgage Loan matures on March 9, 2010, with a single one-year extension option. The terms of the Goldman Mortgage Loan were negotiated between the Goldman Borrower and GSCMC and Citicorp. The Goldman Mortgage Loan bore interest at 4.35% over one-month LIBOR. The Goldman Mortgage Loan provides for customary events of default, the occurrence of which could result in an acceleration of all amounts payable under the Goldman Mortgage Loan. The Goldman Mortgage Loan allows for prepayment under the terms of the agreement, subject to a 1.00% prepayment fee during the first six months, payable to the lender, as long as simultaneously therewith a proportionate prepayment of the Goldman Mezzanine Loan (discussed below) shall also be made on such date. In August 2008, an amendment to the loan agreement was entered into for the Goldman Mortgage Loan in conjunction with the bifurcation of the Goldman Mezzanine loan into two separate mezzanine loans. Under this loan agreement amendment, the Goldman Mortgage Loan bears interest at 1.99% over LIBOR. We have accrued interest of $253 and borrowings of $241,324 as of December 31, 2009 and accrued interest of $367 and borrowings of $242,568 as of December 31, 2008. In March 2010, we extended the maturity date of the Goldman Mortgage Loan to March 2011.

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Secured Term Loan

On April 1, 2008 First States Investors 3300 B, L.P., an indirect wholly-owned subsidiary of ours, or the PB Loan Borrower, entered into a loan agreement, the PB Loan Agreement, with PB Capital Corporation, as agent for itself and other lenders, in connection with a secured term loan in the amount of $240,000 or the PB Loan in part to refinance a portion of a portfolio of American Financial’s properties known as the WBBD Portfolio. The PB Loan matures on April 1, 2013 and bears interest at a 1.65% over one-month LIBOR. The PB Loan is secured by mortgages on the 48 properties owned by the PB Loan Borrower and all other assets of the PB Loan Borrower. The PB Loan Agreement provides for customary events of default, the occurrence of which could result in an acceleration of all amounts payable under the PB Loan Agreement. The PB Loan Borrower may prepay the PB Loan, in whole or in part (in amounts equal to at least $1,000), on any date. We had accrued interest of $418 and borrowings of $234,851 as of December 31, 2009 and accrued interest of $657 and borrowings of $240, 000 as of December 31, 2008.

The PB Loan requires us to enter into an interest rate protection agreement within five days of the tenth consecutive LIBOR banking day on which the strike rate exceeds 6.00% per annum. The interest rate protection agreement must protect the PB Loan Borrower against upward fluctuations of interest rates in excess of 6.25% per annum.

The PB Loan Agreement contains covenants relating to liquidity and tangible net worth. As of December 31, 2009, we were in compliance with these covenants.

Goldman Senior and Junior Mezzanine Loans

On April 1, 2008, certain of our subsidiaries, collectively, the Mezzanine Borrowers, entered into a mezzanine loan agreement with GSCMC, Citicorp and SL Green in connection with a mezzanine loan in the amount of $600,000, or the Goldman Mezzanine Loan, which is secured by pledges of certain equity interests owned by the Mezzanine Borrowers and any amounts receivable by the Mezzanine Borrowers whether by way of distributions or other sources. The Goldman Mezzanine Loan matures on March 11, 2010, with a single one-year extension option. The terms of the Goldman Mezzanine Loan were negotiated between the Mezzanine Borrowers and GSCMC and Citicorp. The Goldman Mezzanine Loan bore interest at 4.35% over one-month LIBOR. The Goldman Mezzanine Loan provides for customary events of default, the occurrence of which could result in an acceleration of all amounts payable under the Goldman Mezzanine Loan. The Goldman Mezzanine Loan allows for prepayment under the terms of the agreement, subject to a 1.00% prepayment fee during the first six months, payable to the lender, as long as simultaneously therewith a proportionate prepayment of the Goldman Mortgage Loan shall also be made on such date. In addition, under certain circumstances the Goldman Mezzanine Loan is cross-defaulted with events of default under the Goldman Mortgage Loan and with other mortgage loans pursuant to which an indirect wholly-owned subsidiary of ours is the mortgagor. In August 2008, the $600,000 mezzanine loan was bifurcated into two separate mezzanine loans, (the Junior Mezzanine Loan and the Senior Mezzanine Loan) by the lenders. Additional loan agreement amendments were entered into for the Goldman Mezzanine Loan and Goldman Mortgage Loan. Under these loan agreement amendments, the Junior Mezzanine Loan bears interest at 6.00% over LIBOR and the Senior Mezzanine Loan bears interest at 5.20% over LIBOR, and the Goldman Mortgage Loan bears interest at 1.99% over LIBOR. The weighted average of these interest rate spreads is equal to the combined weighted average of the interest rates spreads on the initial loans. We have accrued interest of $1,455 and borrowings of $553,522 as of December 31, 2009 and accrued interest of $1,821 and borrowings of $580,462 as of December 31, 2008. In March 2010, we extended the maturity date of the Goldman Mezzanine Loan to March 2011.

Collateralized Debt Obligations

During 2005 we issued approximately $1,000,000 of CDO bonds through two indirect subsidiaries, Gramercy Real Estate CDO 2005-1 Ltd., or the 2005 Issuer, and Gramercy Real Estate CDO 2005-1 LLC, or the 2005 Co-Issuer. At issuance, the CDO consisted of $810,500 of investment grade notes, $84,500 of non-investment grade notes, which were co-issued by the 2005 Issuer and the 2005 Co-Issuer, and $105,000 of preferred shares, which were issued by the 2005 Issuer. The investment grade notes were issued with floating rate coupons with a combined weighted average rate of three-month LIBOR plus 0.49%. We incurred

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approximately $11,957 of costs related to Gramercy Real Estate CDO 2005-1, which are amortized on a level- yield basis over the average life of the CDO.

During 2006 we issued approximately $1,000,000 of CDO bonds through two indirect subsidiaries, Gramercy Real Estate CDO 2006-1 Ltd., or the 2006 Issuer, and Gramercy Real Estate CDO 2006-1 LLC, or the 2006 Co-Issuer. At issuance, the CDO consisted of $903,750 of investment grade notes, $38,750 of non-investment grade notes, which were co-issued by the 2006 Issuer and the 2006 Co-Issuer, and $57,500 of preferred shares, which were issued by the 2006 Issuer. The investment grade notes were issued with floating rate coupons with a combined weighted average rate of three-month LIBOR plus 0.37%. We incurred approximately $11,364 of costs related to Gramercy Real Estate CDO 2006-1, which are amortized on a level-yield basis over the average life of the CDO.

In August 2007, we issued $1,100,000 of CDO bonds through two indirect subsidiaries, Gramercy Real Estate CDO 2007-1 Ltd., or the 2007 Issuer, and Gramercy Real Estate CDO 2007-1 LLC, or the 2007 Co-Issuer. At issuance, CDO consisted of $1,045,550 of investment grade notes, $22,000 of non-investment grade notes, which were co-issued by the 2007 Issuer and the 2007 Co-Issuer, and $32,450 of preferred shares, which were issued by the 2007 Issuer. The investment grade notes were issued with floating rate coupons with a combined weighted average rate of three-month LIBOR plus 0.46%. We incurred approximately $16,816 of costs related to Gramercy Real Estate CDO 2007-1, which are amortized on a level-yield basis over the average life of the CDO.

We retained all non-investment grade securities, the preferred shares and the common shares in the Issuer of each CDO. The Issuers and Co-Issuers in each CDO holds assets, consisting primarily of whole loans, subordinate interests in whole loans, mezzanine loans, preferred equity investments and CMBS, which serve as collateral for the CDO. Each CDO may be replenished, pursuant to certain rating agency guidelines relating to credit quality and diversification, with substitute collateral using cash generated by debt investments that are repaid during the reinvestment periods (generally, five years from issuance) of the CDO. Thereafter, the CDO securities will be retired in sequential order from senior-most to junior-most as debt investments are repaid. The financial statements of the Issuer of each CDO are consolidated in our financial statements. The securities originally rated as investment grade at time of issuance are treated as a secured financing, and are non-recourse to us. Proceeds from the sale of the securities originally rated as investment grade in each CDO were used to repay substantially all outstanding debt under our repurchase agreements and to fund additional investments. Loans and other investments are owned by the Issuers and the Co-Issuers, serve as collateral for our CDO securities, and the income generated from these investments is used to fund interest obligations of our CDO securities and the remaining income, if any, is retained by us. The CDO indentures contain minimum interest coverage and asset over collateralization covenants that must be satisfied in order for us to receive cash flow on the interests retained by us in our CDOs and to receive the subordinate collateral management fee earned. If some or all of our CDOs fail these covenants, all cash flows from the applicable CDO other than senior collateral management fees would be diverted to repay principal and interest on the most senior outstanding CDO securities, and we may not receive some or all residual payments or the subordinate collateral management fee until the applicable CDO regained compliance with such tests. As of December 31, 2009, our 2005 and 2006 CDOs were in compliance with their interest coverage and asset over collateralization covenants, however their compliance margin was narrow, particularly with respect to our 2005 CDO, and relatively small declines in their collateral performance and credit metrics could cause either or both CDOs to fall out of compliance. Our 2007 CDO failed its overcollateralization test at the November 2009 and February 2010 distribution dates. All three CDOs were in covenant compliance as of December 31, 2008.

During the year ended December 31, 2008, we repurchased, at a discount, $127,300 of investment grade notes previously issued by our three CDOs. We recorded a net gain on the early extinguishment of debt of $77,234 for the year ended December 31, 2008.

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Junior Subordinated Debentures

In May 2005, August 2005 and January 2006, we completed issuances of $50,000 each in unsecured trust preferred securities through three Delaware Statutory Trusts, or DSTs, Gramercy Capital Trust I, or GCTI, Gramercy Capital Trust II, or GCTII, and Gramercy Capital Trust III, or GCT III, that were also wholly-owned subsidiaries of our Operating Partnership. The securities issued in May 2005 bore interest at a fixed rate of 7.57% for the first ten years ending June 2015 and the securities issued in August 2005 bore interest at a fixed rate of 7.75% for the first ten years ending October 2015. Thereafter the rates were to float based on the three-month LIBOR plus 300 basis points. The securities issued in January 2006 bore interest at a fixed rate of 7.65% for the first ten years ending January 2016, with an effective rate of 7.43% when giving effect to the swap arrangement previously entered into in contemplation of this financing. Thereafter the rate was to float based on the three-month LIBOR plus 270 basis points.

In January 2009, our Operating Partnership entered into an exchange agreement with the holders of the securities, pursuant to which we and the holders agreed to exchange all of the previously issued trust preferred securities for newly issued unsecured junior subordinated notes, or our Junior Notes, in the aggregate principal amount of $150,000. Our Junior Notes will mature on June 30, 2035, or the Maturity Date, and will bear (i) a fixed interest rate of 0.50% per annum for the period beginning on January 30, 2009 and ending on January 29, 2012 and (ii) a fixed interest rate of 7.50% per annum for the period commencing on January 30, 2012 through and including the Maturity Date. We may redeem our Junior Notes in whole at any time, or in part from time to time, at a redemption price equal to 100% of the principal amount of the Junior Notes. The optional redemption of our Junior Notes in part must be made in at least $25,000 increments. The Junior Notes also contained additional covenants restricting, among other things, our ability to declare or pay any dividends during the calendar year 2009 (except to maintain our REIT qualification), or make any payment or redeem any debt securities ranked pari passu or junior to the Junior Notes. In connection with the exchange agreement, the final payment on the trust preferred securities for the period October 30, 2008 through January 29, 2009 was revised to be at a reduced interest rate of 0.50% per annum. In October 2009, a subsidiary of our Operating Partnership exchanged $97,500 of our Junior Notes for $97,533 face amount of the bonds issued by our CDOs that we had repurchased in the open market. Certain indenture covenants restricting us from declaring or paying dividends and taking certain other corporate actions during the 2009 calendar year have been eliminated for the remaining $52,500 of our Junior Notes. For the year ended December 31, 2009, we expensed fees and costs incurred in connection with the exchange agreement of $1,626 which is included in management, general and administrative expenses in the Consolidated Statement of Operations.

Contractual Obligations

Combined aggregate principal maturities of our CDOs, junior subordinated notes, mortgage loans (including the Goldman Mortgage and Senior and Junior Mezzanine Loans), unfunded loan commitments and operating leases as of December 31, 2009 are as follows:

	CDOs		Junior Subordinated Notes		Mortgage and Mezzanine Loans(1)			Interest Payments(4)		Unfunded Loan Commitments(2)		Operating Leases		Total
2010	$	—	$	—	$	832,438	(3)	$	165,298	$	18,900	$	18,661	$	1,035,297
2011		—		—		25,227			173,039		8,767		18,483		225,516
2012		—		—		80,413			172,313		—		18,088		270,814
2013		—		—		617,827			144,332		—		17,578		779,737
2014		—		—		12,566			112,420		—		17,287		142,273
Thereafter		2,705,534		52,500		712,784			363,993		—		137,042		3,971,853
Above/Below Market Interest		—		—		15,935			—		—		—		15,935
Total	$	2,705,534	$	52,500	$	2,297,190		$	1,131,395	$	27,667	$	227,139	$	6,441,425

(1) Certain of our real estate assets are subject to mortgage liens. As of December 31, 2009, 713 real estate assets were encumbered with 28 mortgages with a cumulative outstanding balance of approximately $1,727,733. As of December 31, 2009, the mortgages’ balance ranged in amount from approximately

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$411,644 to $461,782 and had maturity dates ranging from approximately 3 months to 14 years. As of December 31, 2009, 25 of the loans had fixed interest rates ranging 5.06% to 8.29% and four variable rate loans had interest rates ranging from 1.89% to 6.249%.

(2) Based on loan budgets and estimates

(3) Includes $241,324 and $553,522 of maturities due on the Goldman Mortgage and Mezzanine loans, which have subsequently been extended to March 9, 2011.

(4) Does not include $36,926 of interest payments that will be paid during the extension period on the Goldman Mortgage and Mezzanine loans mentioned above.

Leasing Agreements

Our properties are leased and subleased to tenants under operating leases with expiration dates extending through the year 2031. These leases generally contain rent increases and renewal options. As of December 31, 2009, we also leased bank branches and office buildings from third parties with expiration dates extending to the year 2085 and have various ground leases with expiration dates extending through 2087. These lease obligations generally contain rent increases and renewal options.

Future minimum rental payments under non-cancelable leases, excluding reimbursements for operating expenses, as of December 31, 2009 are as follows:

	Operating Leases
2010	$	219,985
2011		193,515
2012		182,095
2013		171,478
2014		164,788
Thereafter		1,113,678
Total minimum lease payments	$	2,045,539

Off-Balance-Sheet Arrangements

We have several off-balance-sheet investments, including joint ventures and structured finance investments. These investments all have varying ownership structures. Substantially all of our joint venture arrangements are accounted for under the equity method of accounting as we have the ability to exercise significant influence, but not control over the operating and financial decisions of these joint venture arrangements. Our off-balance-sheet arrangements are discussed in Note 6, “Investments in Unconsolidated Joint Ventures” in the accompanying financial statements.

Dividends

To maintain our qualification as a REIT, we must pay annual dividends to our stockholders of at least 90% of our REIT taxable income, if any, determined before taking into consideration the dividends paid deduction and net capital gains. Before we pay any dividend, whether for U.S. federal income tax purposes or otherwise, which would only be paid out of available cash, we must first meet both our operating requirements and scheduled debt service on our mortgages and loans payable. We may elect to pay dividends on our common stock in cash or a combination of cash and shares of common stock as permitted under U.S. federal income tax laws governing REIT distribution requirements. However, in accordance with the provisions of our charter, we may not pay any dividends on our common stock until all accrued dividends and the dividend for the then current quarter on the Series A preferred stock are paid in full.

Beginning with the third quarter of 2008, our board of directors elected to not pay a dividend our common stock. Our board of directors also elected not to pay the Series A preferred stock dividend of $0.50781 per share beginning with the fourth quarter of 2008. The unpaid preferred stock dividend has been accrued for five quarters. Based on current estimates of taxable loss, we believe we will have no distribution requirement in order to maintain our REIT status for the 2009 tax year.

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Inflation

A majority of our assets and liabilities are interest rate sensitive in nature. As a result, interest rates and other factors influence our performance more so than inflation. Changes in interest rates do not necessarily correlate with inflation rates or changes in inflation rates.

Further, our financial statements are prepared in accordance with GAAP and our distributions are determined by our board of directors based primarily on our net income as calculated for tax purposes, in each case, our activities and balance sheet are measured with reference to historical costs or fair market value without considering inflation.

Related Party Transactions

On April 24, 2009, in connection with the internalization, we entered into a securities transfer agreement with SL Green Operating Partnership L.P., or SL Green OP, GKK Manager Member Corp., or Manager Corp., and SL Green, pursuant to which (i) SL Green OP and Manager Corp. agreed to transfer to our Operating Partnership, membership interests in the Manager and (ii) SL Green OP agreed to transfer to our Operating Partnership its Class B limited partner interests in our Operating Partnership, in exchange for certain de minimis cash consideration. The securities transfer agreement contains standard representations, warranties, covenants and indemnities. No distributions were due on the Class B limited partner interests for the year ended December 31, 2009 or otherwise in connection with the internalization.

Concurrently with the execution of the securities transfer agreement, we also entered into a special rights agreement with SL Green OP and SL Green, pursuant to which SL Green and SL Green OP agreed to provide us certain management information systems services from April 24, 2009 through the date that was 90 days thereafter and we agreed to pay SL Green OP a monthly cash fee of $25 in connection therewith. We also agreed to use our best efforts to operate as a REIT during each taxable year and to cause our tax counsel to provide legal opinions to SL Green relating to our REIT status. Other than with respect to the transitional services provisions of the special rights agreement as set forth therein, the special rights agreement will terminate when SL Green OP ceases to own at least 7.5% of the shares of our common stock.

In connection with our initial public offering, we entered into a management agreement with the Manager, which was subsequently amended and restated in April 2006. The management agreement was further amended in September 2007, and amended and restated in October 2008 and was subsequently terminated in connection with the internalization. The management agreement provided for a term through December 2009 with automatic one-year extension options and was subject to certain termination rights. We paid the Manager an annual management fee equal to 1.75% of our gross stockholders equity (as defined in the management agreement) inclusive of our trust preferred securities. In October 2008, we entered into the second amended and restated management agreement with the Manager which generally contained the same terms and conditions as the amended and restated management agreement, as amended, except for the following material changes: (1) reduced the annual base management fee to 1.50% of our gross stockholders equity; (2) reduces the termination fee to an amount equal to the management fee earned by the Manager during the 12 months preceding the termination date; and (3) commencing July 2008, all fees in connection with collateral management agreements were to be remitted by the Manager to us. We incurred expense to the Manager under this agreement of an aggregate of $7,534, $21,058 and $13,135 for the years ended December 31, 2009, 2008 and 2007, respectively.

Prior to the internalization, to provide an incentive to enhance the value of our common stock, the holders of the Class B limited partner interests of our Operating Partnership were entitled to an incentive return equal to 25% of the amount by which FFO plus certain accounting gains and losses (as defined in the partnership agreement of our Operating Partnership) exceed the product of the weighted average stockholders equity (as defined in the partnership agreement of our Operating Partnership) multiplied by 9.5% (divided by four to adjust for quarterly calculations). We recorded any distributions on the Class B limited partner interests as an incentive distribution expense in the period when earned and when payments of such became probable and reasonably estimable in accordance with the partnership agreement. In October 2008, we entered into a letter agreement with the Class B limited partners to waive the incentive distribution that would have otherwise been earned for the period July 1, 2008 through December 31, 2008 and provided that starting January 1, 2009, the incentive distribution could have been paid, at our option, in cash or shares of common

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stock. In December 2008, we entered into a letter agreement with the Manager and SL Green, pursuant to which the Manager agreed to pay $2,750 in cash and SL Green transferred to us, 1.9 million shares of our common stock, in full satisfaction of all potential obligations that the holders of the Class B limited partner interests of our Operating Partnership may have had to our Operating Partnership, and our Operating Partnership may have to the holders, each in accordance with the amended operating partnership agreement of our Operating Partnership, in respect of the recalculation of the distribution amount to the holders at the end of the 2008 calendar year. We incurred approximately $2,350 and $32,235 with respect to such Class B limited partner interests for the years ended December 31, 2008 and 2007. No incentive distribution was earned by the Class B limited partner interests for the year ended December 31, 2009.

Prior to the internalization, we were obligated to reimburse the Manager for its costs incurred under an asset servicing agreement between the Manager and an affiliate of SL Green OP and a separate outsource agreement between the Manager and SL Green OP. The asset servicing agreement, which was amended and restated in April 2006, provided for an annual fee payable to SL Green OP by us of 0.05% of the book value of all credit tenant lease assets and non-investment grade bonds and 0.15% of the book value of all other assets. The outsource agreement provided for an annual fee payable by us, which became $2,814 per year subsequent to the closing of the American Financial merger to reflect higher costs resulting from the increased size and number of assets of the combined company, increasing 3% annually over the prior year on the anniversary date of the outsource agreement in August of each year. For the years ended December 31, 2008 and 2007, respectively, we realized expense of $1,721 and $1,343, to the Manager under the outsource agreement. For the year ended December 31, 2009, 2008 and 2007 we realized expense of $0, $4,022 and $3,564 to the Manager, respectively, under the asset servicing agreement. In October 2008, the outsource agreement was terminated and the asset servicing agreement was replaced with that certain interim asset servicing agreement between the Manager and an affiliate of SL Green, pursuant to which we were obligated to reimburse the Manager for its costs incurred there under from October 2008 until April 24, 2009 when such agreement was terminated in connection with the internalization. Pursuant to that agreement, the SL Green affiliate acted as the rated special servicer to our CDOs, for a fee equal to two basis points per year on the carrying value of the specially serviced loans assigned to it. Concurrent with the internalization, the interim asset servicing agreement was terminated and the Manager entered into a special servicing agreement with an affiliate of SL Green, pursuant to which the SL Green affiliate agreed to act as the rated special servicer to our CDOs for a period beginning on April 24, 2009 through the date that is the earlier of (i) 60 days thereafter and (ii) a date on which a new special servicing agreement is entered into between the Manager and a rated third-party special servicer. The SL Green affiliate was entitled to a servicing fee equal to (i) 25 basis points per year on the outstanding principal balance of assets with respect to certain specially serviced assets and (ii) two basis points per year on the outstanding principal balance of assets with respect to certain other assets. The April 24, 2009 agreement expired effective June 23, 2009. Effective May 2009 we entered into new special servicing arrangements with Situs Serve, L.P., which became the rated special servicer for our CDOs. An affiliate of SL Green continues to provide special servicing services with respect to a limited number of loans owned by us that are secured by properties in New York City, or in which we and SL Green are co-investors. For the year ended December 31, 2009, we incurred expense of $1,014, pursuant to the special servicing arrangement.

On October 27, 2008, we entered into a services agreement with SL Green and SL Green OP which was subsequently terminated in connection with the internalization. Pursuant to the services agreement, SL Green agreed to provide consulting and other services to us. SL Green would make Marc Holliday, Andrew Mathias and David Schonbraun available in connection with the provision of the services until the earliest of (i) September 30, 2009, (ii) the termination of the management agreement or (iii) with respect to a particular executive, the termination of any such executive’s employment with SL Green. In consideration for the consulting services, we paid a fee to SL Green of $200 per month, payable, at our option, in cash or, if permissible under applicable law or the requirements of the exchange on which the shares of our common stock trade, shares of our common stock. SL Green also provided us with certain other services described in the services agreement for a fee of $100 per month in cash and for a period terminating at the earlier of (i) three months after the date of the services agreement, subject to a one-time 30-day extension, or (ii) the termination of the management agreement.

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In connection with the closing of our first CDO in July 2005, the 2005 Issuer entered into a collateral management agreement with the Manager. Pursuant to the collateral management agreement, the Manager agreed to provide certain advisory and administrative services in relation to the collateral debt securities and other eligible investments securing the CDO notes. The collateral management agreement provides for a senior collateral management fee, payable quarterly in accordance with the priority of payments as set forth in the indenture, equal to 0.15% per annum of the net outstanding portfolio balance, and a subordinate collateral management fee, payable quarterly in accordance with the priority of payments as set forth in the indenture, equal to 0.25% per annum of the net outstanding portfolio balance. Net outstanding portfolio balance is the sum of the (i) aggregate principal balance of the collateral debt securities, excluding defaulted securities, (ii) aggregate principal balance of all principal proceeds held as cash and eligible investments in certain accounts, and (iii) with respect to the defaulted securities, the calculation amount of such defaulted securities. As compensation for the performance of its obligations as collateral manager under the first CDO, the Board of Directors had allocated to the Manager the subordinate collateral management fee paid on the CDO notes not held by us. In October 2008, pursuant to the second amended and restated management agreement, the Manager had, commencing July 1, 2008, agreed to remit this amount to us. At September 30, 2009 and December 31, 2008, we owned all of the non-investment grade bonds, preferred equity and equity in our 2005 CDO. The senior collateral management fee and balance of the subordinate collateral management fee is allocated to us. For the years ended December 31, 2008 and 2007, we realized expense of $1,024 and $2,054, to the Manager under such collateral management agreement.

Prior to the internalization, fees payable in connection with CDOs or other securitization vehicles, except for our 2005 CDO, were governed by the management agreement. Pursuant to the management agreement, if a collateral manager is retained as part of the formation of a CDO or other securitization vehicle, the Manager or an affiliate will be the collateral manager and will receive the following fees: (i) 0.25% per annum of the principal amount outstanding of bonds issued by a managed transitional CDO that are owned by third-party investors unaffiliated with us or the Manager, which CDO is structured to own loans secured by transitional properties, (ii) 0.15% per annum of the book value of the principal amount outstanding of bonds issued by a managed non-transitional CDO that are owned by third-party investors unaffiliated with us or the Manager, which CDOs structured to own loans secured by non-transitional properties, (iii) 0.10% per annum of the principal amount outstanding of bonds issued by a static CDO that are owned by third-party investors unaffiliated with us or the Manager, which CDO is structured to own non-investment grade bonds, and (iv) 0.05% per annum of the principal amount outstanding of bonds issued by a static CDO that are owned by third-party investors unaffiliated with us or the Manager, which CDO is structured to own investment grade bonds. For the purposes of the management agreement, a “managed transitional” CDO means a CDO that is actively managed, has a reinvestment period and is structured to own debt collateral secured primarily by non-stabilized real estate assets that are expected to experience substantial net operating income growth, and a “managed non-transitional” CDO means a CDO that is actively managed, has a reinvestment period and is structured to own debt collateral secured primarily by stabilized real estate assets that are not expected to experience substantial net operating income growth. Both “managed transitional” and “managed non-transitional” CDOs may at any given time during the reinvestment period of the respective vehicles invest in and own non-debt collateral (in limited quantity) as defined by the respective indentures. If any fees are paid to the collateral manager in excess of the fee structure provided for above, such fees are paid to us. In October 2008, pursuant to the second amended and restated management agreement, the Manager, commencing July 1, 2008, agreed to remit this amount to us. For the years ended December 31, 2008 and 2007, we realized expense of approximately $1,574 and $2,575, to the Manager under this agreement.

In connection with the internalization, the management agreement was terminated and the fees payable in connection with our 2006 and 2007 CDOs will be governed by their respective collateral management agreements. The collateral management agreement for our 2006 CDO provides for a senior collateral management fee, payable quarterly in accordance with the priority of payments as set forth in the indenture, equal to 0.15% per annum of the net outstanding portfolio balance, and a subordinate collateral management fee, payable quarterly in accordance with the priority of payments as set forth in the indenture, equal to 0.25% per annum of the net outstanding portfolio balance. Net outstanding portfolio balance is the sum of the (i) aggregate principal balance of the collateral debt securities, excluding defaulted securities, (ii) aggregate principal balance of all principal proceeds held as cash and eligible investments in certain accounts, and (iii)

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with respect to the defaulted securities, the calculation amount of such defaulted securities. The collateral management agreement for our 2007 CDO provides for a senior collateral management fee, payable quarterly in accordance with the priority of payments as set forth in the indenture, equal to (i) 0.05% per annum of the aggregate principal balance of the CMBS securities, (ii) 0.10% per annum of the aggregate principal balance of loans, preferred equity securities, cash and certain defaulted securities, and (iii) a subordinate collateral management fee, payable quarterly in accordance with the priority of payments as set forth in the indenture, equal to 0.15% per annum of the aggregate principal balance of the loans, preferred equity securities, cash and certain defaulted securities.

Commencing in May 2005, we are party to a lease agreement with SLG Graybar Sublease LLC, an affiliate of SL Green, for our corporate offices at 420 Lexington Avenue, New York, New York. The lease is for approximately 7,300 square feet and carries a term of 10 years with rents of approximately $249 per annum for year one rising to $315 per annum in year ten. In May and June 2009, we amended our lease with SLG Graybar Sublease LLC to increase the leased premises by approximately 2,260 square feet. The additional premises is leased on a co-terminus basis with the remainder of our leased premises and carries rents of approximately $103 per annum during the initial year and $123 per annum during the final lease year. For the year ended December 31, 2009, 2008 and 2007 we paid $710, $423 and $235 under this lease, respectively.

In July 2005, we closed on the purchase from an SL Green affiliate of a $40,000 mezzanine loan which bears interest at 11.20%. As part of that sale, the seller retained an interest-only participation. The mezzanine loan is secured by the equity interests in an office property in New York, New York. As of December 31, 2009 and December 31, 2008, the loan has a book value of $39,285 and $39,520, respectively.

In March 2006, we closed on the purchase of a $25,000 mezzanine loan, which bears interest at one-month LIBOR plus 8.00%, to a joint venture in which SL Green was an equity holder. The mezzanine loan was repaid in full on May 9, 2006, when we originated a $90,287 whole loan, which bears interest at one-month LIBOR plus 2.75%, to the joint venture. The whole loan is secured by office and industrial properties in northern New Jersey and has a book value of $64,130 and $90,595 as of December 31, 2009 and December 31, 2008, respectively.

In June 2006, we closed on the acquisition of a 49.75% TIC interest in 55 Corporate Drive, located in Bridgewater, New Jersey with a 0.25% interest to be acquired in the future. The remaining 50% of the property was owned as a TIC interest by an affiliate of SL Green Operating Partnership, L.P. The property was comprised of three buildings totaling approximately 670,000 square feet which was 100% net leased to an entity whose obligations were guaranteed by Sanofi-Aventis Group through April 2023. The transaction was valued at $236,000 and was financed with a $190,000, 10-year, fixed-rate first mortgage loan. In January 2009, we and SL Green sold 100% of the respective interests in 55 Corporate.

In December 2006, we acquired from a financial institution a pari-passu interest of $125,000 in a $200,000 mezzanine loan, which bears interest at 6.384% and is secured by a multi-family portfolio in New York, New York. An affiliate of SL Green simultaneously acquired the remaining $75,000 pari-passu interest in the mezzanine loan. As of December 31, 2009 and December 31, 2008, the loan has a book value of $0 and $118,703, respectively.

In January 2007, we originated two mezzanine loans totaling $200,000. The $150,000 loan was secured by a pledge of cash flow distributions and partial equity interests in a portfolio of multi-family properties and bore interest at one-month LIBOR plus 6.00%. The $50,000 loan was initially secured by cash flow distributions and partial equity interests in an office property. On March 8, 2007, the $50,000 loan was increased by $31,000 when the existing mortgage loan on the property was defeased, upon which event our loan became secured by a first mortgage lien on the property and was reclassified as a whole loan. The whole loan currently bears interest at one-month LIBOR plus 6.00% for the initial funding and one-month LIBOR plus 1.00% for the subsequent funding. At closing, an affiliate of SL Green acquired from us and held a 15.15% pari-passu interest in the mezzanine loan and the whole loan. As of December 31, 2009 and December 31, 2008, our interest in the whole loan had a carrying value of $63,894 and $66,707, respectively. The investment in the mezzanine loan was repaid in full in September 2007.

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In April 2007, we purchased for $103,200 a 45% TIC interest to acquire the fee interest in a parcel of land located at 2 Herald Square, located along 34^th Street in New York, New York. The acquisition was financed with $86,063 10-year fixed rate mortgage loan. The property is subject to a long-term ground lease with an unaffiliated third party for a term of 70 years. The remaining TIC interest is owned by a wholly-owned subsidiary of SL Green. The TIC interests are pari-passu. As of December 31, 2009 and December 31, 2008, the investment had a carrying value of $31,557 and $26,118, respectively. We recorded our pro rata share of net income of $4,988, $5,228 and $3,105 for the years ended December 31, 2009, 2008 and 2007, respectively.

In July 2007, we purchased for $144,240 an investment in a 45% TIC interest to acquire a 79% fee interest and 21% leasehold interest in the fee position in a parcel of land located at 885 Third Avenue, on which is situated The Lipstick Building. The transaction was financed with a $120,443 10-year fixed rate mortgage loan. The property is subject to a 70-year leasehold ground lease with an unaffiliated third party. The remaining TIC interest is owned by a wholly-owned subsidiary of SL Green. The TIC interests are pari passu. As of December 31, 2009 and December 31, 2008, the investment had a carrying value of $45,695 and $37,070, respectively. We recorded our pro rata share of net income of $5,972, $6,292 and $2,480 for the years ended December 31, 2009, 2008 and 2007, respectively.

Our agreements with SL Green in connection with our commercial property investments in 885 Third Avenue and 2 Herald Square contain a buy-sell provision that can be triggered by us in the event we and SL Green are unable to agree upon a major decision that would materially impair the value of the assets. Such major decisions involve the sale or refinancing of the assets, any extensions or modifications to the leases with the tenant therein or any material capital expenditures.

In September 2007, we acquired a 50% interest in a $25,000 senior mezzanine loan from SL Green. Immediately thereafter, we, along with SL Green, sold all of our interests in the loan to an unaffiliated third party. Additionally, we acquired from SL Green a 100% interest in a $25,000 junior mezzanine loan associated with the same properties as the preceding senior mezzanine loan. Immediately thereafter we participated 50% of our interest in the loan back to SL Green. As of December 31, 2009 and December 31, 2008, the loan has a book value of $0 and $11,925, respectively. In October 2007, we acquired a 50% pari-passu interest in $57,795 of two additional tranches in the senior mezzanine loan from an unaffiliated third party. At closing, an affiliate of SL Green simultaneously acquired the other 50% pari-passu interest in the two tranches. As of December 31, 2009 and December 31, 2008, the loan has a book value of $319 and $28,026, respectively.

In November 2007, we acquired from a syndicate comprised of financial institutions a $25,000 interest in a $100,000 junior mezzanine investment secured by a hotel portfolio and franchise headquarters. An affiliate of SL Green simultaneously acquired and owns another $25,000 interest in the investment. The investment was purchased at a discount and bears interest at an effective spread to one-month LIBOR of 9.50%. As of December 31, 2009 and December 31, 2008, the loan has a book value of $0 and $22,656, respectively.

In December 2007, we acquired a $52,000 interest in a senior mezzanine loan from a financial institution. Immediately thereafter, we participated 50% of our interest in the loan to an affiliate of SL Green. The investment, which is secured by an office building in New York, New York, was purchased at a discount and bears interest at an effective spread to one-month LIBOR of 5.00%. In July 2009, we sold our remaining interest in the loan to an affiliate of SL Green for $16,120 pursuant to purchase rights established when the loan was acquired. The sale includes contingent participation in future net proceeds from SL Green of up to $1,040 in excess of the purchase price upon their ultimate disposition of the loan. As of December 31, 2009 and December 31, 2008, the loan had a book value of $0 and $24,599, respectively.

In December 2007, we acquired a 50% interest in a $200,000 senior mezzanine loan from a financial institution. Immediately thereafter, we participated 50% of our interest in the loan to an affiliate of SL Green. The investment was purchased at a discount and bears interest at an effective spread to one-month LIBOR of 6.50%. As of December 31, 2009 and December 31, 2008, the loan has a book value of $28,228 and $46,488, respectively.

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In connection with the closing of the acquisition of American Financial, as part of a larger financing, we received financing of $50,000 from SL Green, which is described more fully in Note 9. An affiliate SL Green was granted 644,787 shares of our common stock for services rendered, subject to a one-year vesting period. These shares had a value of approximately $11,213 on the date of issuance.

In August 2008, we closed on the purchase from an SL Green affiliate of a $9,375 pari-passu participation interest in $18,750 first mortgage. The loan is secured by a retail shopping center located in Staten Island, New York. The investment bears interest at a fixed rate of 6.50%. As of December 31, 2009 and 2008 the loan has a book value of $9,926 and $9,324, respectively.

In September 2008, we closed on the purchase from an SL Green affiliate of a $30,000 interest in a $135,000 mezzanine loan. The loan is secured by the borrower’s interests in a retail condominium located New York, New York. The investment bears interest at an effective spread to one-month LIBOR of 10.00%. As of December 31, 2009 and 2008, the loan has a book value of $29,925 and $30,367, respectively.

Funds from Operations

We present FFO because we consider it an important supplemental measure of our operating performance and believe that it is frequently used by securities analysts, investors and other interested parties in the evaluation of REITS. We also use FFO as one of several criteria to determine performance-based incentive compensation for members of our senior management, which may be payable in cash or equity awards. The revised White Paper on FFO approved by the Board of Governors of the National Association of Real Estate Investment Trusts, or NAREIT, in April 2002 defines FFO as net income (loss) (computed in accordance with GAAP, inclusive of the impact of straight line rents), excluding gains (or losses) from items which are not a recurring part of our business, such as sales of properties, plus real estate-related depreciation and amortization and after adjustments for unconsolidated partnerships and joint ventures. We consider gains and losses on the sales of debt investments to be a normal part of our recurring operations and therefore include such gains and losses when arriving at FFO. FFO does not represent cash generated from operating activities in accordance with GAAP and should not be considered as an alternative to net income (determined in accordance with GAAP), as an indication of our financial performance, or to cash flow from operating activities (determined in accordance with GAAP) as a measure of our liquidity, nor is it entirely indicative of funds available to fund our cash needs, including our ability to make cash distributions. Our calculation of FFO may be different from the calculation used by other companies and, therefore, comparability may be limited.

FFO for the years ended December 31, 2009, 2008 and 2007 are as follows:

	For the Year Ended December 31,
	2009			2008			2007
Net income (loss) available to common shareholders	$	(529,043	)	$	49,959		$	155,030
Add:
Depreciation and amortization		122,489			84,290			12,572
FFO adjustments for unconsolidated joint ventures		4,450			625			4,802
Less:
Gain in sale of unconsolidated joint venture interest		—			—			18,994
Incentive fee attributable to gain from sale of unconsolidated joint venture interest		—			—			(92,235	)
Non real estate depreciation and amortization		(10,348	)		(11,379	)		(10,107	)
Gain on sale		(5,158	)		—			—
Funds from operations	$	(417,610	)	$	123,495		$	89,056
Funds from operations per share – basic	$	(8.38	)	$	2.61		$	3.18
Funds from operations per share – diluted	$	(8.38	)	$	2.61		$	3.03

Recently Issued Accounting Pronouncements

In March 2008, the FASB issued new guidance which applies to reporting periods beginning after November 15, 2008 and requires enhanced disclosures about an entity’s derivative and hedging activities. It

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does not change the accounting for such activities. As a result, while the adoption of this guidance has changed our disclosures, it did not have a material impact on our financial condition, liquidity or results of operations.

In January 2009, the FASB issued clarification guidance on impairment of securities by removing the requirement to place exclusive reliance on market participants’ assumptions about future cash flows when evaluating an asset for other-than-temporary impairment. The standard now requires that assumptions about future cash flows consider reasonable management judgment about the probability that the holder of an asset will be unable to collect all amounts due. The new guidance is effective for interim and annual reporting periods ending after December 15, 2008. We have adopted the new guidance and it did not have a material impact on our consolidated financial statements.

In April 2009, the FASB issued guidance that requires fair value disclosures to be included for interim reporting periods. We have adopted this new accounting standard effective April 1, 2009. We have made the appropriate disclosures in the interim financial statements during 2009.

In April 2009, the FASB issued guidance on other-than-temporary-impairments that amends the impairment guidance relating to certain debt securities and will require a company to assess the likelihood of selling the security prior to recovering its cost basis. Additionally, when a company meets the criteria for impairment, the impairment charges related to credit losses would be recognized in earnings, while non-credit losses would be reflected in other comprehensive income. We adopted this standard effective April 1, 2009. Adoption of the new guidance did not have a material impact on our consolidated financial statements.

In April 2009, the FASB issued clarifying guidance on determining when the trading volume and activity for an asset or liability has significantly decreased, which may indicate an inactive market, and on measuring the fair value of an asset or liability in inactive markets. We adopted this new accounting standard effective April 1, 2009. Adoption of the new guidance did not have a material impact on our consolidated financial statements.

In April 2009, the FASB issued guidance that requires that an acquirer to recognize at fair value, at the acquisition date, an asset acquired or a liability assumed in a business combination that arises from a contingency if the acquisition-date fair value of the asset or liability can be determined during the measurement period. We adopted this new accounting standard effective January 1, 2009. Adoption of the new guidance did not have a material impact on the consolidated financial statements.

In May 2009, the FASB issued new guidance that incorporates into authoritative accounting literature certain guidance that already existed within generally accepted auditing standards relative to the reporting of subsequent events, with the requirements concerning recognition and disclosure of subsequent events remaining essentially unchanged. This guidance addresses events which occur after the balance sheet date but before the issuance of financial statements. Under the new guidance, as under previous practice, an entity must record the effects of subsequent events that provide evidence about conditions that existed at the balance sheet date and must disclose but not record the effects of subsequent events which provide evidence about conditions that did not exist at the balance sheet date. This standard added an additional required disclosure relative to the date through which subsequent events have been evaluated and whether that is the date on which the financial statements were issued. We adopted this standard effective April 1, 2009. In February 2010, the FASB issued an Accounting Standards Update (ASU) clarifying the application of this guidance to entities, specifying that if an entity is an SEC filer then it should evaluate subsequent events through the date the financial statements are available to be issued. Additionally the ASU incorporates a definition of an SEC filer and states that an SEC filer is not required to disclose the date through which subsequent events have been evaluated. We have applied this update to our financial statements for the period ended December 31, 2009.

In June 2009, the FASB amended the guidance on transfers of financial assets to, among other things, eliminate the qualifying special-purpose entity concept, include a new unit of account definition that must be met for transfers of portions of financial assets to be eligible for sale accounting, clarify and change the derecognition criteria for a transfer to be accounted for as a sale, and require significant additional disclosure. This standard is effective January 1, 2010. Adoption of this guidance will not have a material impact on our

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consolidated financial statements.

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In June 2009, the FASB issued new guidance which revised the consolidation guidance for variable-interest entities. The modifications include the elimination of the exemption for qualifying special purpose entities, a new approach for determining who should consolidate a variable-interest entity, and changes to when it is necessary to reassess who should consolidate a variable-interest entity. This standard is effective January 1, 2010. Adoption of this guidance will not have a material impact on our consolidated financial statements.

In June 2009, the Financial Accounting Standards Board, or FASB, issued guidance regarding the Accounting Codification and the Hierarchy of Generally Accepted Accounting Principles. This guidance establishes the FASB Accounting Standards Codification, or the Codification, as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP, and states that all guidance contained in the Codification carries equal level of authority. Rules and interpretive releases of the Securities and Exchange Commissions, or SEC, under federal securities laws are also sources of authoritative GAAP for SEC registrants. The Codification does not change GAAP, however it does change the way in which it is to be researched and referenced. This guidance is effective for financial statements issued for interim and annual periods ending after September 15, 2009. We have implemented the Codification in this annual report.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Market Risk

Market risk includes risks that arise from changes in interest rates, commodity prices, equity prices and other market changes that affect market sensitive instruments. In pursuing our business plan, we expect that the primary market risks to which we will be exposed are real estate, interest rate, liquidity and credit risks.

During 2007 and continuing throughout 2009, the global capital markets experienced unprecedented volatility, resulting in dramatic changes in credit spreads, prices of financial assets, liquidity and the availability and cost of debt and equity capital. The impact has been most severe in the single-family residential real estate mortgage markets in the United States, but has also significantly affected the commercial real estate debt markets in which we invest. In particular, subsequent to the issuance of our third CDO in August 2007, the commercial real estate securitization markets experienced severe declines in transaction activity, reductions in short-term and long-term liquidity, and widening credit spreads. We have historically relied on the securitization markets as a source of efficient match-funded financing structures for our portfolio of commercial loans and CMBS investment portfolio. Currently, the new issue market for structured finance transactions including commercial real estate CDOs is dormant. This capital markets environment has led to increased cost of funds and reduced availability of efficient debt capital, factors which have caused us to reduce our investment activity. These conditions have also adversely impacted the ability of commercial property owners to service their debt and refinance their loans as they mature, and for our tenants to service their leases.

Real Estate Risk

Commercial and multi-family property values and net operating income derived from such properties are subject to volatility and may be affected adversely by a number of factors, including, but not limited to, national, regional and local economic conditions, local real estate conditions (such as an oversupply of retail, industrial, office or other commercial or multi-family space), changes or continued weakness in specific industry segments, construction quality, age and design, demographic factors, retroactive changes to building or similar codes, and increases in operating expenses (such as energy costs). In the event net operating income decreases, a borrower may have difficulty repaying our loans, which could result in losses to us. In addition, decreases in property values reduce the value of the collateral and the potential proceeds available to a borrower to repay our loans, which could also cause us to suffer losses. Even when a property’s net operating income is sufficient to cover the property’s debt service at the time a loan is made, there can be no assurance that this will continue in the future. We employ careful business selection, rigorous underwriting and credit approval processes and attentive asset management to mitigate these risks. These same factors pose risks to the operating income we receive from our portfolio of real estate investments, the valuation of our portfolio of owned properties, and our ability to refinance existing mortgage and mezzanine borrowings supported by the cash flow and value of our owned properties.

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Interest Rate Risk

Interest rate risk is highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors beyond our control. Our operating results will depend in large part on differences between the income from our assets and our borrowing costs. Most of our commercial real estate finance assets and borrowings are variable-rate instruments that we finance with variable rate debt. The objective of this strategy is to minimize the impact of interest rate changes on the spread between the yield on our assets and our cost of funds. We seek to enter into hedging transactions with respect to all liabilities relating to fixed rate assets. If we were to finance fixed rate assets with variable rate debt and the benchmark for our variable rate debt increased, our net income would decrease. Some of our loans are subject to various interest rate floors. As a result, if interest rates fall below the floor rates, the spread between the yield on our assets and our cost of funds will increase, which will generally increase our returns. Because we generate income on our commercial real estate finance assets principally from the spread between the yields on our assets and the cost of our borrowing and hedging activities, our net income on our commercial real estate finance assets will generally increase if LIBOR increases and decrease if LIBOR decreases. Our real estate assets generate income principally from fixed long-term leases and we are exposed to changes in interest rates primarily from our floating rate borrowing arrangements. We have used interest rate caps to manage our exposure to interest rate changes above 5.25% on $850,000 of borrowings, however, because our borrowing secured by our real estate assets is largely unhedged and because our real estate assets generate income from long-term leases, our net income from our real estate assets will generally decrease if LIBOR increases. The following chart shows a hypothetical 100 basis point increase in interest rates along the entire interest rate curve:

Change in LIBOR	Projected Increase (Decrease) in Net Income
Base case		—
+100 bps	$	(8,889,685	)
+200 bps	$	(17,779,370	)
+300 bps	$	(26,669,056	)

Our exposure to interest rates will also be affected by our overall corporate leverage, which may vary depending on our mix of assets.

In the event of a significant rising interest rate environment and/or economic downturn, delinquencies and defaults could increase and result in loan losses to us, which could adversely affect our liquidity and operating results. Further, such delinquencies or defaults could have an adverse effect on the spreads between interest-earning assets and interest-bearing liabilities.

In the event of a rapidly rising interest rate environment, our operating cash flow from our real estate assets may be insufficient to cover the corresponding increase in interest expense on our variable rate borrowing secured by our real estate assets.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Index to Financial Statements and Schedules

GRAMERCY CAPITAL CORP.
Reports of Independent Registered Public Accounting Firm		103
Consolidated Balance Sheets as of December 31, 2009 and 2008		105
Consolidated Statements of Operations for the years ended December 31, 2009, 2008 and 2007		106
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2009, 2008 and 2007		107
Consolidated Statements of Cash Flows for the years ended December 31, 2009, 2008 and 2007		108
Notes to Consolidated Financial Statements		110
Schedules
Schedule III Real Estate and Accumulated Depreciation as of December 31, 2009		165
Schedule IV Mortgage Loans on Real Estate as of December 31, 2009		194

All other schedules are omitted because they are not required or the required information is shown in the financial statements or notes thereto.

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Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders of
Gramercy Capital Corp.

We have audited the accompanying consolidated balance sheets of Gramercy Capital Corp. as of December 31, 2009 and 2008, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2009. Our audits also included the financial statement schedules listed in the Index as Item 15(a)(2). These financial statements and schedules are the responsibility of Gramercy Capital Corp.’s management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Gramercy Capital Corp. at December 31, 2009 and 2008, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2009, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects, the information set forth therein.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Gramercy Capital Corp.’s internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 15, 2010 expressed an unqualified opinion thereon.

/s/ ERNST & YOUNG LLP

New York, New York
March 15, 2010

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Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders of
Gramercy Capital Corp.

We have audited Gramercy Capital Corp.’s internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Gramercy Capital Corp.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed 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. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, Gramercy Capital Corp. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Gramercy Capital Corp. as of December 31, 2009 and 2008, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2009 of Gramercy Capital Corp. and our report dated March 15, 2010 expressed an unqualified opinion thereon.

/s/ ERNST & YOUNG LLP

New York, New York
March 15, 2010

105

Gramercy Capital Corp.
  
Consolidated Balance Sheets
(Amounts in thousands, except share and per share data)

	December 31, 2009			December 31, 2008
Assets:
Real estate investments, at cost:
Land	$	910,137		$	885,101
Building and improvements		2,428,403			2,441,839
Less: accumulated depreciation		(107,460	)		(47,071	)
Total real estate investments, net		3,231,080			3,279,869
Cash and cash equivalents		138,345			136,828
Restricted cash		207,190			234,781
Pledged government securities, net		97,286			101,576
Loans and other lending investments, net		1,383,832			2,213,473
Commercial mortgage-backed securities		984,709			869,973
Investments in joint ventures		108,465			93,919
Assets held for sale, net		841			192,780
Tenant and other receivables, net		61,163			34,528
Accrued interest		32,184			25,447
Acquired lease assets, net of accumulated amortization of $92,958 and $30,760		450,436			536,212
Deferred costs, net of accumulated amortization of $40,721 and $26,451		32,041			53,248
Other assets		37,865			45,464
Total assets	$	6,765,437		$	7,818,098
Liabilities and Stockholders’ Equity:
Liabilities:
Mortgage notes payable	$	1,743,668		$	1,833,005
Mezzanine loans payable		553,522			580,462
Unsecured credit facility		—			172,301
Term loan, credit facility and repurchase facility		—			95,897
Collateralized debt obligations		2,705,534			2,608,065
Junior subordinated notes		52,500			—
Total secured and other debt		5,055,224			5,289,730
Accounts payable and accrued expenses		67,706			88,437
Management and incentive fees payable		—			979
Dividends payable		11,707			2,325
Accrued interest payable		9,784			8,167
Deferred revenue		159,246			98,693
Below market lease liabilities, net of accumulated amortization of $144,253 and $53,369		770,781			846,351
Leasehold interests, net of accumulated amortization of $5,030 and $2,182		18,254			21,051
Liabilities related to assets held for sale		238			110,543
Derivative instruments, at fair value		88,786			157,776
Other liabilities		16,193			11,613
Deferrable interest debentures held by trusts that issued trust preferred securities		—			150,000
Total liabilities		6,197,919			6,785,665
Commitments and contingencies		—			—
Stockholders’ Equity:
Common stock, par value $0.001, 100,000,000 shares authorized, 49,884,500 and 49,852,243 shares issued and outstanding at December 31, 2009 and 2008, respectively.		50			50
Series A cumulative redeemable preferred stock, par value $0.001, liquidation preference $115,000, 4,600,000 shares authorized, 4,600,000 shares issued and outstanding at December 31, 2009 and December 31, 2008, respectively.		111,205			111,205
Additional paid-in-capital		1,078,784			1,077,983
Accumulated other comprehensive loss		(96,038	)		(160,739	)
Retained earnings (accumulated deficit)		(527,821	)		1,222
Total Gramercy Capital Corp stockholders’ equity		566,180			1,029,721
Non-controlling interests		1,338			2,712
Total stockholders’ equity		567,518			1,032,433
Total liabilities and stockholders’ equity	$	6,765,437		$	7,818,098

 
 
The accompanying notes are an integral part of these financial statements.

106

Gramercy Capital Corp.
  
Consolidated Statements of Operations
(Amounts in thousands, except per share data)

	Year Ended December 31,
	2009			2008			2007
Revenues
Rental revenue	$	326,660		$	230,346		$	2,935
Investment income		184,607			254,821			297,712
Operating expense reimbursements		120,146			92,863			—
Gain on sales and other income		4,693			15,374			14,797
Total revenues		636,106			593,404			315,444
Expenses
Property operating expenses
Utilities		42,007			31,498			—
Real estate taxes		39,933			28,609			—
Property and leasehold impairments		19,970			—			—
Ground rent and leasehold obligations		18,511			13,270			—
Direct billable expenses		6,468			5,877			—
Other property operating expenses		82,059			66,204			—
Total property operating expenses		208,948			145,458			—
Interest expense		233,335			260,533			172,094
Depreciation and amortization		112,232			67,072			2,158
Management, general and administrative		40,400			17,577			13,534
Management fees		7,787			30,299			22,671
Incentive fee		—			2,350			32,235
Impairment on loans held for sale and commercial mortgage backed securities		151,081			—			—
Provision for loan losses		517,784			97,853			9,398
Total expenses		1,271,567			621,142			252,090
Income (loss) from continuing operations before equity in net income from unconsolidated joint ventures, provisions for taxes and non-controlling interests		(635,461	)		(27,738	)		63,354
Equity in net income of unconsolidated joint ventures		8,436			9,088			4,944
Income (loss) from continuing operations before provision for taxes, gain on extinguishment of debt, and discontinued operations		(627,025	)		(18,650	)		68,298
Gain on extinguishment of debt		119,305			77,234			3,806
Gain on sale of unconsolidated joint venture interest		—			—			92,235
Provision for taxes		(2,498	)		(83	)		(1,341	)
Net income (loss) from continuing operations		(510,218	)		58,501			162,998
Net income (loss) from discontinued operations		(21,678	)		1,187			(1,401	)
Net gains from disposals		11,497			—			—
Net income (loss) from discontinued operations		(10,181	)		1,187			(1,401	)
Net income (loss)		(520,399	)		59,688			161,597
Net income (loss) attributable to non-controlling interests		770			(385	)		—
Net income (loss) attributable to Gramercy Capital Corp.		(519,629	)		59,303			161,597
Preferred stock dividends		(9,414	)		(9,344	)		(6,567	)
Net income (loss) available to common stockholders	$	(529,043	)	$	49,959		$	155,030
Basic earnings per share:
Net income (loss) from continuing operations, net of non-controlling interest and after preferred dividends	$	(10.42	)	$	1.03		$	5.59
Net Income (loss) from discontinued operations		(0.19	)		0.03			(0.05	)
Net income (loss) available to common stockholders	$	(10.61	)	$	1.06		$	5.54
Diluted earnings per share:
Net income (loss) from continuing operations, net of non-controlling interest and after preferred dividends	$	(10.42	)	$	1.03		$	5.33
Net income (loss) from discontinued operations		(0.19	)		0.03			(0.05	)
Net income (loss) available to common stockholders	$	(10.61	)	$	1.06		$	5.28
Basic weighted average common shares outstanding		49,854			47,205			27,968
Diluted weighted average common shares and common share equivalents outstanding		49,854			47,330			29,379

107

Gramercy Capital Corp.
  
Consolidated Statements of Stockholders’ Equity
(Amounts in thousands)

	Common Stock						Series A Preferred Stock		Additional Paid-In- Capital			Accumulated Other Comprehensive Income (Loss)			Retained Earnings/ (Accumulated Deficit)			Total Gramercy Capital Corp			Non- controlling interest			Total			Comprehensive Income (loss)
	Shares			Par Value
Balance at December 31, 2006		25,878		$	26		$	—	$	453,766		$	2,890		$	3,978		$	460,660		$	—		$	460,660
Net income																161,597			161,597						161,597			161,597
Net unrealized loss on derivative instruments													(62,973	)					(62,973	)					(62,973	)		(62,973	)
Net unrealized loss on securities previously available for sale													(5,575	)					(5,575	)					(5,575	)		(5,575	)
Net proceeds from common stock offering		8,635			8					224,175									224,183						224,183
Net proceeds from issuance of preferred stock								111,205											111,205						111,205
Stock based compensation – fair value										1,059									1,059						1,059
Proceeds from stock options exercised		103								2,008									2,008						2,008
Deferred compensation plan, net		234								4,950									4,950						4,950
Dividends declared																(148,379	)		(148,379	)					(148,379	)
Balance at December 31, 2007		34,850		$	34		$	111,205	$	685,958		$	(65,658	)	$	17,196		$	748,735		$	—		$	748,735		$	93,049
Net income																59,303			59,303			384			59,687			59,303
Change in net unrealized loss on derivative instruments													(85,350	)					(85,350	)					(85,350	)		(85,350	)
Reclassification adjustments from cash flow hedges included in net income													(10,320	)					(10,320	)					(10,320	)		(10,320	)
Reclassification adjustments of net unrealized loss on securities previously available for sale													589						589						589			589
Issuance of common stock in connection with American Financial Realty Trust acquisition		16,280			16					389,793									389,809						389,809
Issuance of stock – stock purchase plan		11								61									61						61
Acquisition of common stock in connection with recapture agreement with SL Green		(1,900	)		(2	)													(2	)					(2	)
Proceeds from stock options exercised		86			1					1,305									1,306						1,306
Stock based compensation – fair value		—								3,214									3,214						3,214
Deferred compensation plan, net		525			1					(2,348	)								(2,347	)					(2,347	)
Dividends declared on common stock																(65,933	)		(65,933	)					(65,933	)
Dividends declared on preferred stock																(9,344	)		(9,344	)					(9,344	)
Non-controlling interest assumed in connection with American Financial Realty Trust acquisition																			—			2,328			2,328
Balance at December 31, 2008		49,852		$	50		$	111,205	$	1,077,983		$	(160,739	)	$	1,222		$	1,029,721		$	2,712		$	1,032,433		$	(35,778	)
Net loss																(519,629	)		(519,629	)		(770	)		(520,399	)		(519,629	)
Change in net unrealized loss on derivative instruments													63,621						63,621						63,621			63,621
Reclassification of adjustments of net unrealized loss on securities previously available for sale													1,080						1,080						1,080			1,080
Issuance of stock – stock purchase plan		45								27									27						27
Stock based compensation – fair value		(12	)							937									937						937
Dividends accrued on preferred stock																(9,414	)		(9,414	)					(9,414	)
Contributions from non-controlling interests																						7,227			7,227
Distributions to non-controlling interests										(163	)								(163	)		(7,831	)		(7,994	)
Balance at December 31, 2009		49,885		$	50		$	111,205	$	1,078,784		$	(96,038	)	$	(527,821	)	$	566,180		$	1,338		$	567,518		$	(454,928	)

 
 
The accompanying notes are an integral part of these financial statements.

108

Gramercy Capital Corp.
  
Consolidated Statements of Cash Flows
(Amounts in thousands)

	Year ended December 31,
	2009			2008			2007
Operating Activities
Net income (loss)	$	(520,399	)	$	59,688		$	161,597
Adjustments to net cash provided by operating activities:
Depreciation and amortization		123,451			83,858			11,926
Amortization of leasehold interests		(2,860	)		—			—
Amortization of acquired leases to rental revenue		(80,666	)		(44,734	)		—
Amortization of deferred costs		11,580			10,392			—
Amortization of discount and other fees		(24,030	)		(31,223	)		(25,821	)
Payment of capitalized tenant leasing costs		(2,161	)		(1,204	)		—
Straight-line rent adjustment		24,641			14,553			—
Non-cash impairment charges		194,286			—			—
Net gain on sale of properties and lease terminations		(5,180	)		—			—
Equity in net loss of joint ventures		(8,130	)		(7,782	)		(3,513	)
Gain on extinguishment of debt		(119,305	)		(77,234	)		(3,806	)
Amortization of stock compensation		961			866			6,009
Provision for loan losses		517,784			97,853			9,398
Unrealized gain on derivative instruments		(916	)		(10,320	)		(435	)
Net realized gain on loans held for sale		—			—			(4,018	)
Net realized gain on sale of joint venture investment		(6,317	)		—			(92,235	)
Changes in operating assets and liabilities:
Restricted cash		8,836			51,421			—
Tenant and other receivables		(12,075	)		1,419			—
New investments in loans held for sale		—			—			(151,638	)
Proceeds from sale of loans and loan commitments held for sale		—			—			177,414
Accrued interest		(10,064	)		549			(7,769	)
Other assets		8,143			27,917			(18,864	)
Management and incentive fees payable		(847	)		(4,638	)		2,329
Settlement of derivative instruments		—			—			(460	)
Accounts payable, accrued expenses and other liabilities		(31,819	)		(12,267	)		8,217
Deferred revenue		22,047			12,641			(8,757	)
Net cash provided by operating activities		86,960			171,755			59,574
Investing Activities
Transaction costs of business combination		—			(108,199	)		—
Cash consideration paid for business combination, net of cash acquired of $155,356		—			(586,900	)		—
Capital expenditures and leasehold costs		—			(13,724	)		—
Proceeds from sale of joint venture investment		(10,450	)		—			146,665
Deferred investment costs		(651	)		(2,297	)		(4,586	)
Proceeds from sale of real estate		172,895			138,750			—
New investment originations and funded commitments		(55,374	)		(355,854	)		(1,914,626	)
Principal collections on investments		89,106			456,438			1,201,423
Proceeds from loan syndications		52,926			105,421			238,489
Investment in commercial real estate		—			(1,828	)		(76,292	)
Investment in commercial mortgage-backed securities		(119,122	)		(72,196	)		(796,306	)
Investment in joint venture		(3,237	)		(2,324	)		(42,789	)
Change in accrued interest income		(32	)		80			—
Purchase of marketable investments		(7	)		(5,362	)		—
Sale of marketable investments		6,606			4,989			—
Change in restricted cash from investing activities		(1,539	)		(47,566	)		18,640
Net cash provided by (used by) investing activities		131,121			(490,572	)		(1,229,382	)

 
 
The accompanying notes are an integral part of these financial statements.

109

Gramercy Capital Corp.
  
Consolidated Statements of Cash Flows – continued
(Amounts in thousands)

	Year ended December 31,
	2009			2008			2007
Financing Activities
Distribution to non-controlling interests		(7,995	)		—			—
Proceeds from hedge termination		(4,452	)		—			—
Proceeds from repurchase facilities		9,500			45,039			1,358,056
Repayments of repurchase facilities		(76,243	)		(149,339	)		(1,435,271	)
Proceeds of unsecured credit facility		—			172,301			129,000
Repayment of unsecured credit facility		(45,000	)		—			(144,000	)
(Repurchase) issuance of collateralized debt obligations		—			(50,066	)		1,024,628
Proceeds from mortgage payable		—			—			59,099
Repayment of mortgage notes		(111,559	)		(801,913	)		—
Proceeds from stock options exercised		—			1,305			2,008
Proceeds from acquisition financing		—			1,114,743			—
Deferred financing costs and other liabilities		(3,205	)		(27,031	)		(12,795	)
Net proceeds of sale of common stock		—			61			224,183
Net proceeds of sale of preferred stock		—			—			111,205
Dividends paid on common stock		(31	)		(159,891	)		(64,576	)
Dividends paid on preferred stock		—			(7,019	)		(4,231	)
Change in restricted cash from financing activities		22,421			24,329			196,314
Net cash (used by) provided by financing activities		(216,564	)		162,519			1,443,620
Net (decrease) increase in cash and cash equivalents		1,517			(156,298	)		273,812
Cash and cash equivalents at beginning of period		136,828			293,126			19,314
Cash and cash equivalents at end of period	$	138,345		$	136,828		$	293,126
Non-cash activity
Deferred gain (loss) and other non-cash activity related to derivatives	$	68,073		$	5,299		$	—
Issuance of common stock for acquisition advisory costs	$	—		$	11,213		$	—
Issuance of common stock in business combination	$	—		$	378,672		$	—
Assumptions of mortgage loans in a business combination	$	—		$	1,316,004		$	—
Mark-to-market of debt assumed in business acquisition	$	—		$	24,743		$	—
Debt assumed by purchaser in sale of real estate	$	103,621		$	—		$	—
Supplemental cash flow disclosures
Interest paid	$	192,229		$	249,400		$	163,135
Income taxes paid	$	513		$	433		$	869

 
 
The accompanying notes are an integral part of these financial statements.

110

Gramercy Capital Corp.
  
Notes To Consolidated Financial Statements
(Amounts in thousands, except share and per share data)
December 31, 2009

1. Business and Organization

Gramercy Capital Corp. (the “Company” or “Gramercy”) is a self-managed, integrated, commercial real estate finance and property investment company. The Company was formed in April 2004 and commenced operations upon the completion of its initial public offering in August 2004. On April 1, 2008, the Company completed the acquisition of American Financial Realty Trust (NYSE: AFR) (“American Financial”) in a transaction with a total value of approximately $3,300,000, including the assumption of approximately $1,300,000 of American Financial’s secured debt.

From its inception until April 2009, the Company was externally managed and advised by GKK Manager LLC, or the Manager, a wholly-owned subsidiary of SL Green Realty Corp., or SL Green. On April 24, 2009, the Company completed the internalization of its management through the direct acquisition of the Manager from SL Green. Beginning in May 2009, management and incentive fees payable by the Company to the Manager ceased and the Company added 77 former employees of the Manager to its own staff. For the year ended December 31, 2009, the Company expensed $5,010 for the costs incurred in connection with the Company’s acquisition of the Manager. At December 31, 2009 and 2008, SL Green Operating Partnership, L.P., or SL Green OP, a wholly-owned subsidiary of SL Green, owned approximately 12.5% of the outstanding shares of the Company’s common stock.

The Company relies on the credit and equity markets to finance and grow its business. Beginning during the second half of 2007, severe credit and liquidity issues in the sub-prime residential lending and single family housing sectors negatively impacted the asset-backed and corporate fixed income markets, and the equity securities of financial institutions and real estate companies. As the severity of residential sector issues increased, nearly all securities markets experienced reduced liquidity and greater risk premiums as concerns about the outlook for the U.S. and world economic growth increased. These concerns continue to persist and risk premiums in many capital markets remain at or near all-time highs with liquidity extremely low or virtually non-existent when compared to historical standards. As a result, most commercial real estate finance and financial services industry participants, including the Company, have reduced new investment activity until the capital markets become more stable, the macroeconomic outlook becomes clearer and market liquidity increases. In this environment, the Company is focused on actively managing portfolio credit, generating and recycling liquidity from existing assets, leasing vacant space, extending debt maturities and reducing capital expenditures.

The Company’s commercial real estate finance business, which operates under the name Gramercy Finance, focuses on the direct origination, acquisition and portfolio management of whole loans, bridge loans, subordinate interests in whole loans, mezzanine loans, preferred equity, commercial mortgage-backed securities, or CMBS, and other real estate related securities. The Company’s property investment business, which operates under the name Gramercy Realty, focuses on the acquisition and management of commercial properties net leased primarily to regulated financial institutions and affiliated users throughout the United States. These institutions are, for the most part, deposit-taking commercial banks, thrifts and credit unions, which the Company generally refers to as “banks.” The Company’s portfolio of wholly-owned and jointly-owned bank branches and office buildings is leased to large banks such as Bank of America, N.A., or Bank of America, Wachovia Bank, National Association (now owned by Wells Fargo & Company, or Wells Fargo), or Wachovia Bank, Regions Financial Corporation, or Regions Financial and Citizens Financial Group, Inc., or Citizens Financial, and to mid-sized and community banks. Neither Gramercy Finance nor Gramercy Realty is a separate legal entity but are divisions of the Company through which the Company’s commercial real estate finance and property investment businesses are conducted.

Substantially all of the Company’s operations are conducted through GKK Capital LP, a Delaware limited partnership, or the Operating Partnership. The Company, as the sole general partner, has responsibility and discretion in the management and control of the Operating Partnership, accordingly, the Company consolidates the accounts of the Operating Partnership. The Company qualified as a real estate investment trust, or REIT,

111

Gramercy Capital Corp.
  
Notes To Consolidated Financial Statements
(Amounts in thousands, except share and per share data)
December 31, 2009

1. Business and Organization  – (continued)

under the Internal Revenue Code of 1986, as amended, or the Internal Revenue Code, commencing with its taxable year ended December 31, 2004 and the Company expects to qualify for the current fiscal year. To maintain the Company’s qualification as a REIT, the Company plans to distribute at least 90% of taxable income, if any.

As of December 31, 2009, Gramercy Finance held loans and other lending investments and CMBS of $2,368,541 net of unamortized fees, discounts, asset sales, unfunded commitments reserves for loan losses and other adjustments, with an average spread to 30-day LIBOR of 463 basis points for its floating rate investments, and an average yield of approximately 7.74% for its fixed rate investments. As of December 31, 2009, Gramercy Finance also held interests in two credit tenant net lease investments, or CTL investments, two interests in joint ventures holding fee positions on properties subject to long-term ground leases and a 100% fee interest in a property subject to a long-term ground lease.

As of December 31, 2009, Gramercy Realty’s portfolio consisted of 637 bank branches, 324 office buildings and six land parcels, of which 54 bank branches and one office building were partially owned through unconsolidated joint ventures. Gramercy Realty’s consolidated properties aggregated approximately 25,574 rentable square feet and its unconsolidated properties aggregated approximately 251 rentable square feet. As of December 31, 2009, the occupancy of Gramercy Realty’s consolidated properties was 85.9% and the occupancy for its unconsolidated properties was 100%. Gramercy Realty’s two largest tenants are Bank of America and Wachovia Bank (now owned by Wells Fargo), and as of December 31, 2009, they represented approximately 41.7% and 15.7%, respectively, of the rental income of the Company’s portfolio and occupied approximately 44.2% and 17.7%, respectively, of Gramercy Realty’s total rentable square feet.

Due to the nature of the business of Gramercy Realty’s tenant base, Gramercy Realty typically enters into long-term net leases with its financial institution tenants. As of December 31, 2009, the weighted average remaining term of Gramercy Realty’s leases was 9.3 years and approximately 79.6% of its base revenue was derived from net leases. With in-house capabilities in acquisitions, asset management, property management and leasing, Gramercy Realty is focused on maximizing the value of its portfolio through strategic sales, effective and efficient property management, and leasing.

2. Significant Accounting Policies

Accounting Standards Codification

In June 2009, the Financial Accounting Standards Board, or FASB, issued guidance regarding the Accounting Codification and the Hierarchy of Generally Accepted Accounting Principles. This guidance establishes the FASB Accounting Standards Codification, or the Codification, as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP, and states that all guidance contained in the Codification carries equal level of authority. Rules and interpretive releases of the Securities and Exchange Commissions, or SEC, under federal securities laws are also sources of authoritative GAAP for SEC registrants. The Codification does not change GAAP, however it does change the way in which it is to be researched and referenced. This guidance is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The Company has implemented the Codification in this annual report.

Principles of Consolidation

The consolidated financial statements include the Company’s accounts and those of the Company’s subsidiaries which are wholly-owned or controlled by the Company, or entities which are variable interest entities (“VIE”) in which the Company is the primary beneficiary. The primary beneficiary is the party that absorbs a majority of the VIE’s anticipated losses and/or a majority of the expected returns. The Company has evaluated its investments for potential classification as variable interests by evaluating the sufficiency of each

112

Gramercy Capital Corp.
  
Notes To Consolidated Financial Statements
(Amounts in thousands, except share and per share data)
December 31, 2009

2. Significant Accounting Policies  – (continued)

entity’s equity investment at risk to absorb losses, and determined that the Company is the primary beneficiary for one variable interest entity and has included the accounts of this entity in the consolidated financial statements. Entities which the Company does not control and entities which are VIE’s, but where the Company is not the primary beneficiary, are accounted for under the equity method. All significant intercompany balances and transactions have been eliminated.

Variable Interest Entities

The Company’s ownership of the subordinated classes of CMBS from a single issuer may provide the Company with the right to control the foreclosure/workout process on the underlying loans. An investor that holds a variable interest in a qualifying special-purpose entity (“QSPE”) does not consolidate that entity unless the investor has the unilateral ability to cause the entity to liquidate. GAAP provides the requirements for an entity to qualify as a QSPE. To maintain the QSPE exception, the special-purpose entity must initially meet the QSPE criteria and must continue to satisfy such criteria in subsequent periods. A special-purpose entity’s QSPE status can be affected in future periods by activities by its transferors or other involved parties, including the manner in which certain servicing activities are performed. To the extent that the Company’s CMBS investments were issued by a special-purpose entity that meets the QSPE requirements, the Company records those investments at the purchase price paid. To the extent the underlying special-purpose entities do not satisfy the QSPE requirements, the Company evaluates for consolidation if the special-purpose entities that would be determined to be VIEs. The Company has analyzed the pooling and servicing agreements governing each of its controlling class CMBS investments and the Company believes that the terms of those agreements conform to industry standards and are consistent with the QSPE criteria.

In June 2009, the FASB issued new guidance that eliminates the qualifying special purpose entity concept including the exemption under which the Company excludes certain CMBS investments from consolidation. The Company has evaluated its investments and believes that the adoption of this guidance in January 2010, will not have a material impact on the Company’s consolidated financial statements.

At December 31, 2009, the Company owned securities of three controlling class CMBS trusts with a carrying value of $28,968. The total par amounts of CMBS issued by the three CMBS trusts was $921,654. Using the fair value approach to calculate expected losses or residual returns, the Company has concluded that it would not be the primary beneficiary of any of the underlying special-purpose entities. At December 31, 2009, the Company’s maximum exposure to loss as a result of its investment in these QSPEs totaled $28,968, which equals the book value of these investments as of December 31, 2009.

The financing structures that the Company offers to the borrowers on certain of its real estate loans involve the creation of entities that could be deemed VIEs and, therefore, could be subject to GAAP consolidation guidance. The Company’s management has evaluated these entities and has concluded that none of such entities are VIEs that are subject to the consolidation rules.

113

Gramercy Capital Corp.
  
Notes To Consolidated Financial Statements
(Amounts in thousands, except share and per share data)
December 31, 2009

2. Significant Accounting Policies  – (continued)

The following is a summary of the Company’s involvement with VIEs (excluding QSPEs) as of December 31, 2009:

	Company carrying value-assets		Company carrying value-liabilities		Face value of assets held by the VIE		Face value of liabilities issued by the VIE
Consolidated VIEs
Total real estate investments, net	$	43,159	$	41,934	$	43,159	$	41,934
Collateralized debt obligations		—		2,705,534		3,083,873		3,101,953
	$	43,159	$	2,747,468	$	3,127,032	$	3,143,887
Unconsolidated VIEs
Commercial mortgage-backed securities	$	28,968	$	—	$	921,654	$	921,654

The Company has determined that it is the non-transferor sponsor of one of the Company’s non-investment grade CMBS investments, GS Mortgage Securities Trust 2007-GKK1, or the Trust). The Trust is a resecuritization of approximately $634,000 of commercial mortgage backed securities rated AA through BB structured in a Qualified Special Purpose Entity, or QSPE. The Company purchased a portion of the below investment securities, totaling approximately $27,300, GKK Manager LLC, the Manager, is the collateral administrator on the transaction and receives a total fee of 5.5 basis points on the par value of the underlying collateral. As collateral administrator, the Manager’s on going duty is to liquidate defaulted securities, for the Trust, if very specific triggers have been reached. The Manager can be removed as collateral administrator, for cause only, with the vote of 66 2/3% of the certificate holders. There are no liquidity facilities or financing agreements associated with the Trust. Neither the Company nor the Manager have any on-going financial obligations, including advancing, funding or purchasing collateral in the Trust. The Company’s maximum exposure to the QSPE is limited to its investment in the bonds purchased.

Real Estate and CTL Investments

The Company records acquired real estate and CTL investments at cost. Costs directly related to the acquisition of such investments are capitalized. Certain improvements are capitalized when they are determined to increase the useful life of the building. Depreciation is computed using the straight-line method over the shorter of the estimated useful life of the capitalized item or 40 years for buildings, five to ten years for building equipment and fixtures, and the lesser of the useful life or the remaining lease term for tenant improvements and leasehold interests. Maintenance and repair expenditures are charged to expense as incurred.

In leasing office space, the Company may provide funding to the lessee through a tenant allowance. In accounting for tenant allowances, the Company determines whether the allowance represents funding for the construction of leasehold improvements and evaluates the ownership, for accounting purposes, of such improvements. If the Company is considered the owner of the leasehold improvements for accounting purposes, the Company capitalizes the amount of the tenant allowance and depreciates it over the shorter of the useful life of the leasehold improvements or the lease term. If the tenant allowance represents a payment for a purpose other than funding leasehold improvements, or in the event the Company is not considered the owner of the improvements for accounting purposes, the allowance is considered to be a lease incentive and is recognized over the lease term as a reduction of rental revenue. Factors considered during this evaluation usually include (i) who holds legal title to the improvements, (ii) evidentiary requirements concerning the spending of the tenant allowance, and (iii) other controlling rights provided by the lease agreement

114

Gramercy Capital Corp.
  
Notes To Consolidated Financial Statements
(Amounts in thousands, except share and per share data)
December 31, 2009

2. Significant Accounting Policies  – (continued)

(e.g. unilateral control of the tenant space during the build-out process). Determination of the accounting for a tenant allowance is made on a case-by-case basis, considering the facts and circumstances of the individual tenant lease.

The Company also reviews the recoverability of the property’s carrying value when circumstances indicate a possible impairment of the value of a property. The review of recoverability is based on an estimate of the future undiscounted cash flows, excluding interest charges, expected to result from the property’s use and eventual disposition. These estimates consider factors such as expected future operating income, market and other applicable trends and residual value, as well as the effects of leasing demand, competition and other factors. If management determines impairment exists due to the inability to recover the carrying value of a property, an impairment loss is recorded to the extent that the carrying value exceeds the estimated fair value of the property for properties to be held and used and for assets held for sale, an impairment loss is recorded to the extent that the carrying value exceeds the fair value less estimated cost to dispose for assets held for sale. These assessments are recorded as an impairment loss in the consolidated statement of income in the period the determination is made.

The Company allocates the purchase price of real estate to land, building, improvements and intangibles, such as the value of above- and below-market leases and origination costs associated with the leases in-place at the acquisition date.

Leasehold Interests

Leasehold interest liabilities are recorded based on the difference between the fair value of management’s estimate of the net present value of cash flows expected to be paid and earned from the subleases over the non-cancelable lease terms and any payments received in consideration for assuming the leasehold interests. Factors used in determining the net present value of cash flows include contractual rental amounts, costs of tenant improvements, costs of capital expenditures and amounts due under the corresponding operating lease assumed. Amounts allocated to leasehold interests, based on their respective fair values, are amortized on a straight-line basis over the remaining lease term.

Investments in Unconsolidated Joint Ventures

The Company accounts for its investments in unconsolidated joint ventures under the equity method of accounting since it exercises significant influence, but does not unilaterally control the entities, and is not considered to be the primary beneficiary. In the joint ventures, the rights of the other investors are protective and participating. Unless the Company is determined to be the primary beneficiary, these rights preclude it from consolidating the investments. The investments are recorded initially at cost as an investment in unconsolidated joint ventures, and subsequently are adjusted for equity in net income (loss) and cash contributions and distributions. Any difference between the carrying amount of the investments on the Company’s balance sheet and the underlying equity in net assets is evaluated for impairment at each reporting period. None of the joint venture debt is recourse to the Company. As of December 31, 2009 and 2008, the Company had investments of $108,465 and $93,919 in unconsolidated joint ventures, respectively.

Cash and Cash Equivalents

The Company considers all highly liquid investments with maturities of three months or less when purchased to be cash equivalents.

115

Gramercy Capital Corp.
  
Notes To Consolidated Financial Statements
(Amounts in thousands, except share and per share data)
December 31, 2009

2. Significant Accounting Policies  – (continued)

Restricted Cash

Restricted cash at December 31, 2009 consists of $62,448 on deposit with the trustee of the Company’s collateralized debt obligations, or CDOs. The remaining balance consists of $69,314 held as collateral for letters of credit, $2,064 of interest reserves held on behalf of borrowers and $73,364 which represents amounts escrowed pursuant to mortgage agreements securing the Company’s real estate investments and CTL investments for insurance, taxes, repairs and maintenance, tenant improvements, interest, and debt service and amounts held as collateral under security and pledge agreements relating to leasehold interests.

Assets Held for Sale

Real Estate and CTL Investments Held for Sale

Real estate investments or CTL investments to be disposed of are reported at the lower of carrying amount or estimated fair value, less cost to sell. Once an asset is classified as held for sale, depreciation expense is no longer recorded and current and prior periods are reclassified as ‘discontinued operations.’ As of December 31, 2009 and 2008, the Company had real estate investments held for sale of $841 and $192,780, respectively.

Loans and Other Lending Investments Held For Sale

Loans held for investment are intended to be held to maturity and, accordingly, are carried at cost, net of unamortized loan origination fees, discounts, repayments, sales of partial interests in loans, and unfunded commitments unless such loan or investment is deemed to be impaired. Loans held for sale are carried at the lower of cost or market value using available market information obtained through consultation with dealers or other originators of such investments. As of December 31, 2009 and 2008, the Company had no loans and other lending investments designated as held for sale.

Commercial Mortgage-Backed Securities

The Company designates its CMBS investments on the date of acquisition of the investment. Held to maturity investments are stated at cost plus any premiums or discounts which are amortized through the consolidated statements of operations using the level yield method. CMBS securities that the Company does not hold for the purpose of selling in the near-term but may dispose of prior to maturity, are designated as available-for-sale and are carried at estimated fair value with the net unrealized gains or losses recorded as a component of accumulated other comprehensive income (loss) in stockholders’ equity. Unrealized losses that are, in the judgment of management, an other-than-temporary impairment are 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 computed by comparing the amortized cost of the investment to the present value of cash flows expected to be collected, discounted at the investment’s current yield, and is charged against 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 loss on the consolidated balance sheet. The determination of an other-than-temporary impairment is a subjective process, and different judgments and assumptions could affect the timing of loss realization. In November 2007, subsequent to financing the Company’s CMBS investments in its CDOs, the Company redesignated all of its available-for-sale CMBS investments with a book value of approximately $43,600 to held to maturity. As of December 31, 2009 and December 31, 2008, the unrealized loss on the redesignated CMBS investments included in other comprehensive income (loss) was $3,906 and $4,986, respectively.

On a quarterly basis, when significant changes in estimated cash flows from the cash flows previously estimated occur due to actual prepayment and credit loss experience, and the present value of the revised cash flow is less than the present value previously estimated, an other-than-temporary impairment is deemed to

116

Gramercy Capital Corp.
  
Notes To Consolidated Financial Statements
(Amounts in thousands, except share and per share data)
December 31, 2009

2. Significant Accounting Policies  – (continued)

have occurred. The security is written down to fair value with the resulting charge against earnings and a new cost basis is established. The Company calculates a revised yield based on the current amortized cost of the investment (including any other-than-temporary impairments recognized to date) and the revised yield is then applied prospectively to recognize interest income. In January 2009, the FASB clarified the guidance for impairment by removing the requirement to place exclusive reliance on market participants’ assumptions about future cash flows when evaluating an asset for other-than-temporary impairment. The standard now requires that assumptions about future cash flows consider reasonable management judgment about the probability that the holder of an asset will be unable to collect all amounts due. During the year ended December 31, 2009, the Company recognized an other-than-temporary impairment of $12,511 due to an adverse change in expected cash flows related to credit losses for five CMBS investments which are recorded in impairment on loans held for sale and CMBS in the Company’s Consolidated Statement of Operations.

The Company determines the fair value of CMBS based on the types of securities in which the Company has invested. For liquid, investment-grade securities, the Company consults with dealers of such securities to periodically obtain updated market pricing for the same or similar instruments. For non-investment grade securities, the Company actively monitors the performance of the underlying properties and loans and updates the Company’s pricing model to reflect changes in projected cash flows. The value of the securities is derived by applying discount rates to such cash flows based on current market yields. The yields employed are obtained from the Company’s own experience in the market, advice from dealers when available, and/or information obtained in consultation with other investors in similar instruments. Because fair value estimates, when available, may vary to some degree, the Company must make certain judgments and assumptions about the appropriate price to use to calculate the fair values for financial reporting purposes. Different judgments and assumptions could result in materially different presentations of value.

Pledged Government Securities

The Company maintains a portfolio of treasury securities that are pledged to provide principal and interest payments for mortgage debt previously collateralized by properties in its real estate portfolio. The Company does not intend to sell the securities and believes it is more likely than not that it will realize the full amortized cost basis of the securities over their remaining life. These securities had a carrying value of $97,286, a fair value of $98,832 and unrealized gains of $1,545 at December 31, 2009, and have maturities that extend through November 2013.

Tenant and Other Receivables

Tenant and other receivables are primarily derived from the rental income that each tenant pays in accordance with the terms of its lease, which is recorded on a straight-line basis over the initial term of the lease. Since many leases provide for rental increases at specified intervals, straight-line basis accounting requires the Company to record a receivable, and include in revenues, unbilled rent receivables that will only be received if the tenant makes all rent payments required through the expiration of the initial term of the lease. Tenant and other receivables also include receivables related to tenant reimbursements for common area maintenance expenses and certain other recoverable expenses that are recognized as revenue in the period in which the related expenses are incurred.

Tenant and other receivables are recorded net of the allowances for doubtful accounts, which as of December 31, 2009 and December 31, 2008, were $8,172 and $6,361, respectively. The Company continually reviews receivables related to rent, tenant reimbursements and unbilled rent receivables and determines collectability by taking into consideration the tenant’s payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates and economic conditions in the area in which

117

Gramercy Capital Corp.
  
Notes To Consolidated Financial Statements
(Amounts in thousands, except share and per share data)
December 31, 2009

2. Significant Accounting Policies  – (continued)

the property is located. In the event that the collectability of a receivable is in doubt, the Company increases the allowance for doubtful accounts or records a direct write-off of the receivable in the consolidated statements of income.

Intangible Assets

The Company follows the purchase method of accounting for business combinations. The Company allocates the purchase price of acquired properties to tangible and identifiable intangible assets acquired based on their respective fair values. Tangible assets include land, buildings and improvements on an as-if vacant basis. The Company utilizes various estimates, processes and information to determine the as-if vacant property value. Estimates of value are made using customary methods, including data from appraisals, comparable sales, discounted cash flow analyses and other methods. Identifiable intangible assets include amounts allocated to acquired leases for above- and below-market lease rates and the value of in-place leases.

Above-market, below-market and in-place lease values for properties acquired are recorded based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between the contractual amount to be paid pursuant to each in-place lease and management’s estimate of the fair market lease rate for each such in-place lease, measured over a period equal to the remaining non-cancelable term of the lease. The capitalized above-market lease values are amortized as a reduction of rental income over the remaining non-cancelable terms of the respective leases. The capitalized below-market lease values are amortized as an increase to rental income over the initial term and any fixed-rate renewal periods in the respective leases. If a tenant vacates its space prior to the contractual termination of the lease and no rental payments are being made on the lease, any unamortized balance of the related intangible will be written off.

The aggregate value of intangible assets related to in-place leases is primarily the difference between the property valued with existing in-place leases adjusted to market rental rates and the property valued as-if vacant. Factors considered by management in its analysis of the in-place lease intangibles include an estimate of carrying costs during the expected lease-up period for each property taking into account current market conditions and costs to execute similar leases. In estimating carrying costs, management includes real estate taxes, insurance and other operating expenses and estimates of lost rentals at market rates during the anticipated lease-up period, which is expected to average six months. Management also estimates costs to execute similar leases including leasing commissions, legal and other related expenses.

The value of in-place leases is amortized to expense over the initial term of the respective leases, which range primarily from one to 20 years. In no event does the amortization period for intangible assets exceed the remaining depreciable life of the building. If a tenant terminates its lease, the unamortized portion of the in-place lease value is charged to expense.

In making estimates of fair values for purposes of allocating purchase price, management utilizes a number of sources, including independent appraisals that may be obtained in connection with the acquisition or financing of the respective property and other market data. Management also considers information obtained about each property as a result of its pre-acquisition due diligence, as well as subsequent marketing and leasing activities, in estimating the fair value of the tangible and intangible assets acquired and intangible liabilities assumed.

118

Gramercy Capital Corp.
  
Notes To Consolidated Financial Statements
(Amounts in thousands, except share and per share data)
December 31, 2009

2. Significant Accounting Policies  – (continued)

Intangible assets and acquired lease obligations consist of the following:

	December 31, 2009			December 31, 2008
Intangible assets:
In-place leases, net of accumulated amortization of $70,363 and $22,283	$	363,655		$	428,977
Above market leases, net of accumulated amortization of $22,601 and $8,865		86,823			110,489
Amounts related to assets held for sale, net of accumulated amortization of $6 and $388		(42	)		(3,254	)
Total intangible assets	$	450,436		$	536,212
Intangible liabilities:
Below market leases, net of accumulated amortization of $144,261 and $53,597	$	770,839		$	847,528
Amounts related to assets held for sale, net of accumulated amortization of $8 and $228		(58	)		(1,177	)
Total intangible liabilities	$	770,781		$	846,351

The following table provides the weighted-average amortization period as of December 31, 2009 for intangible assets and liabilities and the projected amortization expense for the next five years.

	Weighted- Average Amortization Period		2010			2011			2012			2013			2014
In-Place Leases		13.2	$	46,308		$	34,452		$	31,537		$	29,637		$	28,637
Total to be included in Depreciation and Amorization Expense			$	46,308		$	34,452		$	31,537		$	29,637		$	28,637
Above-Market Lease Assets		13.4	$	(11,091	)	$	(8,741	)	$	(7,780	)	$	(7,178	)	$	(6,075	)
Below-Market Lease Liabilities		13.7		77,850			68,192			65,282			63,041			62,067
Total to be included in Rental Revenue			$	66,759		$	59,451		$	57,502		$	55,863		$	55,992

Deferred Costs

Deferred costs include deferred financing costs that represent commitment fees, legal and other third party costs associated with obtaining commitments for financing which result in a closing of such financing. These costs are amortized over the terms of the respective agreements and the amortization is reflected as interest expense. Unamortized deferred financing costs are expensed when the associated debt is refinanced or repaid before maturity. Costs incurred in seeking financing transactions that do not close are expensed in the period in which it is determined that the financing will not close. Deferred costs also consist of fees and direct costs incurred to originate new investments and are amortized using the effective yield method over the related term of the investment.

119

Gramercy Capital Corp.
  
Notes To Consolidated Financial Statements
(Amounts in thousands, except share and per share data)
December 31, 2009

2. Significant Accounting Policies  – (continued)

The Company has deferred certain expenditures related to the leasing of certain properties. Direct costs of leasing including internally capitalized payroll costs associated with leasing activities are deferred and amortized over the terms of the underlying leases.

Other Assets

The Company makes payments for certain expenses such as insurance and property taxes in advance of the period in which it receives the benefit. These payments are classified as other assets and amortized over the respective period of benefit relating to the contractual arrangement. The Company also escrows deposits related to pending acquisitions and financing arrangements, as required by a seller or lender, respectively. Costs prepaid in connection with securing financing for a property are reclassified into deferred financing costs at the time the transaction is completed.

Asset Retirement Obligation

Accounting for asset retirement obligations, refers to a legal obligation to perform an asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the control of the entity. The obligation to perform the asset retirement activity is unconditional even though uncertainty exists about the timing and (or) method of settlement. Thus, the timing and (or) method of settlement may be conditional on a future event. Accordingly, an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably estimated. The fair value of a liability for the conditional asset retirement obligation is recognized when incurred — generally upon acquisition, construction, or development and (or) through the normal operation of the asset.

The Company assessed the cost associated with its legal obligation to remediate asbestos in its properties known to contain asbestos and recorded the present value of the asset retirement obligation. As of December 31, 2009 and December 31, 2008 the Company has recorded a liability of approximately $3,498 and $3,323 and an expense of $175 and $181, respectively.

Valuation of Financial Instruments

ASC 820-10, “Fair Value Measurements and Disclosures”, which among other things, establishes a hierarchical disclosure framework associated with the level of pricing observability utilized in measuring financial instruments at fair value. Considerable judgment is necessary to interpret market data and develop estimated fair values. Accordingly, fair values are not necessarily indicative of the amounts the Company could realize on disposition of the financial instruments. Financial instruments with readily available active quoted prices or for which fair value can be measured from actively quoted prices generally will have a higher degree of pricing observability and will require a lesser degree of judgment to be utilized in measuring fair value. Conversely, financial instruments rarely traded or not quoted will generally have less, or no, pricing observability and will require a higher degree of judgment to be utilized in measuring fair value. Pricing observability is generally affected by such items as the type of financial instrument, whether the financial instrument is new to the market and not yet established, the characteristics specific to the transaction and overall market conditions. The use of different market assumptions and/or estimation methodologies may have a material effect on estimated fair value amounts.

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, or an exit price. The level of pricing observability generally correlates to the degree of judgment utilized in measuring the fair value of financial instruments. The less judgment utilized in measuring fair value financial instruments such as with readily available active quoted prices or for which fair value can be measured from actively quoted prices in active markets generally have more pricing observability. Conversely, financial instruments rarely traded or not

120

Gramercy Capital Corp.
  
Notes To Consolidated Financial Statements
(Amounts in thousands, except share and per share data)
December 31, 2009

2. Significant Accounting Policies  – (continued)

quoted have less observability and are measured at fair value using valuation models that require more judgment. Impacted by a number of factors, pricing observability is generally affected by such items as the type of financial instrument, whether the financial instrument is new to the market and not yet established, the characteristics specific to the transaction and overall market conditions.

The three broad levels defined are as follows:

Level I — This level is comprised of financial instruments that have quoted prices that are available in active markets for identical assets or liabilities. The type of financial instruments included in this category are highly liquid instruments with quoted prices.

Level II — This level is comprised of financial instruments that have pricing inputs other than quoted prices in active markets that are either directly or indirectly observable. The nature of these financial instruments includes instruments for which quoted prices are available but traded less frequently and instruments that are fair valued using other financial instruments, the parameters of which can be directly observed.

Level III — This level is comprised of financial instruments that have little to no pricing observability as of the reported date. These financial instruments do not have active markets and are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment and assumptions. Instruments that are generally included in this category are derivatives, whole loans, subordinate interests in whole loans and mezzanine loans.

For a further discussion regarding the measurement of financial instruments see Note 14, “Fair Value of Financial Instruments.”

Revenue Recognition

Real Estate and CTL Investments

Rental income from leases is recognized on a straight-line basis regardless of when payments are contractually due. Certain lease agreements also contain provisions that require tenants to reimburse the Company for real estate taxes, common area maintenance costs and the amortized cost of capital expenditures with interest. Such amounts are included in both revenues and operating expenses when the Company is the primary obligor for these expenses and assumes the risks and rewards of a principal under these arrangements. Under leases where the tenant pays these expenses directly, such amounts are not included in revenues or expenses.

Deferred revenue represents rental revenue and management fees received prior to the date earned. Deferred revenue also includes rental payments received in excess of rental revenues recognized as a result of straight-line basis accounting.

Other income includes fees paid by tenants to terminate their leases, which are recognized when fees due are determinable, no further actions or services are required to be performed by the Company, and collectability is reasonably assured. In the event of early termination, the unrecoverable net book values of the assets or liabilities related to the terminated lease are recognized as depreciation and amortization expense in the period of termination.

The Company recognizes sales of real estate properties only upon closing. Payments received from purchasers prior to closing are recorded as deposits. Profit on real estate sold is recognized using the full accrual method upon closing when the collectability of the sale price is reasonably assured and the Company is not obligated to perform significant activities after the sale. Profit may be deferred in whole or part until the sale meets the requirements of profit recognition on sale of real estate.

121

Gramercy Capital Corp.
  
Notes To Consolidated Financial Statements
(Amounts in thousands, except share and per share data)
December 31, 2009

2. Significant Accounting Policies  – (continued)

Finance Investments

Interest income on debt investments, which includes loan and CMBS investments, are recognized over the life of the investments using the effective interest method and recognized on the accrual basis. Fees received in connection with loan commitments are deferred until the loan is funded and are then recognized over the term of the loan using the effective interest method. Anticipated exit fees, whose collection is expected, are also recognized over the term of the loan as an adjustment to yield. Fees on commitments that expire unused are recognized at expiration. Fees received in exchange for the credit enhancement of another lender, either subordinate or senior to the Company, in the form of a guarantee are recognized over the term of that guarantee using the straight-line method.

Income recognition is generally suspended for debt investments 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.

The Company designates loans as non-performing at such time as: (1) the loan becomes 90 days delinquent or (2) the loan has a maturity default. All non-performing loans are placed on non-accrual status and income is recognized only upon actual cash receipt. At December 31, 2009, the Company had three first mortgage loans with an aggregate carrying value of $55,122, four mezzanine loans with a carrying value of $319, one second lien loan with the carrying value of $0 and one third lien loan with a carrying value of $0, which were classified as non-performing loans. At December 31, 2008, the Company had three first mortgage loans with an aggregate carrying value of $164,809, one second lien loan with a carrying value of $0, and one third lien loan with a carrying value of $0, which were classified as non-performing loans.

The Company classifies loans as sub-performing if they are not performing in material accordance with their terms, but they do not qualify as non-performing loans and the specific facts and circumstances of these loans may cause them to develop into non-performing loans should certain events occur in the normal passage of time, which the Company considers to be 90 days from the measurement date. At December 31, 2009, four first mortgage loans with a total carrying value of $160,212 were classified as sub-performing. At December 2008, five first mortgage loans with a total carrying value of $216,597 were classified as sub-performing.

For the years ended December 31, 2009, 2008 and 2007, the Company recognized $0, $1,256 and $3,985, respectively, in net gains from the sale of debt investments or commitments.

Reserve for Loan Losses

Specific valuation allowances are established for loan losses on loans in instances where it is deemed probable that the Company may be unable to collect all amounts of principal and interest due according to the contractual terms of the loan. The reserve is increased through the provision for loan losses on the Consolidated Statements of Operations and is decreased by charge-offs when losses are realized through sale, foreclosure, or when significant collection efforts have ceased.

The Company considers the present value of payments expected to be received, observable market prices or the estimated fair value of the collateral (for loans that are dependent on the collateral for repayment), and compares it to the carrying value of the loan. The determination of the estimated fair value is based on the key characteristics of the collateral type, collateral location, quality and prospects of the sponsor, the amount and status of any senior debt, and other factors. The Company also includes the evaluation of operating cash flow from the property during the projected holding period, and the estimated sales value of the collateral computed by applying an expected capitalization rate to the stabilized net operating income of the specific property, less selling costs, all of which are discounted at market discount rates. The Company also considers

122

Gramercy Capital Corp.
  
Notes To Consolidated Financial Statements
(Amounts in thousands, except share and per share data)
December 31, 2009

2. Significant Accounting Policies  – (continued)

if the loans terms have been modified in a troubled debt restructuring. Because the determination of estimated value is based upon projections of future economic events, which are inherently subjective, amounts ultimately realized from loans and investments may differ materially from the carrying value at the balance sheet date.

If, upon completion of the valuation, the estimated fair value of the underlying collateral securing the loan is less than the net carrying value of the loan, an allowance is created with a corresponding charge to the provision for loan losses. The allowance for each loan is maintained at a level the Company believes is adequate to absorb losses. During the year ended December 31, 2009, the Company incurred charge-offs totaling $188,574 relating to realized losses on 16 loans. During the year ended December 31, 2008, the Company incurred charge-offs totaling $17,519 related to two defaulted loans the Company foreclosed upon which had a carrying value totaling $31,760 and three additional loans, two of which were sold at a loss and the other was resolved for a negotiated payoff below par. The Company maintained a reserve for loan losses of $418,202 against 23 separate investments with a carrying value of $536,445 as of December 31, 2009, and a reserve for loan losses of $88,992 against 13 investments with a carrying value of $424,177 as of December 31, 2008.

Rent Expense

Rent expense is recognized on a straight-line basis regardless of when payments are due. Accounts payable and accrued expenses in the accompanying consolidated balance sheet as of December 31, 2009 and 2008 includes an accrual for rental expense recognized in excess of amounts due at that time. Rent expense related to leasehold interests is included in property operating expenses, and rent expense related to office rentals is included in management, general and administrative expense.

Stock Based Compensation Plans

The Company has a stock-based compensation plan, described more fully in Note 15. The Company accounts for this plan using the fair value recognition provisions.

The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company’s plan has characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in the Company’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of the Company’s stock options.

Prior to amending and restating the management agreement in October 2008, which was subsequently terminated in April 2009, employees of the Manager who provided services to the Company pursuant to the then-existing management agreement were characterized as its co-leased employees. Stock option awards granted to such persons under the Company’s 2004 Equity Incentive Plan were valued at the time of grant using the Black-Scholes option pricing model, which value was amortized over the option vesting period. The amended management agreement that was executed in October 2008 resulted in the re-characterization of such employees of the Manager, and they were no longer classified as the Company’s co-leased employees. Consequently, the Company determined fair value of the stock options granted to such persons using a mark-to-market model, until April 2009 when the Company completed the internalization of management through the direct acquisition of the Manager. Stock option awards were re-valued at the date of the internalization and such value will be amortized over the remaining vesting period of the award for employees that remained with the Manager.

123

Gramercy Capital Corp.
  
Notes To Consolidated Financial Statements
(Amounts in thousands, except share and per share data)
December 31, 2009

2. Significant Accounting Policies  – (continued)

Compensation cost for stock options, if any, is recognized ratably over the vesting period of the award. The Company’s policy is to grant options with an exercise price equal to the quoted closing market price of its stock on the business day preceding the grant date. Awards of stock or restricted stock are expensed as compensation over the benefit period.

The fair value of each stock option granted is estimated on the date of grant for options issued to employees, and quarterly awards to non-employees, using the Black-Scholes option pricing model with the following weighted average assumptions for grants in 2009 and 2008.

	2009			2008
Dividend yield		14.0	%		9.0	%
Expected life of option		5.0 years			6.0 years
Risk-free interest rate		1.72	%		2.97	%
Expected stock price volatility		90.0	%		67.0	%

Incentive Distribution (Class B Limited Partner Interest)

Prior to the internalization, the Class B limited partner interests were entitled to receive an incentive return equal to 25% of the amount by which funds from operations, or FFO, plus certain accounting gains (as defined in the partnership agreement of the Company’s Operating Partnership) exceed the product of the Company’s weighted average stockholders equity (as defined in the partnership agreement of the Company’s Operating Partnership) multiplied by 9.5% (divided by four to adjust for quarterly calculations). The Company recorded any distributions on the Class B limited partner interests as an incentive distribution expense in the period when earned and when payment of such amounts became probable and reasonably estimable in accordance with the partnership agreement. These cash distributions reduced the amount of cash available for distribution to the common unit holders in the Company’s Operating Partnership and to the Company’s common stockholders. In October 2008, the Company entered into a letter agreement with the Class B limited partners to waive the incentive distribution that would have otherwise been earned for the period July 1, 2008 through December 31, 2008 and provide that the starting January 1, 2009, the incentive distribution could be paid, at the Company’s option, in cash or shares of common stock. In December 2008, the Company entered into a letter agreement with the Manager and SL Green, pursuant to which the Manager agreed to pay $2,750 in cash, and SL Green transferred to the Company 1.9 million shares of the Company’s common stock, in full satisfaction of all potential obligations that the holders of the Class B limited partner interests may have had to the Company’s Operating Partnership, and the Company’s Operating Partnership may have to the holders, each in accordance with the amended operating partnership agreement of the Company’s Operating Partnership, in respect of the recalculation of the distribution amount to the holders at the end of the 2008 calendar year. In April 2009, the Company completed the internalization of its management through the direct acquisition of the Manager from SL Green. Accordingly, beginning in May 2009, management and incentive fees payable by the Company to the Manager ceased and Class B limited partner interests have been cancelled. No incentive distribution was earned for the year ended December 31, 2009. The Company incurred approximately $2,350 and $32,235 with respect to incentive distributions on such Class B limited partner interests for the year ended December 31, 2008 and 2007, respectively.

Derivative Instruments

In the normal course of business, the Company uses a variety of derivative instruments to manage, or hedge, interest rate risk. The Company requires that hedging derivative instruments be effective in reducing the interest rate risk exposure that they are designated to hedge. This effectiveness is essential for qualifying for hedge accounting. Instruments that meet these hedging criteria are formally designated as hedges at the inception of the derivative contract. The Company uses a variety of commonly used derivative products that

124

Gramercy Capital Corp.
  
Notes To Consolidated Financial Statements
(Amounts in thousands, except share and per share data)
December 31, 2009

2. Significant Accounting Policies  – (continued)

are considered “plain vanilla” derivatives. These derivatives typically include interest rate swaps, caps, collars and floors. The Company expressly prohibits the use of unconventional derivative instruments and using derivative instruments for trading or speculative purposes. Further, the Company has a policy of only entering into contracts with major financial institutions based upon their credit ratings and other factors.

To determine the fair value of derivative instruments, the Company uses a variety of methods and assumptions that are based on market conditions and risks existing at each balance sheet date. For the majority of financial instruments including most derivatives, long-term investments and long-term debt, standard market conventions and techniques such as discounted cash flow analysis, option-pricing models, replacement cost and termination cost are used to determine fair value. All methods of assessing fair value result in a general approximation of value, and such value may never actually be realized.

In the normal course of business, the Company is exposed to the effect of interest rate changes and limits these risks by following established risk management policies and procedures including the use of derivatives. To address exposure to interest rates, the Company uses derivatives primarily to hedge the cash flow variability caused by interest rate fluctuations its liabilities. Each of the Company’s CDOs maintain a minimum amount of allowable unhedged interest rate risk. The 2005 CDO permits 20% of the net outstanding principal balance and the 2006 CDO and the 2007 CDO permit 5% of the net outstanding principal balance to be unhedged.

The Company recognizes all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If a derivative is a hedge, depending on the nature of the hedge, changes in the fair value of the derivative will either be offset against the change in fair value of the hedged asset, liability or firm commitment through earnings, or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative’s change in fair value will be immediately recognized in earnings. Derivative accounting may increase or decrease reported net income and stockholders’ equity prospectively, depending on future levels of LIBOR, swap spreads and other variables affecting the fair values of derivative instruments and hedged items, but will have no effect on cash flows, provided the contract is carried through to full term.

All hedges held by the Company are deemed effective based upon the hedging objectives established by the Company’s corporate policy governing interest rate risk management. The effect of the Company’s derivative instruments on its financial statements is discussed more fully in Note 18.

Income Taxes

The Company elected to be taxed as a REIT, under Sections 856 through 860 of the Internal Revenue Code, beginning with its taxable year ended December 31, 2004. To qualify as a REIT, the Company must meet certain organizational and operational requirements, including a requirement to distribute at least 90% of its ordinary taxable income, if any, to stockholders. As a REIT, the Company generally will not be subject to U.S. federal income tax on taxable income that the Company distributes to its stockholders. If the Company fails to qualify as a REIT in any taxable year, it will then be subject to U.S. federal income taxes on taxable income at regular corporate rates and will not be permitted to qualify for treatment as a REIT for U.S. federal income tax purposes for four years following the year during which qualification is lost unless the Internal Revenue Service grants the Company relief under certain statutory provisions. Such an event could materially adversely affect the Company’s net income and net cash available for distributions to stockholders. However, the Company believes that it will be organized and operate in such a manner as to qualify for treatment as a REIT and the Company intends to operate in the foreseeable future in such a manner so that it will qualify as a REIT for U.S. federal income tax purposes. The Company is subject to certain state and local taxes.

125

Gramercy Capital Corp.
  
Notes To Consolidated Financial Statements
(Amounts in thousands, except share and per share data)
December 31, 2009

2. Significant Accounting Policies  – (continued)

For the years December 31, 2009, 2008 and 2007, the Company recorded $2,498, $83 and $1,341 of income tax expense, respectively. Tax expense for the year ended December 31, 2009 and 2008 is comprised entirely of state and local taxes. Included in tax expense for the year ended December 31, 2009 is an accrual for state income taxes on the gain of extinguishment of debt of $119,305. Under federal tax law, the Company is allowed to defer this gain until 2014; however not all states follow this federal rule.

Underwriting Commissions and Costs

Underwriting commissions and costs incurred in connection with the Company’s stock offerings are reflected as a reduction of additional paid-in-capital.

Earnings Per Share

The Company presents both basic and diluted earnings per share, or EPS. Basic EPS excludes dilution and is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock, as long as their inclusion would not be antidilutive.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Concentrations of Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash investments, debt investments and accounts receivable. The Company places its cash investments in excess of insured amounts with high quality financial institutions. The Company performs ongoing analysis of credit risk concentrations in its loan and other lending investment portfolio by evaluating exposure to various markets, underlying property types, investment structure, term, sponsors, tenants and other credit metrics.

Four investments accounted for approximately 20.8% of the total carrying value of the Company’s debt investments as of December 31, 2009 compared to five investments which accounted for approximately 20.9% of the total carrying value of the Company’s debt investments as of December 31, 2008. Six investments accounted for approximately 16.7% of the revenue earned on the Company’s debt investments for the year ended December 31, 2009, compared to six investments which accounted for approximately 17.9% of the revenue earned on the Company’s debt investments for the year ended December 31, 2008 and six investments which accounted for approximately 21.0% of the revenue earned on the Company’s debt investments for the year ended December 31, 2007. The largest sponsor accounted for approximately 9.5% and 5.6% of the total carrying value of the Company’s debt investments as of December 31, 2009 and 2008, respectively. The largest sponsor accounted for approximately 5.9% of the revenue earned on the Company’s debt investments for the year ended December 31, 2009, compared to approximately 4.7% and 3.0% of the revenue earned on the Company’s debt investments for the year ended December 31, 2008 and 2007, respectively.

Additionally, two tenants, Bank of America and Wachovia Bank (now owned by Wells Fargo), accounted for approximately 41.7% and 15.7% of Gramercy Real Estate’s rental revenue for the year ended December 31, 2009, respectively.

126

Gramercy Capital Corp.
  
Notes To Consolidated Financial Statements
(Amounts in thousands, except share and per share data)
December 31, 2009

2. Significant Accounting Policies  – (continued)

Recently Issued Accounting Pronouncements

In March 2008, the FASB issued new guidance which applies to reporting periods beginning after November 15, 2008 and requires enhanced disclosures about an entity’s derivative and hedging activities. It does not change the accounting for such activities. As a result, while the adoption of this guidance has changed the Company’s disclosures, it did not have a material impact on its financial condition, liquidity or results of operations.

In January 2009, the FASB issued clarification guidance on impairment of securities by removing the requirement to place exclusive reliance on market participants’ assumptions about future cash flows when evaluating an asset for other-than-temporary impairment. The standard now requires that assumptions about future cash flows consider reasonable management judgment about the probability that the holder of an asset will be unable to collect all amounts due. The new guidance is effective for interim and annual reporting periods ending after December 15, 2008. The Company has adopted the new guidance and it did not have a material impact on the Company’s consolidated financial statements.

In April 2009, the FASB issued guidance that requires fair value disclosures to be included for interim reporting periods. The Company has adopted this new accounting standard effective April 1, 2009. The Company has made the appropriate disclosures in the interim financial statements during 2009.

In April 2009, the FASB issued guidance on other-than-temporary-impairments that amends the impairment guidance relating to certain debt securities and will require a company to assess the likelihood of selling the security prior to recovering its cost basis. Additionally, when a company meets the criteria for impairment, the impairment charges related to credit losses would be recognized in earnings, while non-credit losses would be reflected in other comprehensive income. The Company adopted this standard effective April 1, 2009. Adoption of the new guidance did not have a material impact on the Company’s consolidated financial statements.

In April 2009, the FASB issued clarifying guidance on determining when the trading volume and activity for an asset or liability has significantly decreased, which may indicate an inactive market, and on measuring the fair value of an asset or liability in inactive markets. The Company adopted this new accounting standard effective April 1, 2009. Adoption of the new guidance did not have a material impact on the Company’s consolidated financial statements.

In April 2009, the FASB issued guidance that requires that an acquirer to recognize at fair value, at the acquisition date, an asset acquired or a liability assumed in a business combination that arises from a contingency if the acquisition-date fair value of the asset or liability can be determined during the measurement period. The Company adopted this new accounting standard effective January 1, 2009. Adoption of the new guidance did not have a material impact on the consolidated financial statements.

In May 2009, the FASB issued new guidance that incorporates into authoritative accounting literature certain guidance that already existed within generally accepted auditing standards relative to the reporting of subsequent events, with the requirements concerning recognition and disclosure of subsequent events remaining essentially unchanged. This guidance addresses events which occur after the balance sheet date but before the issuance of financial statements. Under the new guidance, as under previous practice, an entity must record the effects of subsequent events that provide evidence about conditions that existed at the balance sheet date and must disclose but not record the effects of subsequent events which provide evidence about conditions that did not exist at the balance sheet date. This standard added an additional required disclosure relative to the date through which subsequent events have been evaluated and whether that is the date on which the financial statements were issued. The Company adopted this standard effective beginning in April 1, 2009. In February 2010, the FASB issued an Accounting Standards Update (ASU) clarifying the application of

127

Gramercy Capital Corp.
  
Notes To Consolidated Financial Statements
(Amounts in thousands, except share and per share data)
December 31, 2009

2. Significant Accounting Policies  – (continued)

this guidance to entities, specifying that if an entity is an SEC filer then it should evaluate subsequent events through the date the financial statements are available to be issued. Additionally the ASU incorporates a definition of an SEC filer and states that an SEC filer is not required to disclose the date through which subsequent events have been evaluated. The Company has applied this update to its financial statements for the period ended December 31, 2009.

In June 2009, the FASB amended the guidance on transfers of financial assets to, among other things, eliminate the qualifying special-purpose entity concept, include a new unit of account definition that must be met for transfers of portions of financial assets to be eligible for sale accounting, clarify and change the derecognition criteria for a transfer to be accounted for as a sale, and require significant additional disclosure. This standard is effective January 1, 2010. Adoption of this guidance will not have a material impact on the Company’s consolidated financial statements.

In June 2009, the FASB issued new guidance which revised the consolidation guidance for variable-interest entities. The modifications include the elimination of the exemption for qualifying special purpose entities, a new approach for determining who should consolidate a variable-interest entity, and changes to when it is necessary to reassess who should consolidate a variable-interest entity. This standard is effective January 1, 2010. Adoption of this guidance will not have a material impact on the Company’s consolidated financial statements.

3. Loans and Other Lending Investments

The aggregate carrying values, allocated by product type and weighted-average coupons, of the Company’s loan, other lending investments, and CMBS investments as of December 31, 2009 and December 31, 2008, were as follows:

	Carrying Value(1)				Allocation by Investment Type						Fixed Rate Average Yield(2)						Floating Rate Average Spread over LIBOR(3)
	2009		2008		2009			2008			2009			2008			2009		2008
Whole loans, floating rate	$	830,617	$	1,222,991		60.2	%		55.3	%		—			—			454 bps		418 bps
Whole loans, fixed rate		122,846		189,946		8.9	%		8.6	%		6.9	%		7.2	%		—		—
Subordinate interests in whole loans, floating rate		76,331		80,608		5.5	%		3.6	%		—			—			246 bps		564 bps
Subordinate interests in whole loans, fixed rate		44,988		63,179		3.2	%		2.9	%		7.5	%		9.2	%		—		—
Mezzanine loans, floating rate		190,668		396,190		13.7	%		17.9	%		—			—			577 bps		654 bps
Mezzanine loans, fixed rate		85,898		248,558		6.2	%		11.2	%		8.1	%		10.2	%				—
Preferred equity, floating rate		28,228		—		2.0	%		—			—			—			1,064 bps		—
Preferred equity, fixed rate		4,256		12,001		0.3	%		0.5	%		7.2	%		10.2	%		—		—
Subtotal/Weighted average		1,383,832		2,213,473		100.0	%		100.0	%		7.4	%		9.0	%		476 bps		480 bps
CMBS, floating rate		67,876		70,893		6.9	%		8.1	%		—			—			254 bps		945 bps
CMBS, fixed rate		916,833		799,080		93.1	%		91.9	%		7.8	%		6.3	%		—		—
Subtotal/Weighted average		984,709		869,973		100.0	%		100.0	%		7.8	%		6.3	%		254 bps		945 bps
Total	$	2,368,541	$	3,083,446		100.0	%		100.0	%		7.7	%		7.3	%		463 bps		498 bps

(1) Loans and other lending investments and CMBS investments are presented net of unamortized fees, discounts, asset sales, unfunded commitments, reserves for loan losses and other adjustments.

128

Gramercy Capital Corp.
  
Notes To Consolidated Financial Statements
(Amounts in thousands, except share and per share data)
December 31, 2009

3. Loans and Other Lending Investments  – (continued)

(2) Weighted average effective yield and weighted average effective spread calculations include loans classified as non-performing. The schedule includes non-performing loans classified as whole loans — floating rate of approximately $55,122 with an effective spread of 660 basis points and non-performing loans classified as mezzanine loans — floating rate of approximately $319 with an effective yield of 858 basis points.

(3) Spreads over an index other than 30 day-LIBOR have been adjusted to a LIBOR based equivalent. In some cases, LIBOR is floored, giving rise to higher current effective spreads.

As of December 31, 2009, the Company’s loans and other lending investments, excluding CMBS investments, had the following maturity characteristics:

Year of Maturity	Number of Investments Maturing			Current Carrying Value (In thousands)			% of Total
2010		26	(1)	$	576,407			41.7	%
2011		20			429,269			31.0	%
2012		5			147,317			10.6	%
2013		1			84,012			6.1	%
2014		2			58,192			4.2	%
Thereafter		8			88,635			6.4	%
Total		62		$	1,383,832			100.0%
Weigthed average maturity					1.7 years	(2)

(1) Of the loans maturing in 2010, 17 investments with a carrying value of $440,557 have extension options, which may be subject to performance criteria.

(2) The calculation of weighted-average maturity is based upon the remaining initial term of the investment and does not include option or extension periods or the ability to prepay the investment after a negotiated lock-out period, which may be available to the borrower.

For the year ended December 31, 2009, 2008 and 2007, the Company’s investment income from loan and other lending investments and CMBS investments, was generated by the following investment types:

	For the year ended December 31, 2009					For the year ended December 31, 2008					For the year ended December 31, 2007
Investment Type	Investment Income		% of Total			Investment Income		% of Total			Investment Income		% of Total
Whole loans	$	74,536		40.3	%	$	121,843		47.8	%	$	171,798		57.7	%
Subordinate interest in whole loans		4,863		2.6	%		9,290		3.7	%		23,852		8.0	%
Mezzanine loans		38,169		20.7	%		66,180		26.0	%		78,254		26.3	%
Preferred equity		1,941		1.1	%		1,361		0.5	%		3,139		1.1	%
CMBS		65,098		35.3	%		56,147		22.0	%		20,669		6.9	%
Total	$	184,607		100.0	%	$	254,821		100.0	%	$	297,712		100.0	%

129

Gramercy Capital Corp.
  
Notes To Consolidated Financial Statements
(Amounts in thousands, except share and per share data)
December 31, 2009

3. Loans and Other Lending Investments  – (continued)

At December 31, 2009 and 2008, the Company’s loans and other lending investments, excluding CMBS investments, had the following geographic diversification:

	December 31, 2009					December 31, 2008
Region	Carrying Value		% of Total			Carrying Value		% of Total
Northeast	$	638,937		46.2	%	$	1,023,718		46.2	%
West		347,531		25.1	%		626,180		28.3	%
South		132,961		9.6	%		225,674		10.2	%
Mid-Atlantic		127,872		9.2	%		121,515		5.5	%
Southwest		71,960		5.2	%		107,735		4.9	%
Midwest		22,165		1.6	%		22,358		1.0	%
Various		42,406		3.1	%		86,293		3.9	%
Total	$	1,383,832		100.0	%	$	2,213,473		100.0	%

At December 31, 2009 and 2008, the Company’s loans and other lending investments, excluding CMBS investments, by property type are as follows:

	December 31, 2009					December 31, 2008
Project Type	Carrying Value		% of Total			Carrying Value		% of Total
Office	$	644,720		46.6	%	$	874,682		39.5	%
Hotel		220,385		15.9	%		345,615		15.6	%
Land – Commercial		167,300		12.1	%		209,572		9.5	%
Retail		107,115		7.7	%		218,763		9.9	%
Multifamily		88,975		6.4	%		272,950		12.4	%
Condo		53,475		3.9	%		91,418		4.1	%
Industrial		50,842		3.7	%		47,229		2.1	%
Mixed-Use		24,203		1.8	%		78,107		3.5	%
Land – Residential (1)		17,196		1.2	%		65,973		3.0	%
Other(2)		9,621		0.7	%		9,164		0.4	%
Total	$	1,383,832		100.0	%	$	2,213,473		100.0	%

(1) All of the loans secured by residential land are secured by first mortgages or first deeds of trust, except for two loans secured by second-and third-mortgage liens to the same sponsor with an aggregate carrying value of $0. The second and third lien loans are secured by land intended primarily for residential development. These loans were classified as non-performing as of December 31, 2009 and 2008.

(2) Includes interest-only strips and a defeased loan, and a loan to one sponsor secured by the equity interests in seven properties.

The Company recorded provisions for loan losses of $517,784, $97,853 and $9,398 for the years ended December 31, 2009, 2008 and 2007, respectively. These provisions represent increases in loan loss reserves based on management’s estimates considering delinquencies, loss experience and collateral quality by individual asset or category of asset.

For the year ended December 31, 2009, the Company incurred charge-offs of $188,574 related to realized losses on 16 loan investments. During the year ended December 31, 2008, the Company incurred charge-offs totaling $17,519 related to two defaulted loans the Company foreclosed upon which had a carrying value

130

Gramercy Capital Corp.
  
Notes To Consolidated Financial Statements
(Amounts in thousands, except share and per share data)
December 31, 2009

3. Loans and Other Lending Investments  – (continued)

totaling $31,760, which is included in real estate investments on the Consolidated Balance Sheet, and three additional loans, two of which were sold at a loss and the other was for a negotiated payoff below par. During the year ended December 31, 2007, the Company incurred a charge-off totaling $3,200, relating to one defaulted loan that the Company foreclosed upon which had a carrying value of $19,911 and $19,155 at December 31, 2008 and December 31, 2007, respectively. The interest income on impaired loans during the time within the financial statement period that they were impaired was $38,966 and $25,813 for the years ended December 31, 2009 and 2008, respectively.

Changes in the reserve for possible loan losses were as follows:

Reserve for loan losses, December 31, 2006	$	2,460
Additional provision for loan losses		9,398
Charge-offs		(3,200	)
Reserve for loan losses, December 31, 2007		8,658
Additional provision for loan losses		97,853
Charge-offs		(17,519	)
Reserve for loan losses, December 31, 2008		88,992
Additional provision for loan losses		517,784
Charge-offs		(188,574	)
Reserve for loan losses, December 31, 2009	$	418,202

The following is a summary of the Company’s CMBS investments at December 31, 2009:

Description	Number of Securities		Face Value		Book Value		Gross Unrealized Gain		Gross Unrealized Loss			Fair Value
Held to maturity:
Floating rate CMBS		9	$	81,664	$	67,876	$	—	$	(25,512	)	$	42,364
Fixed rate CMBS		90		1,096,968		916,833		30,662		(433,464	)		514,031
Total		99	$	1,178,632	$	984,709	$	30,662	$	(458,976	)	$	556,395

The following is a summary of the Company’s CMBS investments at December 31, 2008:

Description	Number of Securities		Face Value		Book Value		Gross Unrealized Gain		Gross Unrealized Loss			Fair Value
Held to maturity:
Floating rate CMBS		8	$	73,664	$	70,894	$	—	$	(33,596	)	$	37,298
Fixed rate CMBS		66		835,578		799,079		—		(536,392	)		262,687
Total		74	$	909,242	$	869,973	$	—	$	(569,988	)	$	299,985

As of December 31, 2009, the Company’s CMBS investments had the following maturity characteristics:

Year of Maturity	Number of Investments Maturing		Current Carrying Value		Percent of Total Carrying Value			Current Market Value		Percent of Total Market Value
Less than 1 year		1		13,701		1.4	%		12,181		2.2	%
1 – 5 years		6		81,189		8.2	%		54,082		9.7	%
5 – 10 years		87		866,689		88.1	%		479,675		86.2	%
Thereafter		5		23,130		2.3	%		10,458		1.9	%
Total		99		984,709		100.0	%		556,396		100.0	%

131

Gramercy Capital Corp.
  
Notes To Consolidated Financial Statements
(Amounts in thousands, except share and per share data)
December 31, 2009

3. Loans and Other Lending Investments  – (continued)

The following is a summary of the underlying credit ratings of the Company’s CMBS investments at December 31, 2009 and 2008 (for split-rated securities, the higher rating was used):

	December 31, 2009					December 31, 2008
	Book Value		Percentage			Book Value		Percentage
AAA	$	111,902		11.4	%	$	799,440		91.9	%
AA+		13,701		1.4	%		—		0.0	%
AA		139,449		14.2	%		29,689		3.4	%
AA-		25,967		2.6	%		—		—
A+		84,214		8.6	%		—		—
A		219,563		22.4	%		—		—
A-		29,441		3.0	%		—		—
BBB		79,231		8.0	%		—		—
BBB-		93,626		9.5	%		13,229		1.5	%
BB+		55,606		5.6	%		7,442		0.9	%
BB		100,631		10.2	%		4,901		0.6	%
B+		—		—			4,658		0.5	%
B		1,477		0.1	%		4,309		0.5	%
B-		932		0.1	%		—		—
CCC		12,164		1.2	%		5,241		0.6	%
CCC-		6,374		0.6	%		—		—
C		4,644		0.5	%		—		—
D		5,787		0.6	%		—		—
Not rated		—		—			1,064		0.1	%
Total	$	984,709		100.00	%	$	869,973		100.00	%

The Company evaluates CMBS investments to determine if there has been an other-than-temporary impairment. As of December 31, 2009 and 2008, all of the Company’s CMBS investments with an unrealized loss (the carrying value is in excess of the market value) have been in a continuous loss position for 12 months or longer. The Company’s unrealized losses are primarily the result of market factors other than credit impairment which is generally indicated by significant change in estimated cash flows from the cash flows previously estimated based on actual prepayments and credit loss experience. Unrealized losses can be caused by changes in interest rates, changes in credit spreads, realized losses in the underlying collateral, or general market conditions. The Company evaluates CMBS investments on a quarterly basis and has determined that there has been an adverse change in expected cash flows related to credit losses for five CMBS investments. Therefore, the Company recognized an other-than-temporary impairment of $12,511 during the year ended December 31, 2009 that was recorded as an impairment in the Company’s Consolidated Statement of Operations. This other-than-temporary impairment relates entirely to expected credit losses which has been recorded through earnings. To determine the component of the other-than-temporary impairment related to expected credit losses, the Company compares 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, (i) assumptions regarding the collectability of principal and interest, net of related expenses, on the underlying loans, and (ii) current subordination levels at both the individual loans which serve as collateral under the Company’s securities and at the securities themselves. The Company’s assessment of cash flows, which is supplemented by third-party research reports and dialogue with market participants, combined with the Company’s ability and intent to hold its CMBS investments to maturity, at which point the

132

Gramercy Capital Corp.
  
Notes To Consolidated Financial Statements
(Amounts in thousands, except share and per share data)
December 31, 2009

3. Loans and Other Lending Investments  – (continued)

Company expects to recover book value, is the basis for its conclusion the remainder of these investments are not other-than-temporarily impaired, despite the difference between the carrying value the and fair value. The Company has considered the rating downgrades in its evaluation and apart from the five bonds noted above, it believes that their investment is recoverable at December 31, 2009. The Company attributes the current difference between carrying value and market value to current market conditions including a decrease demand in for structured financial products and commercial real estate. The Company has concluded that it does not intend to sell these securities and it is not more likely than not it will be required to sell the securities before recovering the amortized costs basis.

In connection with a preferred equity investment, which was repaid in October 2006, the Company has guaranteed a portion of the outstanding principal balance of the first mortgage loan that is a financial obligation of the entity in which the Company was previously a preferred equity investor invested in the event of a borrower defaultl under such loan. The loan matures in 2032. This guarantee in the event of a borrower default under such loan is considered to be an off-balance-sheet arrangement and will survive until the repayment of the first mortgage loan. As compensation, the Company received a credit enhancement fee of $125 from the borrower, which is recognized as the fair value of the guarantee and has been recorded on its consolidated Balance Sheet as a liability. The liability is amortized over the life of the guarantee using the straight-line method and corresponding fee income will be recorded. The Company’s maximum exposure under this guarantee is approximately $1,387 as of December 31, 2009. Under the terms of the guarantee, the investment sponsor is required to reimburse the Company for the entire amount paid under the guarantee until the guarantee expires.

4. Acquisitions

American Financial

On April 1, 2008, the Company completed the acquisition of American Financial Realty Trust (NYSE: AFR), or American Financial, in a transaction with a total value of approximately $3,300,000, including the assumption of approximately $1,300,000 of American Financial’s secured debt, and the issuance of common stock of $378,672. The Company accounted for the acquisition of assets utilizing the purchase method of accounting. The following table summarizes the final purchase price allocation for the acquired entity:

Real estate investments, at cost:
Land	$	848,461
Buildings and improvements		2,640,009
		3,488,470
Intangibles and other assets:
In-place leases		442,927
Above-market lease assets		109,440
Other assets		447,275
Total assets		4,488,112
Leasehold interests		23,233
Below-market lease liabilities		924,455
Mortgage notes assumed, at fair value		2,600,747
Other liabilities		132,149
Non-controlling interest		2,328
Total liabilities and non-controlling interest		3,682,912
Net investment	$	805,200

133

Gramercy Capital Corp.
  
Notes To Consolidated Financial Statements
(Amounts in thousands, except share and per share data)
December 31, 2009

4. Acquisitions  – (continued)

GKK Manager, LLC

On April 24, 2009, in connection with the Company’s internalization of the Manager, the Company and the Operating Partnership entered into a securities transfer agreement with SL Green OP, GKK Manager Member Corp. (“Manager Corp”) and SL Green, pursuant to which (i) SL Green OP and Manager Corp agreed to transfer to the Operating Partnership, membership interests in the Manager and (ii) SL Green OP agreed to transfer to the Operating Partnership its Class B limited partner interests in the Operating Partnership, in exchange for certain de minimis cash consideration. The securities transfer agreement contains standard representations, warranties, covenants and indemnities. For the year ended December 31, 2009, the Company expensed costs incurred in connection with the internalization of the Manager of $5,010 which is included under management, general and administrative expense in the Consolidated Statement of Operations.

Pro Forma

The following table summarizes, on an unaudited pro forma basis, the Company’s combined results of operations for the years ended December 31, 2009 and 2008 as though the acquisition of American Financial and GKK Manager were completed on January 1, 2008. The supplemental pro forma operating data is not necessarily indicative of what the actual results of operations would have been assuming the transaction had been completed as set forth above, nor do they purport to represent the Company’s results of operations for future periods. In addition, the following supplement pro forma operating data does not present the sale of assets through December 31, 2009.

	2009			2008
Pro forma revenues	$	636,106		$	704,281
Pro forma net income (loss) available to common stockholders	$	(528,420	)	$	74,311
Pro forma earnings per common share-basic	$	(10.60	)	$	1.57
Pro forma earnings per common share-diluted	$	(10.60	)	$	1.57
Pro forma common shares-basic		49,854			47,205
Pro forma common share-diluted		49,854			47,330

5. Dispositions and Assets Held for Sale

During the year ended December 31, 2009, the Company sold 56 properties, for net sales proceeds of $172,895. The Company sold 82 properties, for net sale proceeds of $126,389 during the year ended December 31, 2008. The sale transactions resulted in gains totaling $5,180 for the year ended December 31, 2009. The sales transactions resulted in no gains or losses for the year ended December 31, 2008.

The Company separately classifies properties held for sale in the consolidated balance sheets and consolidated statements of operations. In the normal course of business the Company identifies non-strategic assets for sale. Changes in the market may compel the Company to decide to classify a property held for sale or classify a property that was designated as held for sale back to held for investment. During the year ended December 31, 2009, the Company reclassified 69 properties, with a total carrying value of $37,174, previously identified as held for sale to held for investment. Each property was impaired to value it at the lesser of (i) fair value as the date of transfer, or (ii) its carrying value before the asset was classified as held for sale, adjusted for any depreciation expense that would have been recognized had the property been continuously classified as held for investment. The Company recorded an impairment of $8,868 during the year ended December 31, 2009.

134

Gramercy Capital Corp.
  
Notes To Consolidated Financial Statements
(Amounts in thousands, except share and per share data)
December 31, 2009

5. Dispositions and Assets Held for Sale  – (continued)

The Company classified two properties as held for sale as of December 31, 2009. The Company classified 104 properties as held for sale at December 31, 2008. The following table summarizes information for these properties:

	December 31, 2009			December 31, 2008
Assets held for sale:
Real estate investments, at cost:
Land	$	279		$	34,560
Building and improvement		565			140,685
Total real estate investments, at cost		844			175,245
Less: accumulated depreciation		(6	)		(4,629	)
Real estate investments held for sale, net		838			170,616
Accrued interest and receivables		(35	)		10,656
Acquired lease asets, net of accumulated amortization		42			—
Deferred costs		—			59
Other Assets		(4	)		11,449
Total assets held for sale		841			192,780
Liabilities related to assets held for sale:
Mortgage payable		—			104,262
Accrued expenses		55			4,628
Deferred revenue		125			1,405
Below market lease liabilities, net of accumulated amortization		58			—
Other liabilities		—			248
Total liabilities related to assets held for sale:		238			110,543
Net assets held for sale	$	603		$	82,237

The following operating results of the assets held for sale as of December 31, 2009, and the assets sold during the years ended December 31, 2009, 2008 and 2007 are included in discontinued operations for all periods presented:

	Year Ended December 31,
	2009			2008			2007
Operating Results:
Revenues	$	23,931		$	32,064		$	8,035
Operating expenses		(40,537	)		(16,268	)		(23	)
Interest expense		(2,589	)		(8,035	)		(5,517	)
Depreciation and amortization		(2,009	)		(5,268	)		(2,465	)
Equity in net income from unconsolidated joint venture		(474	)		(1,306	)		(1,431	)
Net income (loss) from operations		(21,678	)		1,187			(1,401	)
Net gains from disposals		11,497			—			—
Net income (loss) from discontiued operations	$	(10,181	)	$	1,187		$	(1,401	)

135

Gramercy Capital Corp.
  
Notes To Consolidated Financial Statements
(Amounts in thousands, except share and per share data)
December 31, 2009

5. Dispositions and Assets Held for Sale  – (continued)

Subsequent to December 31, 2009, the Company entered into agreements of sale on seven properties totaling approximately $5,456 on properties with a total carrying value of $4,261 as of December 31, 2009, and net income of $7 for the year the ended December 31, 2009.

Discontinued operations have not been segregated in the consolidated statements of cash flows.

6. Investments in Unconsolidated Joint Ventures

South Building at One Madison Avenue, New York, New York

In April 2005, the Company closed on a $57,503 initial investment in a joint venture with SL Green to acquire, own and operate the South Building located at One Madison Avenue, New York, New York, or the South Building. The joint venture was owned 45% by a wholly-owned subsidiary of the Company and 55% by a wholly-owned subsidiary of SL Green. The joint venture interests were pari-passu. The joint venture completed the acquisition of the South Building from Metropolitan Life Insurance Company for the purchase price of approximately $802,800 plus closing costs, financed in part through a $690,000 first mortgage loan on the South Building. The first mortgage was non-recourse to the Company. The South Building comprised approximately 1.2 million square feet and was almost entirely net leased to Credit Suisse Securities (USA) LLC, or CS, pursuant to a lease with a 15-year remaining term. In July 2007, the Company entered into an agreement to sell its entire investment in the One Madison Avenue joint venture to SL Green for approximately $147,000, subject to an external appraisal, which was approved by the board of directors of both parties. The sale transaction closed on August 17, 2007, at which time the Company realized a gain of $92,235 and simultaneously repaid the entire loan amount with interest due through such date. The Company recorded its pro rata share of net losses of the joint venture of $759 for the years ended December 31, 2007, respectively.

200 Franklin Square Drive, Somerset, New Jersey

The Company owns a 25% interest in an equity owner and a fee interest in 200 Franklin Square Drive, a 200,000 square foot building located in Somerset, New Jersey which is 100% net leased to Philips Holdings, USA Inc, a wholly-owned subsidiary of Royal Phillips Electronics through December 2021. As of December 31, 2009 and December 31, 2008, the investment has a carrying value of $997 and $2,142, respectively. The Company recorded its pro rata share of net income of the joint venture of $114, $119 and $118 for the years ended December 31, 2009, 2008 and 2007, respectively.

101 S. Marengo Avenue, Pasadena, California

In November 2005, the Company closed on the purchase of a 50% interest in an office building in Pasadena, CA. The Company also acquired an interest in certain related assets as part of the transaction. The 345,000 square foot office property, which was net leased to Bank of America through September 2015, assuming the exercise of options, and related collateral were acquired for $52,000 plus closing costs, using a non-recourse, $50,000, ten-year fixed-rate first mortgage loan. The Company sold its 50% interest in April 2009 for a gain of $6,317. For the years ended December 31, 2009, 2008 and 2007, the Company recorded its pro rata share of net losses of the joint ventures of $474, $1,306 and $1,431, respectively, within discontinued operations.

2 Herald Square, New York, New York

In April 2007, the Company purchased for $103,200 a 45% Tenant-In-Common, or TIC, interest to acquire the fee interest in a parcel of land located at 2 Herald Square, located along 34th Street in New York, New York. The acquisition was financed with a $86,063 ten-year fixed rate mortgage loan. The property is subject to a long-term ground lease with an unaffiliated third party for a term of 70 years. The remaining TIC

136

Gramercy Capital Corp.
  
Notes To Consolidated Financial Statements
(Amounts in thousands, except share and per share data)
December 31, 2009

6. Investments in Unconsolidated Joint Ventures  – (continued)

interest is owned by a wholly-owned subsidiary of SL Green. The TIC interests are pari-passu. As of December 31, 2009 and December 31, 2008, the investment had a carrying value of $31,567 and $26,118, respectively. For the years ended December 31, 2009, 2008 and 2007 the Company recorded its pro rata share of net income of $4,987, $5,228 and $3,105, respectively.

885 Third Avenue, New York, New York

In July 2007, the Company purchased for $144,240 an investment in a 45% TIC interest to acquire a 79% fee interest and 21% leasehold interest in the fee position in a parcel of land located at 885 Third Avenue, on which is situated The Lipstick Building. The transaction was financed with a $120,443 ten-year fixed-rate mortgage loan. The property is subject to a 70-year leasehold ground lease with an unaffiliated third party. The remaining TIC interest is owned by a wholly-owned subsidiary of SL Green. The TIC interests are pari-passu. As of December 31, 2009 and December 31, 2008, the investment had a carrying value of $45,695 and $37,070 respectively. The Company recorded its pro rata share of net income of $5,972, $6,292 and $2,480 for the years ended December 31, 2009, 2008 and 2007, respectively.

Citizens Portfolio

The Company, through its acquisition of American Financial on April 1, 2008, obtained an interest in a joint venture with UBS. The joint venture, as of December 31, 2009, owns and manages 54 bank branches totaling approximately 251,000 square feet. These branches are fully occupied, on a triple-net basis, by Citizens Bank, N.A. and Charter One Bank, N.A., two bank subsidiaries of Citizens Financial Group, Inc. As of December 31, 2009 and December 31, 2008, the investment had a carrying value of $6,386 and $10,495 respectively. The Company recorded its pro rata share of net loss of $2,637 and $2,092 for the years ended December 31, 2009 and 2008, respectively.

Whiteface, Lake Placid, New York

In April 2008, the Company acquired via a deed-in-lieu of foreclosure, a 40% interest in the Whiteface Lodge, a hotel and condominium located in Lake Placid, New York. As of December 31, 2009 and December 31, 2008, the investment had a carrying value of $23,820 and $22,161, respectively. The Company recorded its pro rata share of net loss of $0 and $459 for the years ended December 31, 2009 and 2008, respectively.

7. Junior Subordinated Notes

In May 2005, August 2005 and January 2006, the Company completed issuances of $50,000 each in unsecured trust preferred securities through three Delaware Statutory Trusts, or DSTs, Gramercy Capital Trust I, or GCTI, Gramercy Capital Trust II, or GCTII, and Gramercy Capital Trust III, or GCT III, that were also wholly-owned subsidiaries of the Operating Partnership. The securities issued in May 2005 bore interest at a fixed rate of 7.57% for the first ten years ending June 2015 and the securities issued in August 2005 bore interest at a fixed rate of 7.75% for the first ten years ending October 2015. Thereafter, the rates were to float based on the three-month LIBOR plus 300 basis points. The securities issued in January 2006 bore interest at a fixed rate of 7.65% for the first ten years ending January 2016, with an effective rate of 7.43% when giving effect to the swap arrangement previously entered into in contemplation of this financing. Thereafter, the rate was to float based on the three-month LIBOR plus 270 basis points.

In January 2009, the Operating Partnership entered into an exchange agreement with the holders of the securities, pursuant to which the Operating Partnership and the holders agreed to exchange all of the previously issued trust preferred securities for newly issued unsecured junior subordinated notes, or the Junior Notes, in the aggregate principal amount of $150,000. The Junior Notes will mature on June 30, 2035, or the Maturity Date, and will bear (i) a fixed interest rate of 0.50% per annum for the period beginning on

137

Gramercy Capital Corp.
  
Notes To Consolidated Financial Statements
(Amounts in thousands, except share and per share data)
December 31, 2009

7. Junior Subordinated Notes  – (continued)

January 30, 2009 and ending on January 29, 2012 and (ii) a fixed interest rate of 7.50% per annum for the period commencing on January 30, 2012 through and including the Maturity Date. The Company, at its option, may redeem the Junior Notes in whole at any time, or in part from time to time, at a redemption price equal to 100% of the principal amount of the Junior Notes. The optional redemption of the Junior Notes in part must be made in at least $25,000 increments. The Junior Notes also contained additional covenants restricting, among other things, the Company’s ability to declare or pay any dividends during the calendar year 2009, or make any payment or redeem any debt securities ranked pari passu or junior to the Junior Notes. In connection with the exchange agreement, the final payment on the trust preferred securities for the period October 30, 2008 through January 29, 2009 was revised to be at a reduced interest rate of 0.50% per annum. On October 15, 2009, a subsidiary of the Operating Partnership exchanged $97,500 of the Junior Notes for $97,533 face amount of bonds issued by the Company’s CDOs that the Company had repurchased in the open market. Certain indenture covenants which restrict the Company from declaring or paying dividends and certain other corporate activities during the 2009 calendar year have been eliminated for the remaining $52,500 of the Junior Notes. For the year ended December 31, 2009, the Company expensed fees and costs incurred in connection with the exchange agreement of $1,626 which is included in management, general and administrative expense in the consolidated statement of operations.

8. Collateralized Debt Obligations

During 2005, the Company issued approximately $1,000,000 of CDO bonds through two indirect subsidiaries, Gramercy Real Estate CDO 2005-1 Ltd., or the 2005 Issuer, and Gramercy Real Estate CDO 2005-1 LLC, or the 2005 Co-Issuer. At issuance, the CDO consisted of $810,500 of investment grade notes, $84,500 of non-investment grade notes, which were co-issued by the 2005 Issuer and the 2005 Co-Issuer, and $105,000 of preferred shares, which were issued by the 2005 Issuer. The investment grade notes were issued with floating rate coupons with a combined weighted average rate of three-month LIBOR plus 0.49%. The Company incurred approximately $11,957 of costs related to Gramercy Real Estate CDO 2005-1, which are amortized on a level-yield basis over the average life of the CDO.

During 2006, the Company issued approximately $1,000,000 of CDO bonds through two indirect subsidiaries, Gramercy Real Estate CDO 2006-1 Ltd., or the 2006 Issuer, and Gramercy Real Estate CDO 2006-1 LLC, or the 2006 Co-Issuer. At issuance, the CDO consisted of $903,750 of investment grade notes, $38,750 of non-investment grade notes, which were co-issued by the 2006 Issuer and the 2006 Co-Issuer, and $57,500 of preferred shares, which were issued by the 2006 Issuer. The investment grade notes were issued with floating rate coupons with a combined weighted average rate of three-month LIBOR plus 0.37%. The Company incurred approximately $11,364 of costs related to Gramercy Real Estate CDO 2006-1, which are amortized on a level-yield basis over the average life of the CDO.

In August 2007, the Company issued $1,100,000 of CDO bonds through two indirect subsidiaries, Gramercy Real Estate CDO 2007-1 Ltd., or the 2007 issuer and Gramercy Real Estate CDO 2007-1 LLC, or the 2007 Co-Issuer. At issuance, the CDO consisted of $1,045,550 of investment grade notes, $22,000 of non-investment grade notes, which were co-issued by the 2007 Issuer and the 2007 Co-Issuer, and $32,450 of preferred shares, which were issued by the 2007 Issuer. The investment grade notes were issued with floating rate coupons with a combined weighted average rate of three-month LIBOR plus 0.46%. The Company incurred approximately $16,816 of costs related to Gramercy Real Estate CDO 2007-1, which are amortized on a level-yield basis over the average life of the CDO.

The Company retained all non-investment grade securities, the preferred shares and the common shares in the Issuer of each CDO. The Issuers and Co-Issuers in each CDO holds assets, consisting primarily of whole loans, subordinate interests in whole loans, mezzanine loans, preferred equity investments and CMBS, which serve as collateral for the CDO. Each CDO may be replenished, pursuant to certain rating agency

138

Gramercy Capital Corp.
  
Notes To Consolidated Financial Statements
(Amounts in thousands, except share and per share data)
December 31, 2009

8. Collateralized Debt Obligations  – (continued)

guidelines relating to credit quality and diversification, with substitute collateral using cash generated by debt investments that are repaid during the reinvestment periods (generally, five years from issuance) of the CDO. Thereafter, the CDO securities will be retired in sequential order from senior-most to junior-most as debt investments are repaid. The financial statements of the Issuer of each CDO are consolidated in the Company’s financial statements. The securities originally rated as investment grade at time of issuance are treated as a secured financing, and are non-recourse to the Company. Proceeds from the sale of the securities originally rated as investment grade in each CDO were used to repay substantially all outstanding debt under the Company’s repurchase agreements and to fund additional investments. Loans and other investments are owned by the Issuers and the Co-Issuers, serve as collateral for the Company’s CDO securities, and the income generated from these investments is used to fund interest obligations of the Company’s CDO securities and the remaining income, if any, is retained by the Company. The CDO indentures contain minimum interest coverage and asset over collateralization covenants that must be satisfied in order for the Company to receive cash flow on the interests retained in its CDOs and to receive the subordinate collateral management fee earned. If some or all of the Company’s CDOs fail these covenants, all cash flows from the applicable CDO other than senior collateral management fees would be diverted to repay principal and interest on the most senior outstanding CDO securities, and the Company may not receive some or all residual payments or the subordinate collateral management fee until the applicable CDO regained compliance with such tests. As of December 31, 2009, the Company’s 2005 and 2006 CDOs were in compliance with their interest coverage and asset over collateralization covenants, however their compliance margin, particularly with respect to the 2005 CDO, was narrow and relatively small declines in their collateral performance and credit metrics could cause either or both CDOs to fall out of compliance. The Company’s 2007 CDO failed its overcollaterization test at the November 2009 and February 2010 distribution dates. All three CDOs were in covenant compliance as of December 31, 2008.

During the year ended December 31, 2008, the Company repurchased, at a discount, $127,300 of investment grade notes previously issued by the Company’s three CDOs. The Company recorded a net gain on the early extinguishment of debt of $77,234 for the year ended December 31, 2008.

9. Debt Obligations

Term Loan, Credit Facility and Repurchase Facility

The facility with Wachovia Capital Markets, LLC or one or more of its affiliates, or Wachovia, was initially established as a $250,000 facility in 2004, and was subsequently increased to $500,000 effective April 2005. In June 2007, the facility was modified further by reducing the credit spreads. In July 2008, the original facility was terminated and a new facility was executed with Wachovia to provide for a total credit availability of $215,680, comprised of a term loan equal to $115,680 and a revolving credit facility equal to $100,000 with a credit spread of 242.5 basis points. The term of the credit facility was two years which could have extended the term for an additional twelve-month period if certain conditions were met. The Company had no accrued interest and borrowings of $72,254 on the repurchase facility at a weighted average spread to LIBOR of 2.68% as of December 31, 2008. Borrowings under the Wachovia facility at December 31, 2008 were secured by mezzanine loans with a carrying value of $202,823. In April 2009, the Company entered into an amendment with Wachovia, pursuant to which the maturity date of the credit facility was extended to March 31, 2011. The amendment also eliminated all financial covenants, eliminated Wachovia’s right to impose future margin calls, reduced the recourse guarantee to be no more than $10,000, and eliminated cross default provisions with respect to the Company’s other indebtedness. The Company made a $13,000 deposit and provided other credit support to backstop letters of credit Wachovia issued in connection with the Company’s mortgage debt obligations of certain of the Company’s subsidiaries. The Company also agreed to attempt to divest of certain loan investments in the future in order to further deleverage the credit facility and to forego additional borrowing under the facility. In December 2009, the Company entered into a termination

139

Gramercy Capital Corp.
  
Notes To Consolidated Financial Statements
(Amounts in thousands, except share and per share data)
December 31, 2009

9. Debt Obligations  – (continued)

agreement with Wachovia, to settle and satisfy in full the pre-existing loan obligation of $44,542 under the secured term loan and credit facility. The Company made a one-time cash payment of $22,500 and executed and delivered to Wachovia a subordinate participation interest in the Company’s 50% interest in one of the four mezzanine loans formerly pledged under the credit agreement. Upon termination, all of the security interests and liens in favor of Wachovia under the credit agreement were released. The Company recorded a gain on extinguishment of debt of $12,126 pursuant the termination agreement.

Subsidiaries of the Company also had entered into a repurchase facility with Goldman Sachs Mortgage Company, or Goldman. In October 2006, this facility was increased from $200,000 to $400,000 and its maturity date extended until September 2009.In August 2008, the facility was amended to reduce the borrowing capacity to $200,000 and to provide for an extension of the maturity to December 2010 for a fee, provided that no event of default has occurred. The facility bore interest at spreads of 2.00% to 2.30% over one-month LIBOR. In April 2009, the Company entered into an amendment to the amended and restated master repurchase agreement and amended guaranty with Goldman, pursuant to which all financial covenants in the amended and restated repurchase agreement and the amended guaranty were eliminated and certain other provisions of the amended and restated repurchase agreement and the amended guaranty were amended or deleted, including, among other things, the elimination of the existing recourse liability and a relaxation of certain affirmative and negative covenants. Borrowings under the Goldman repurchase facility at December 31, 2008 were secured by mezzanine loans with a carrying value of $64,960. The Company had no accrued interest and borrowings of $23,643 at a weighted average spread to LIBOR of 2.50% under this facility at December 31, 2008. On October 27, 2009, the Company repaid the borrowings in full and terminated the Goldman repurchase facility.

In January 2009, the Company closed a master repurchase facility with JP Morgan Chase Bank, N.A. or JP Morgan, in the amount of $9,500. The term of the facility was through July 23, 2010, the interest rate was 30-day LIBOR plus 175 basis points, the facility was recourse to the Company for 30% of the facility amount, and the facility was subject to normal mark-to-market provisions after March 2009. Proceeds under the facility, which was fully drawn at closing, were used to retire certain borrowings under the Wachovia credit facility. This facility was secured by a perfected security interest in a single debt investment. In March 2009, the Company terminated this facility by making a cash payment of approximately $1,880 and transferring the full ownership and control of, and responsibility for, the related loan collateral to JP Morgan. The Company recorded an impairment charge of $8,843 in connection with the collateral transfer.

Unsecured Credit Facility

In May 2006, the Company closed on a $100,000 senior unsecured revolving credit facility with KeyBank National Association, or KeyBank, with an initial term of three years and a one-year extension option. In June 2007, the facility was increased to $175,000. The facility was supported by a negative pledge of an identified asset base. In March 2009, the Company entered into an amendment and compromise agreement with KeyBank to settle and satisfy the loan obligations at a discount for a current cash payment of $45,000, and a future cash payment in a maximum amount of up to $15,000 from 50% of all payments from distributions after May 2009 from certain junior tranches and preferred classes of securities in the Company’s CDOs. The remaining balance of $85 in potential cash distribution is recorded in other liabilities on the Company’s balance sheet as of December 31, 2009 and was fully paid in January 2010. The Company recorded a net gain on extinguishment of debt of $107,229 as a result of to this agreement. The Company had accrued interest of $1,405 and borrowings of $172,301 as of December 31, 2008.

In connection with the acquisition of American Financial on April 1, 2008, the Company’s indirect wholly-owned subsidiaries, First States Investors DB I L.P., (formerly known as First States Investors DB I LLC) and First States Investors DB I B, L.P., and certain of their direct or indirect subsidiaries,

140

Gramercy Capital Corp.
  
Notes To Consolidated Financial Statements
(Amounts in thousands, except share and per share data)
December 31, 2009

9. Debt Obligations  – (continued)

collectively, (the “DB Loan Borrowers”), entered into an amendment and restatement of an assumed American Financial credit facility (the “DB Loan Agreement”) with Deutsche Bank AG, Cayman Islands Branch, or Deutsche Bank, as agent for certain lenders. As part of the amendment and restatement of the DB Loan Agreement, the available amount under the DB Loan Agreement was reduced from $400,000 to $100,000. In addition, amounts were paid to reduce the outstanding borrowings under the facility to $95,000. Originally, the DB Loan Agreement provided the DB Loan Borrowers with a one year facility that would have matured on March 31, 2009, and permitted subject to certain conditions, a six-month extension at the DB Loan Borrowers’ option. Advances made under the DB Loan bear interest at 3.00% plus the greater of (i) 3.50% or (ii) 30 day LIBOR. The DB Loan allows for prepayment in whole or in part on any payment date; provided, however, that any such prepayment shall be accompanied by all accrued interest on the portion of the DB Loan being prepaid. In September 2008, two of the Company’s CDOs purchased the DB Loan from the lender and simultaneously amended the maturity date to be March 2011, and subject to certain conditions, granted the DB Loan Borrowers two options to extend the DB Loan for one year each (i.e. to September 11, 2013 if both options are exercised). In connection with the acquisition of the DB Loan, and an unrelated sale of a property originally subject to the DB Loan, the outstanding principal balance of the DB Loan was reduced to $69,868. The loan is eliminated in the preparation of the Company’s consolidated financial statements. The Company recorded costs related to the purchase of approximately $800, which was expensed.

The obligations under the DB Loan Agreement now owned by two of the Company’s CDOs, are secured by equity pledges of the shares in certain DB Loan Borrowers and mortgages over the various properties owned by certain DB Loan Borrowers. The DB Loan is guaranteed by the Company. The DB Loan Agreement contains customary events of default, the occurrence of which could result in the acceleration of all amounts payable there under. The DB Loan requires the Company to establish and fund certain reserve accounts to be used for the payment of taxes and insurance, rollover and replacement expenses, payment of tenant improvements and leasing commissions and the funding of debt service shortfalls.

Mortgage and Mezzanine Loans

Certain real estate assets are subject to mortgage and mezzanine liens. As of December 31, 2009, 968 (including 54 properties held by an unconsolidated joint venture) of the Company’s real estate investments were encumbered with mortgage and mezzanine loans with a cumulative outstanding balance of $2,297,190. The Company’s mortgage notes payable typically require that specified loan-to-value and debt service coverage ratios be maintained with respect to the financed properties before the Company can exercise certain rights under the loan agreements relating to such properties. The Company was in compliance with these ratios as of December 31, 2009. If the specified criteria are not satisfied, in addition to other conditions that the Company may have to observe, the Company’s ability to release properties from the financing may be restricted and the lender may be able to “trap” portfolio cash flow until the required ratios are met on an ongoing basis.

Certain of the Company’s mortgage notes payable related to assets held for sale contain provisions that require the Company to compensate the lender for the early repayment of the loan. These charges will be separately classified in the statement of operations as yield maintenance fees within discontinued operations during the period in which the charges are incurred.

Goldman Mortgage Loan

On April 1, 2008, certain subsidiaries of the Company, collectively, the Goldman Loan Borrowers, entered into a mortgage loan agreement, or the Goldman Mortgage Loan, with Goldman Sachs Commercial Mortgage Capital, L.P., or GSCMC, Citicorp North America, Inc., or Citicorp and SL Green in connection with a mortgage loan in the amount of $250,000, which is secured by certain properties owned or ground leased by the Goldman Loan Borrowers. The Goldman Mortgage Loan matures on March 11, 2010, with a

141

Gramercy Capital Corp.
  
Notes To Consolidated Financial Statements
(Amounts in thousands, except share and per share data)
December 31, 2009

9. Debt Obligations  – (continued)

single one-year extension option. The terms of the Goldman Mortgage Loan were negotiated between the Goldman Borrowers and GSCMC and Citicorp. The Goldman Mortgage Loan bore interest at 4.35% over one-month LIBOR. The Goldman Mortgage Loan provides for customary events of default, the occurrence of which could result in an acceleration of all amounts payable under the Goldman Mortgage Loan. The Goldman Mortgage Loan allows for prepayment under the terms of the agreement, subject to a 1.00% prepayment fee, during the first six months payable to the lender, as long as simultaneously therewith a proportionate prepayment of the Goldman Mezzanine Loan (discussed below) shall also be made on such date. In August 2008, an amendment to the loan agreement described below was entered into for the Goldman Mortgage Loan in conjunction with the bifurcation of the Goldman Mezzanine loan into two separate mezzanine loans. Under this loan agreement amendment, the Goldman Mortgage Loan bears interest at 1.99% over LIBOR. The Company has accrued interest of $253 and $367 and borrowings of $241,324 and $242,568 as of December 31, 2009 and 2008, respectively. In March 2010, the Company extended the maturity date of the Goldman Mortgage Loan to March 2011.

Secured Term Loan

On April 1, 2008, First States Investors 3300 B, L.P., an indirect wholly-owned subsidiary of the Company (“PB Loan Borrower”), entered into a loan agreement, or the PB Loan Agreement, with PB Capital Corporation, as agent for itself and other lenders, in connection with a secured term loan in the amount of $240,000, or the PB Loan in part to refinance a portion of a portfolio of American Financial’s properties known as the WBBD Portfolio. The PB Loan matures on April 1, 2013 and bears interest at a 1.65% over one-month LIBOR. The PB Loan is secured by mortgages on the 48 properties owned by the PB Loan Borrower and all other assets of the PB Loan Borrower. The PB Loan Agreement provides for customary events of default, the occurrence of which could result in an acceleration of all amounts payable under the PB Loan Agreement. The PB Loan Borrower may prepay the PB Loan, in whole or in part (in amounts equal to at least $1,000), on any date. The Company had accrued interest of $418 and $657 and accrued borrowings of $234,851 and $240,000 as of December 31, 2009 and 2008 respectively.

The PB Loan requires the Company to enter into an interest rate protection agreement within five days of the tenth consecutive LIBOR banking day on which the strike rate exceeds 6.00% per annum. The interest rate protection agreement must protect the PB Loan Borrower against upward fluctuations of interest rates in excess of 6.25% per annum.

The PB Loan Agreement contains certain covenants relating to liquidity and tangible net worth. As of December 31, 2009 and 2008, the Company is in compliance with these covenants.

Goldman Senior and Junior Mezzanine Loans

On April 1, 2008, certain subsidiaries of the Company, collectively, the Mezzanine Borrowers, entered into a mezzanine loan agreement with GSCMC, Citicorp and SL Green in connection with a mezzanine loan in the amount of $600,000, or the Goldman Mezzanine Loan, which is secured by pledges of certain equity interests owned by the Mezzanine Borrowers and any amounts receivable by the Mezzanine Borrowers whether by way of distributions or other sources. The Goldman Mezzanine Loan matures on March 9, 2010, with a single one-year extension option. The terms of the Goldman Mezzanine Loan were negotiated between the Mezzanine Borrowers and GSCMC and Citicorp. The Goldman Mezzanine Loan bore interest at 4.35% over one-month LIBOR. The Goldman Mezzanine Loan provides for customary events of default, the occurrence of which could result in an acceleration of all amounts payable under the Goldman Mezzanine Loan. The Goldman Mezzanine Loan allows for prepayment under the terms of the agreement, subject to a 1.00% prepayment fee during the first six months, payable to the lender, as long as simultaneously therewith a proportionate prepayment of the Goldman Mortgage Loan shall also be made on such date. In addition, under certain circumstances the Goldman Mezzanine Loan is cross- defaulted with events of default under the

142

Gramercy Capital Corp.
  
Notes To Consolidated Financial Statements
(Amounts in thousands, except share and per share data)
December 31, 2009

9. Debt Obligations  – (continued)

Goldman Mortgage Loan and with other mortgage loans pursuant to which, an indirect wholly-owned subsidiary of the Company, is the mortgagor. In August 2008, the $600,000 mezzanine loan was bifurcated into two separate mezzanine loans (the Junior Mezzanine loan and the Senior Mezzanine Loan) by the lenders. Additional loan agreement amendments were entered into for the Goldman Mezzanine Loan and Goldman Mortgage Loan. Under these loan agreement amendments, the Junior Mezzanine Loan bears interest at 6.00% over LIBOR, the Senior Mezzanine Loan bears interest at 5.20% over LIBOR and the Goldman Mortgage Loan bears interest at 1.99% over LIBOR. The weighted average of these interest rate spreads is equal to the combined weighted average of the interest rates spreads on the initial loans. The Goldman Mezzanine loans encumber all properties held by Gramercy Realty. In March 2010, the Company extended the maturity date of the Goldman Mezzanine Loan to March 2011.

The Company has accrued interest of $1,455 and $1,821 and borrowings of $553,522 and $580,462 as of December 31, 2009 and 2008, respectively.

The following is a summary of first mortgage loans as of December 31, 2009:

	Encumbered Properties		Balance			Interest Rate			Maturity Date
Fixed-rate mortgages		474	$	1,251,558	(1)		5.06% to 8.29	%		August 2010 to September 2023
Variable-rate mortgages		239		476,175			1.89% to 6.24	%		March 2010 to April 2013
Total mortgage notes payable		713		1,727,733
Above/below market interest				15,935
Balance, December 31, 2009		713	$	1,743,668

(1) Includes $87,972 of debt that is collateralized by $97,286 of pledged treasury securities, net of discounts and premiums and $4,394 of debt that relates to the proportionate share of the 11% minority interest holder in 801 Market Street as of December 31, 2009.

Combined aggregate principal maturities of the Company’s consolidated CDOs, junior subordinated notes and mortgage loans (including the Goldman Mortgage, Senior Mezzanine Loan and Junior Mezzanine loan) as of December 31, 2009 are as follows:

	CDOs		Junior Subordinated Notes		Mortgage and Mezzanine Loans			Interest Payments(2)		Total
2010	$	—	$	—	$	832,438	(1)	$	165,298	$	832,438
2011		—		—		25,227			173,039		25,227
2012		—		—		80,413			172,313		80,413
2013		—		—		617,827			144,332		617,827
2014		—		—		12,566			112,420		12,566
Thereafter		2,705,534		52,500		712,784			363,993		3,470,818
Above/Below Market Interest		—		—		15,935			—		15,935
Total	$	2,705,534	$	52,500	$	2,297,190		$	1,131,395	$	5,055,224

(1) Includes $241,324 and $553,522 of maturities due on the Goldman Mortgage and Mezzanine loans, which have subsequently been extended to March 9, 2011.

(2) Does not includes $36,926 of interest payments that will be paid during the extension period on the Goldman Mortgage and Mezzanine loans mentioned above.

143

Gramercy Capital Corp.
  
Notes To Consolidated Financial Statements
(Amounts in thousands, except share and per share data)
December 31, 2009

10. Leasing Agreements

The Company’s properties are leased and subleased to tenants under operating leases with expiration dates extending through the year 2027. These leases generally contain rent increases and renewal options.

Future minimum rental payments under non-cancelable leases, excluding reimbursements for operating expenses, as of December 31, 2009 are as follows:

	Operating Leases
2010	$	219,985
2011		193,515
2012		182,095
2013		171,478
2014		164,788
Thereafter		1,113,678
Total minimum lease payments	$	2,045,539

11. Operating Partnership Agreement/Manager

At December 31, 2009 and 2008, the Company owned all of the Class A limited partner interests in the Operating Partnership. For the period January 1, 2009 through April 24, 2009 and at December 31, 2008, all of the Class B limited partner interests were owned by SL Green OP. For the period January 1, 2009 through April 24, 2009 and at December 31, 2008, all of the interests in the Manager were held by SL Green OP. On April 24, 2009, the Company completed the internalization of management through the direct acquisition of the Manager. The consideration paid to SL Green in the transaction was de minimis. Accordingly, beginning in May 2009, management and incentive fees payable by the Company to the Manager ceased and the Class B limited partner interests have been cancelled.

12. Related Party Transactions

On April 24, 2009, in connection with the internalization, the Company and the Operating Partnership entered into a securities transfer agreement with SL Green OP, Manager Corp. and SL Green, pursuant to which (i) SL Green OP and Manager Corp. agreed to transfer to the Operating Partnership, membership interests in the Manager and (ii) SL Green OP agreed to transfer to the Operating Partnership its Class B limited partner interests in the Operating Partnership, in exchange for certain de minimis cash consideration. The securities transfer agreement contains standard representations, warranties, covenants and indemnities. No distributions were due on the Class B limited partner interests for the year ended December 31, 2009 or otherwise in connection with the internalization.

Concurrently with the execution of the securities transfer agreement, the Company also entered into a special rights agreement with SL Green OP and SL Green, pursuant to which SL Green and SL Green OP agreed to provide the Company certain management information systems services from April 24, 2009 through the date that was 90 days thereafter and the Company agreed to pay SL Green OP a monthly cash fee of $25 in connection therewith. The Company also agreed to use its best efforts to operate as a REIT during each taxable year and to cause the Company’s tax counsel to provide legal opinions to SL Green relating to the Company’s REIT status. Other than with respect to the transitional services provisions of the special rights agreement as set forth therein, the special rights agreement will terminate when SL Green OP ceases to own at least 7.5% of the shares of the Company’s common stock.

144

Gramercy Capital Corp.
  
Notes To Consolidated Financial Statements
(Amounts in thousands, except share and per share data)
December 31, 2009

12. Related Party Transactions  – (continued)

In connection with its initial public offering, the Company entered into a management agreement with the Manager, which was subsequently amended and restated in April 2006. The management agreement was further amended in September 2007, and amended and restated in October 2008 and was subsequently terminated in connection with the internalization. The management agreement provided for a term through December 2009 with automatic one-year extension options and was subject to certain termination rights. The Company paid the Manager an annual management fee equal to 1.75% of the Company’s gross stockholders equity (as defined in the management agreement) inclusive of the Company’s trust preferred securities. In October 2008, the Company entered into the second amended and restated management agreement with the Manager which generally contained the same terms and conditions as the amended and restated management agreement, as amended, except for the following material changes: (1) reduced the annual base management fee to 1.50% of the Company’s gross stockholders equity; (2) reduces the termination fee to an amount equal to the management fee earned by the Manager during the 12 months preceding the termination date; and (3) commencing July 2008, all fees in connection with collateral management agreements were to be remitted by the Manager to the Company. The Company incurred expense to the Manager under this agreement of an aggregate of $7,534, $21,058 and $13,135 for the years ended December 31, 2009, 2008 and 2007 respectively.

Prior to the internalization, to provide an incentive to enhance the value of the Company’s common stock, the holders of the Class B limited partner interests of the Operating Partnership were entitled to an incentive return equal to 25% of the amount by which FFO plus certain accounting gains and losses (as defined in the partnership agreement of the Operating Partnership) exceed the product of the weighted average stockholders equity (as defined in the partnership agreement of the Operating Partnership) multiplied by 9.5% (divided by four to adjust for quarterly calculations). The Company recorded any distributions on the Class B limited partner interests as an incentive distribution expense in the period when earned and when payments of such became probable and reasonably estimable in accordance with the partnership agreement. In October 2008, the Company entered into a letter agreement with the Class B limited partners to waive the incentive distribution that would have otherwise been earned for the period July 1, 2008 through December 31, 2008 and provided that starting January 1, 2009, the incentive distribution could have been paid, at the Company’s option, in cash or shares of common stock. In December 2008, the Company entered into a letter agreement with the Manager and SL Green, pursuant to which the Manager agreed to pay $2,750 in cash and SL Green transferred to the Company, 1.9 million shares of the Company’s common stock, in full satisfaction of all potential obligations that the holders of the Class B limited partner interests of the Operating Partnership may have had to the Operating Partnership, and the Operating Partnership may have to the holders, each in accordance with the amended operating partnership agreement of the Operating Partnership, in respect of the recalculation of the distribution amount to the holders at the end of the 2008 calendar year. The Company incurred approximately $2,350 and $32,235 with respect to such Class B limited partner interests for the years ended December 31, 2008 and 2007. No incentive distribution was earned by the Class B limited partner interests for the year ended December 31, 2009.

Prior to the internalization, the Company was obligated to reimburse the Manager for its costs incurred under an asset servicing agreement between the Manager and an affiliate of SL Green OP and a separate outsource agreement between the Manager and SL Green OP. The asset servicing agreement, which was amended and restated in April 2006, provided for an annual fee payable to SL Green OP by the Company of 0.05% of the book value of all credit tenant lease assets and non-investment grade bonds and 0.15% of the book value of all other assets. The outsource agreement provided for an annual fee payable by the Company, which became $2,814 per year subsequent to the closing of the American Financial merger to reflect higher costs resulting from the increased size and number of assets of the combined company, increasing 3% annually over the prior year on the anniversary date of the outsource agreement in August of each year. For the years ended December 31, 2008 and 2007 respectively, the Company realized expense of $1,721 and

145

Gramercy Capital Corp.
  
Notes To Consolidated Financial Statements
(Amounts in thousands, except share and per share data)
December 31, 2009

12. Related Party Transactions  – (continued)

$1,343, to the Manager under the outsource agreement. For the years ended December 31, 2009, 2008 and 2007, the Company realized expense of $0, $4,022 and $3,564 to the Manager, respectively, under the asset servicing agreement. In October 2008, the outsource agreement was terminated and the asset servicing agreement was replaced with that certain interim asset servicing agreement between the Manager and an affiliate of SL Green, pursuant to which the Company was obligated to reimburse the Manager for its costs incurred there under from October 2008 until April 24, 2009 when such agreement was terminated in connection with the internalization. Pursuant to that agreement, the SL Green affiliate acted as the rated special servicer to the Company’s CDOs, for a fee equal to two basis points per year on the carrying value of the specially serviced loans assigned to it. Concurrent with the internalization, the interim asset servicing agreement was terminated and the Manager entered into a special servicing agreement with an affiliate of SL Green, pursuant to which the SL Green affiliate agreed to act as the rated special servicer to the Company’s CDOs for a period beginning on April 24, 2009 through the date that is the earlier of (i) 60 days thereafter and (ii) a date on which a new special servicing agreement is entered into between the Manager and a rated third-party special servicer. The SL Green affiliate was entitled to a servicing fee equal to (i) 25 basis points per year on the outstanding principal balance of assets with respect to certain specially serviced assets and (ii) two basis points per year on the outstanding principal balance of assets with respect to certain other assets. The April 24, 2009 agreement expired effective June 23, 2009 Effective May 2009, the Company entered into new special servicing arrangements with Situs Serve, L.P., which became the rated special servicer for the Company’s CDOs. An affiliate of SL Green continues to provide special servicing services with respect to a limited number of loans owned by the Company that are secured by properties in New York City, or in which the Company and SL Green are co-investors. For the year ended December 31, 2009, the Company incurred expense of $1,014, pursuant to the special servicing arrangement.

On October 27, 2008, the Company entered into a services agreement with SL Green and SL Green OP which was subsequently terminated in connection with the internalization. Pursuant to the services agreement, SL Green agreed to provide consulting and other services to the Company. SL Green would make Marc Holliday, Andrew Mathias and David Schonbraun available in connection with the provision of the services until the earliest of (i) September 30, 2009, (ii) the termination of the management agreement or (iii) with respect to a particular executive, the termination of any such executive’s employment with SL Green. In consideration for the consulting services, the Company paid a fee to SL Green of $200 per month, payable, at its option, in cash or, if permissible under applicable law or the requirements of the exchange on which the shares of the Company’s common stock trade, shares of its common stock. SL Green also provided the Company with certain other services described in the services agreement for a fee of $100 per month in cash and for a period terminating at the earlier of (i) three months after the date of the services agreement, subject to a one-time 30-day extension, or (ii) the termination of the management agreement.

In connection with the closing of the Company’s first CDO in July 2005, the 2005 Issuer, entered into a collateral management agreement with the Manager. Pursuant to the collateral management agreement, the Manager agreed to provide certain advisory and administrative services in relation to the collateral debt securities and other eligible investments securing the CDO notes. The collateral management agreement provides for a senior collateral management fee, payable quarterly in accordance with the priority of payments as set forth in the indenture, equal to 0.15% per annum of the net outstanding portfolio balance, and a subordinate collateral management fee, payable quarterly in accordance with the priority of payments as set forth in the indenture, equal to 0.25% per annum of the net outstanding portfolio balance. Net outstanding portfolio balance is the sum of the (i) aggregate principal balance of the collateral debt securities, excluding defaulted securities, (ii) aggregate principal balance of all principal proceeds held as cash and eligible investments in certain accounts, and (iii) with respect to the defaulted securities, the calculation amount of such defaulted securities. As compensation for the performance of its obligations as collateral manager under the first CDO, the Company’s board of directors had allocated to the Manager the subordinate collateral

146

Gramercy Capital Corp.
  
Notes To Consolidated Financial Statements
(Amounts in thousands, except share and per share data)
December 31, 2009

12. Related Party Transactions  – (continued)

management fee paid on the CDO notes not held by the Company. In October 2008, pursuant to the second amended and restated management agreement, the Manager had, commencing July 1, 2008, agreed to remit this amount to the Company. At September 30, 2009 and December 31, 2008, the Company owned all of the non-investment grade bonds, preferred equity and equity in the 2005 CDO. The senior collateral management fee and balance of the subordinate collateral management fee is allocated to the Company. For the years ended December 31, 2008 and 2007, the Company realized expense of $1,024 and $2,054, to the Manager under such collateral management agreement.

Prior to the internalization, fees payable in connection with CDOs or other securitization vehicles, except for the 2005 CDO, were governed by the management agreement. Pursuant to the management agreement, if a collateral manager is retained as part of the formation of a CDO or other securitization vehicle, the Manager or an affiliate will be the collateral manager and will receive the following fees: (i) 0.25% per annum of the principal amount outstanding of bonds issued by a managed transitional CDO that are owned by third-party investors unaffiliated with the Company or the Manager, which CDO is structured to own loans secured by transitional properties, (ii) 0.15% per annum of the book value of the principal amount outstanding of bonds issued by a managed non-transitional CDO that are owned by third-party investors unaffiliated with the Company or the Manager, which CDOs structured to own loans secured by non-transitional properties, (iii) 0.10% per annum of the principal amount outstanding of bonds issued by a static CDO that are owned by third-party investors unaffiliated with the Company or the Manager, which CDO is structured to own non-investment grade bonds, and (iv) 0.05% per annum of the principal amount outstanding of bonds issued by a static CDO that are owned by third-party investors unaffiliated the Company or the Manager, which CDO is structured to own investment grade bonds. For the purposes of the management agreement, a “managed transitional” CDO means a CDO that is actively managed, has a reinvestment period and is structured to own debt collateral secured primarily by non-stabilized real estate assets that are expected to experience substantial net operating income growth, and a “managed non-transitional” CDO means a CDO that is actively managed, has a reinvestment period and is structured to own debt collateral secured primarily by stabilized real estate assets that are not expected to experience substantial net operating income growth. Both “managed transitional” and “managed non-transitional” CDOs may at any given time during the reinvestment period of the respective vehicles invest in and own non-debt collateral (in limited quantity) as defined by the respective indentures. If any fees are paid to the collateral manager in excess of the fee structure provided for above, such fees are paid to the Company. In October 2008, pursuant to the second amended and restated management agreement, the Manager, commencing July 1, 2008, agreed to remit this amount to the Company. For the years ended December 31, 2008 and 2007, the Company realized expense of approximately $1,574 and $2,575 to the Manager under this agreement.

In connection with the internalization, the management agreement was terminated and the fees payable in connection with the Company’s 2006 and 2007 CDOs will be governed by their respective collateral management agreements. The collateral management agreement for the Company’s 2006 CDO provides for a senior collateral management fee, payable quarterly in accordance with the priority of payments as set forth in the indenture, equal to 0.15% per annum of the net outstanding portfolio balance, and a subordinate collateral management fee, payable quarterly in accordance with the priority of payments as set forth in the indenture, equal to 0.25% per annum of the net outstanding portfolio balance. Net outstanding portfolio balance is the sum of the (i) aggregate principal balance of the collateral debt securities, excluding defaulted securities, (ii) aggregate principal balance of all principal proceeds held as cash and eligible investments in certain accounts, and (iii) with respect to the defaulted securities, the calculation amount of such defaulted securities. The collateral management agreement for the Company’s 2007 CDO provides for a senior collateral management fee, payable quarterly in accordance with the priority of payments as set forth in the indenture, equal to (i) 0.05% per annum of the aggregate principal balance of the CMBS securities, (ii) 0.10% per annum of the aggregate principal balance of loans, preferred equity securities, cash and certain defaulted

147

Gramercy Capital Corp.
  
Notes To Consolidated Financial Statements
(Amounts in thousands, except share and per share data)
December 31, 2009

12. Related Party Transactions  – (continued)

securities, and (iii) a subordinate collateral management fee, payable quarterly in accordance with the priority of payments as set forth in the indenture, equal to 0.15% per annum of the aggregate principal balance of the loans, preferred equity securities, cash and certain defaulted securities.

Commencing in May 2005, the Company is party to a lease agreement with SLG Graybar Sublease LLC, an affiliate of SL Green, for its corporate offices at 420 Lexington Avenue, New York, New York. The lease is for approximately 7,300 square feet and carries a term of 10 years with rents of approximately $249 per annum for year one rising to $315 per annum in year ten. In May and June 2009, the Company amended its lease with SLG Graybar Sublease LLC to increase the leased premises by approximately 2,260 square feet. The additional premises is leased on a co-terminus basis with the remainder of its leased premises and carries rents of approximately $103 per annum during the initial year and $123 per annum during the final lease year. For the years ended December 31, 2009, 2008 and 2007, the Company paid $710, $423 and $235 under this lease, respectively.

In July 2005, the Company closed on the purchase from an SL Green affiliate of a $40,000 mezzanine loan which bears interest at 11.20%. As part of that sale, the seller retained an interest-only participation. The mezzanine loan is secured by the equity interests in an office property in New York, New York. As of December 31, 2009 and December 31, 2008, the loan has a book value of $39,285 and $39,520, respectively.

In March 2006, the Company closed on the purchase of a $25,000 mezzanine loan, which bears interest at one-month LIBOR plus 8.00%, to a joint venture in which SL Green was an equity holder. The mezzanine loan was repaid in full on May 9, 2006, when the Company originated a $90,287 whole loan, which bears interest at one-month LIBOR plus 2.75%, to the joint venture. The whole loan is secured by office and industrial properties in northern New Jersey and has a book value of $64,130 and $90,595 as of December 31, 2009 and December 31, 2008, respectively.

In June 2006, the Company closed on the acquisition of a 49.75% TIC interest in 55 Corporate Drive, located in Bridgewater, New Jersey with a 0.25% interest to be acquired in the future. The remaining 50% of the property was owned as a TIC interest by an affiliate of SL Green Operating Partnership, L.P. The property was comprised of three buildings totaling approximately 670,000 square feet which was 100% net leased to an entity whose obligations were guaranteed by Sanofi-Aventis Group through April 2023. The transaction was valued at $236,000 and was financed with a $190,000, 10-year, fixed-rate first mortgage loan. In January 2009, the Company and SL Green sold 100% of the respective interests in 55 Corporate.

In December 2006, the Company acquired from a financial institution a pari-passu interest of $125,000 in a $200,000 mezzanine loan, which bears interest at 6.384% and is secured by a multi-family portfolio in New York, New York. An affiliate of SL Green simultaneously acquired the remaining $75,000 pari-passu interest in the mezzanine loan. As of December 31, 2009 and December 31, 2008, the loan has a book value of $0 and $118,703, respectively.

In January 2007, the Company originated two mezzanine loans totaling $200,000. The $150,000 loan was secured by a pledge of cash flow distributions and partial equity interests in a portfolio of multi-family properties and bore interest at one-month LIBOR plus 6.00%. The $50,000 loan was initially secured by cash flow distributions and partial equity interests in an office property. On March 8, 2007, the $50,000 loan was increased by $31,000 when the existing mortgage loan on the property was defeased, upon which event the Company’s loan became secured by a first mortgage lien on the property and was reclassified as a whole loan. The whole loan currently bears interest at one-month LIBOR plus 6.00% for the initial funding and one-month LIBOR plus 1.00% for the subsequent funding. At closing, an affiliate of SL Green acquired from the Company and held a 15.15% pari-passu interest in the mezzanine loan and the whole loan. As of

148

Gramercy Capital Corp.
  
Notes To Consolidated Financial Statements
(Amounts in thousands, except share and per share data)
December 31, 2009

12. Related Party Transactions  – (continued)

December 31, 2009 and December 31, 2008, the Company’s interest in the whole loan had a carrying value of $63,894 and $66,707, respectively. The investment in the mezzanine loan was repaid in full in September 2007.

In April 2007, the Company purchased for $103,200 a 45% TIC interest to acquire the fee interest in a parcel of land located at 2 Herald Square, located along 34^th Street in New York, New York. The acquisition was financed with $86,063 10-year fixed rate mortgage loan. The property is subject to a long-term ground lease with an unaffiliated third party for a term of 70 years. The remaining TIC interest is owned by a wholly-owned subsidiary of SL Green. The TIC interests are pari-passu. As of December 31, 2009 and December 31, 2008, the investment had a carrying value of $31,557 and $26,118, respectively. The Company recorded its pro rata share of net income of $4,988, $5,228 and $3,105 for the years ended December 31, 2009, 2008 and 2007 respectively.

In July 2007, the Company purchased for $144,240 an investment in a 45% TIC interest to acquire a 79% fee interest and 21% leasehold interest in the fee position in a parcel of land located at 885 Third Avenue, on which is situated The Lipstick Building. The transaction was financed with a $120,443 10-year fixed rate mortgage loan. The property is subject to a 70-year leasehold ground lease with an unaffiliated third party. The remaining TIC interest is owned by a wholly-owned subsidiary of SL Green. The TIC interests are pari passu. As of December 31, 2009 and December 31, 2008, the investment had a carrying value of $45,695 and $37,070, respectively. The Company recorded its pro rata share of net income of $5,972, $6,292 and $2,480 for the years ended December 31, 2009, 2008 and 2007, respectively.

The Company’s agreements with SL Green in connection with the Company’s commercial property investments in 885 Third Avenue and 2 Herald Square contain a buy-sell provision that can be triggered by the Company in the event it and SL Green are unable to agree upon a major decision that would materially impair the value of the assets. Such major decisions involve the sale or refinancing of the assets, any extensions or modifications to the leases with the tenant therein or any material capital expenditures.

In September 2007, the Company acquired a 50% interest in a $25,000 senior mezzanine loan from SL Green. Immediately thereafter, the Company, along with SL Green, sold all of its interests in the loan to an unaffiliated third party. Additionally, the Company acquired from SL Green a 100% interest in a $25,000 junior mezzanine loan associated with the same properties as the preceding senior mezzanine loan.l Immediately thereafter, the Company participated 50% of its interest in the loan back to SL Green. As of December 31, 2009 and December 31, 2008, the loan has a book value of $0 and $11,925, respectively. In October 2007, the Company acquired a 50% pari-passu interest in $57,795 of two additional tranches in the senior mezzanine loan from an unaffiliated third party. At closing, an affiliate of SL Green simultaneously acquired the other 50% pari-passu interest in the two tranches. As of December 31, 2009 and December 31, 2008, the loan has a book value of $319 and $28,026, respectively.

In November 2007, the Company acquired from a syndicate comprised of financial institutions a $25,000 interest in a $100,000 junior mezzanine investment secured by a hotel portfolio and franchise headquarters. An affiliate of SL Green simultaneously acquired and owns another $25,000 interest in the investment. The investment was purchased at a discount and bears interest at an effective spread to one-month LIBOR of 9.50%. As of December 31, 2009 and December 31, 2008, the loan has a book value of $0 and $22,656, respectively.

In December 2007, the Company acquired a $52,000 interest in a senior mezzanine loan from a financial institution. Immediately thereafter, the Company participated 50% of its interest in the loan to an affiliate of SL Green. The investment, which is secured by an office building in New York, New York, was purchased at a discount and bears interest at an effective spread to one-month LIBOR of 5.00%. In July 2009, the Company sold its remaining interest in the loan to an affiliate of SL Green for $16,120 pursuant to purchase

149

Gramercy Capital Corp.
  
Notes To Consolidated Financial Statements
(Amounts in thousands, except share and per share data)
December 31, 2009

12. Related Party Transactions  – (continued)

rights established when the loan was acquired. The sale includes contingent participation in future net proceeds from SL Green of up to $1,040 in excess of the purchase price upon their ultimate disposition of the loan. As of December 31, 2009 and December 31, 2008, the loan had a book value of $0 and $24,599, respectively.

In December 2007, the Company acquired a 50% interest in a $200,000 senior mezzanine loan from a financial institution. Immediately thereafter, the Company participated 50% of the Company’s interest in the loan to an affiliate of SL Green. The investment was purchased at a discount and bears interest at an effective spread to one-month LIBOR of 6.50%. As of December 31, 2009 and December 31, 2008, the loan has a book value of $28,228 and $46,488, respectively.

In connection with the closing of the acquisition of American Financial, the Company as part of a larger financing received financing of $50,000 from SL Green, which is described more fully in Note 9. An affiliate SL Green was granted 644,787 shares of common stock for services rendered, subject to a one-year vesting period. These shares had a value of approximately $11,213 on the date of issuance.

In August 2008, the Company closed on the purchase from an SL Green affiliate of a $9,375 pari-passu participation interest in $18,750 first mortgage. The loan is secured by a retail shopping center located in Staten Island, New York. The investment bears interest at a fixed rate of 6.50%. As of December 31, 2009 and 2008 the loan has a book value of $9,926 and $9,324, respectively.

In September 2008, the Company closed on the purchase from an SL Green affiliate of a $30,000 interest in a $135,000 mezzanine loan. The loan is secured by the borrower’s interests in a retail condominium located New York, New York. The investment bears interest at an effective spread to one-month LIBOR of 10.00%. As of December 31, 2009 and 2008, the loan has a book value of $29,925 and $30,367, respectively.

13. Deferred Costs

Deferred costs at December 31, 2009 and December 31, 2008 consisted of the following:

	2009			2008
Deferred Financing Costs	$	69,235		$	77,102
Deferred Acquisition Costs		853			1,600
Deferred Leasing Costs		2,674			1,056
		72,762			79,758
Accumulated Amortization		(40,721	)		(26,451	)
		32,041			53,307
Less Held For Sale		—			(59	)
	$	32,041		$	53,248

Deferred financing costs relate to the Goldman Mortgage Loan, the Goldman Senior and Junior Mezzanine Loans, the PB Loan Agreement, the Company’s CDOs, mortgage loans, and the junior subordinated notes. These costs are amortized on a straight-line basis to interest expense based on the contractual term of the related financing.

Deferred acquisition costs consist of fees and direct costs incurred to originate the Company’s investments and are amortized using the effective yield method over the related term of the investment. Straight-line expense approximates the effective interest method.

Deferred leasing costs include direct costs incurred to initiate and renew operating leases and are amortized on a straight-line basis over the related lease term.

150

Gramercy Capital Corp.
  
Notes To Consolidated Financial Statements
(Amounts in thousands, except share and per share data)
December 31, 2009

14. Fair Value of Financial Instruments

The Company discloses fair value information about financial instruments, whether or not recognized in the statement of financial condition, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based upon the application of discount rates to estimated future cash flows based upon market yields or by using other valuation methodologies. Considerable judgment is necessary to interpret market data and develop estimated fair value. Accordingly, fair values are not necessarily indicative of the amounts the Company could realize on disposition of the financial instruments. The use of different market assumptions and/or estimation methodologies may have a material effect on estimated fair value amounts.

The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate the value:

Cash and cash equivalents, accrued interest, and accounts payable:  These balances in the consolidated financial statements reasonably approximate their fair values due to the short maturities of these items.

Government Securities:  The Company maintains a portfolio of treasury securities that are pledged to provide principal and interest payments for mortgage debt previously collateralized by properties in the Company’s real estate portfolio. These securities are presented in the consolidated financial statements on a held-to-maturity basis and not at fair value. The fair values were based upon valuations obtained from dealers of those securities.

Lending investments:  These instruments are presented in the consolidated financial statements at the lower of cost or market value and not at fair value. The fair values were estimated by using market yields floating rate and fixed rate (as appropriate) loans with similar credit characteristics.

CMBS:  These investments are presented in the consolidated financial statements on a held-to-maturity basis and not at fair value. The fair values were based upon valuations obtained from dealers of those securities, and internal models.

Repurchase agreements:  The repurchase agreements are presented in the consolidated financial statements on the basis of the proceeds received and are not at a fair value. The fair value was estimated by using estimates of market yields for similarly placed financial instruments.

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

Derivative instruments:  The Company’s derivative instruments, which are primarily comprised of interest rate swap agreements, are carried at fair value in the consolidated financial statements based upon third party valuations.

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

151

Gramercy Capital Corp.
  
Notes To Consolidated Financial Statements
(Amounts in thousands, except share and per share data)
December 31, 2009

14. Fair Value of Financial Instruments  – (continued)

The following table presents the carrying value in the financial statements, and approximate fair value of other financial instruments at December 31, 2009 and 2008:

	December 31, 2009				December 31, 2008
	Carrying Value		Fair Value		Carrying Value		Fair Value
Financial assets:
Government securities	$	97,286	$	98,832	$	101,576	$	106,796
Lending investments	$	1,383,832	$	1,313,127	$	2,213,473	$	2,040,914
CMBS	$	984,709	$	556,395	$	869,973	$	299,985
Financial liabilities:
Mortgage note payable and senior and junior mezzanine loans	$	2,297,190	$	2,099,450	$	2,413,467	$	1,821,448
Unsecured credit facility	$	—	$	—	$	172,301	$	167,916
Term loan, credit facility and repurchase facility	$	—	$	—	$	95,897	$	94,321
Collateralized debt obligations	$	2,705,534	$	1,097,485	$	2,608,065	$	1,021,114
Junior subordinated debentures	$	52,500	$	9,533	$	150,000	$	134,300

Disclosure about fair value of financial instruments is based on pertinent information available to the Company at December 31, 2009 and 2008. Although the Company is not aware of any factors that would significantly affect the reasonable fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since December 31, 2009 and 2008 and current estimates of fair value may differ significantly from the amounts presented herein.

The following discussion of fair value was determined by the Company using available market information and appropriate valuation methodologies. Considerable judgment is necessary to interpret market data and develop estimated fair value. Accordingly, fair values are not necessarily indicative of the amounts the Company could realize on disposition of the financial instruments. Financial instruments with readily available active quoted prices or for which fair value can be measured from actively quoted prices generally will have a higher degree of pricing observability and a lesser degree of judgment utilized in measuring fair value. Conversely, financial instruments rarely traded or not quoted will generally have less, or no, pricing observability and a higher degree of judgment utilized in measuring fair value. The use of different market assumptions and/or estimation methodologies may have a material effect on estimated fair value amounts.

Fair Value on a Recurring Basis

Liabilities measured at fair value on a recurring basis are categorized in the table below based upon the lowest level of significant input to the valuations.

At December 31, 2009	Total		Level I		Level II		Level III
Financial Liabilities:
Derivative instruments	$	88,786	$	—	$	—	$	88,786

At December 31, 2008	Total		Level I		Level II		Level III
Financial Liabilities:
Derivative instruments	$	157,776	$	—	$	—	$	157,776

152

Gramercy Capital Corp.
  
Notes To Consolidated Financial Statements
(Amounts in thousands, except share and per share data)
December 31, 2009

14. Fair Value of Financial Instruments  – (continued)

Derivatives were classified as Level III due to the significance of the credit valuation allowance which is based upon less observable inputs.

Fair Value on a Non-Recurring Basis

The Company uses fair value measurements on a nonrecurring basis in its assessment of assets classified as loans and other lending investments, which are reported at cost and have been written down to fair value as a result of valuation allowances established for loan losses and commercial mortgage-backed securities which are reported at cost and have been written down to fair value due to other-than-temporary impairments. The following table shows the fair value hierarchy for those assets measured at fair value on a non-recurring basis based upon the lowest level of significant input to the valuations for which a non-recurring change in fair value has been recorded during the years ended December 31, 2009 and December 31, 2008:

At December 31, 2009	Total		Level I		Level II		Level III
Financial Assets:
Lending investments	$	536,445	$	—	$	—	$	536,445
Commercial mortgage-backed securities		1,324		—		—		1,324

At December 31, 2008	Total		Level I		Level II		Level III
Financial Assets:
Lending investments	$	343,403	$	—	$	—	$	343,403
Commercial mortgage-backed securities		—		—		—		—

The total change in fair value of financial instruments for which a fair value adjustment has been included in the Consolidated Statements of Operations for the years ended December 31, 2009 and December 31, 2008 were $517,784 and $97,853, respectively.

The valuations derived from pricing models may include adjustments to the financial instruments. These adjustments may be made when, in management’s judgment, either the size of the position in the financial instrument or other features of the financial instrument such as its complexity, or the market in which the financial instrument is traded (such as counterparty, credit, concentration or liquidity) require that an adjustment be made to the value derived from the pricing models. Additionally, an adjustment from the price derived from a model typically reflects management’s judgment that other participants in the market for the financial instrument being measured at fair value would also consider such an adjustment in pricing that same financial instrument.

Financial assets and liabilities presented at fair value and categorized as Level III are generally those that are marked to model using relevant empirical data to extrapolate an estimated fair value. The models’ inputs reflect assumptions that market participants would use in pricing the instrument in a current period transaction and outcomes from the models represent an exit price and expected future cash flows. The parameters and inputs are adjusted for assumptions about risk and current market conditions. Changes to inputs in valuation models are not changes to valuation methodologies, rather, the inputs are modified to reflect direct or indirect impacts on asset classes from changes in market conditions. Accordingly, results from valuation models in one period may not be indicative of future period measurements.

153

Gramercy Capital Corp.
  
Notes To Consolidated Financial Statements
(Amounts in thousands, except share and per share data)
December 31, 2009

15. Stockholders’ Equity

The Company’s authorized capital stock consists of 125,000,000 shares, $0.001 par value, of which the Company has authorized the issuance of up to 100,000,000 shares of common stock, $0.001 par value per share, and 25,000,000 shares of preferred stock, par value $0.001 per share. As of December 31, 2009, 49,884,500 shares of common stock and 4,600,000 shares of preferred stock were issued and outstanding.

Preferred Stock

In April 2007, the Company issued 4,600,000 shares of its 8.125% Series A cumulative redeemable preferred stock (including the underwriters’ over-allotment option of 600,000 shares) with a mandatory liquidation preference of $25.00 per share. Holders of the Series A cumulative redeemable preferred shares are entitled to receive annual dividends of $2.03125 per share on a quarterly basis and dividends are cumulative, subject to certain provisions. On or after April 18, 2012, the Company may at its option redeem the Series A cumulative redeemable preferred stock at par for cash. Net proceeds (after deducting underwriting fees and expenses) from the offering were approximately $111,205.

Common Stock

In April 2008, the Company issued approximately 15,634,854 shares of common stock in connection with the American Financial acquisition. These shares had a value of approximately $378,672 on the date the merger agreement was executed. Also, as a result of the American Financial acquisition, an affiliate of SL Green was granted 644,787 shares of common stock for services rendered, subject to an one-year vesting period. These shares had a value of approximately $11,213 on the date of issuance. Subsequent to issuance, SL Green Operating Partnership, L.P. owned approximately 15.8% of the outstanding shares of the Company’s common stock.

In December 2008, the Company entered into a letter agreement with the Manager and SL Green pursuant to which the Manager agreed to pay $2,750 in cash and SL Green transferred to the Company, 1.9 million shares of the Company’s common stock, in full satisfaction of all potential obligations that the holders of Class B limited partner interests may have in respect of the recalculation of the distribution amount to the Holders at the end of 2008 calendar year.l The shares of common stock were cancelled upon receipt by the Company. Subsequent to the letter agreement, SL Green Operating Partnership L.P. owned approximately 12.5% of the outstanding shares of the Company’s common stock.

Equity Incentive Plan

As part of the Company’s initial public offering, the Company instituted its Equity Incentive Plan. The Equity Incentive Plan, as amended, authorizes (i) the grant of stock options that qualify as incentive stock options under Section 422 of the Internal Revenue Code of 1986, as amended, or ISOs, (ii) the grant of stock options that do not qualify, or NQSOs, (iii) the grant of stock options in lieu of cash directors’ fees and (iv) grants of shares of restricted and unrestricted common stock. The exercise price of stock options will be determined by the compensation committee, but may not be less than 100% of the fair market value of the shares of common stock on the date of grant. At December 31, 2009, 1,151,127 shares of common stock were available for issuance under the Equity Incentive Plan.

Options granted under the Equity Incentive Plan to recipients who are employees of Gramercy are exercisable at the fair market value on the date of grant and, subject to termination of employment, expire ten years from the date of grant, are not transferable other than on death, and are exercisable in three to four annual installments commencing one year from the date of grant. In some instances, options may be granted under the Equity Incentive Plan to persons who provide significant services to the Company but are not employees of the Company. Options granted to recipients that are not employees have the same terms as those issued to employees except as it relates to any performance-based provisions within the grant. To the extent there are performance provisions associated with a grant to a recipient who is not an employee, an

154

Gramercy Capital Corp.
  
Notes To Consolidated Financial Statements
(Amounts in thousands, except share and per share data)
December 31, 2009

15. Stockholders’ Equity  – (continued)

estimated expense related to these options is recognized over the vesting period and the final expense is reconciled at the point performance has been met, or the measurement date. If no performance based provision exists, the fair value of the options is calculated on a quarterly basis and the related expense is recognized over the vesting period.

A summary of the status of the Company’s stock options as of December 31, 2009 and December 31, 2008 are presented below:

	December 31, 2009					December 31, 2008
	Options Outstanding			Weighted Average Excerise Price		Options Outstanding			Weighted Average Excerise Price
Balance at beginning of period		1,691,336		$	17.61		1,428,169			22.82
Modification		—			—		110,716			—
Granted		30,000			1.25		385,000			5.30
Exercised		—			—		(85,547	)		14.83
Lapsed or cancelled		(204,942	)		21.92		(147,002	)		25.52
Balance at end of period		1,516,394		$	16.70		1,691,336		$	17.61

For the year ended December 31, 2009, all options were granted with a price of $1.25. The remaining weighted average contractual life of the options was 6.7 years. In connection with the payment of a special dividend to common shareholders, the equity incentive plan was amended to provide for the modification of stock options to adjust for the impact of the special dividend paid. There was no incremental cost to the modification. Compensation expense of $119, $792 and $831 was recorded for the years ended December 31, 2009, 2008 and 2007, respectively, related to the issuance of stock options.

Through December 31, 2009, 1,155,004 restricted shares had been issued under the Equity Incentive Plan, of which 62% have vested. The vested and unvested shares are currently entitled to receive distributions on common stock if declared by the Company. Holders of restricted shares are prohibited from selling such shares until they vest but are provided the ability to vote such shares beginning on the date of grant. Compensation expense of $333, $2,422 and $3,301 was recorded for the years ended December 31, 2009, 2008 and 2007, respectively, related to the issuance of restricted shares.

Employee Stock Purchase Plan

In November 2007, the Company’s board of directors adopted, and the stockholders subsequently approved in June 2008, the 2008 Employee Stock Purchase Plan, or ESPP, to provide equity-based incentives to eligible employees. The ESPP is intended to qualify as an “employee stock purchase plan” under Section 423 of the Internal Revenue Code of 1986, as amended, and has been adopted by the board to enable the Company’s eligible employees to purchase its shares of common stock through payroll deductions. The ESPP became effective on January 1, 2008 with a maximum of 250,000 shares of the common stock available for issuance, subject to adjustment upon a merger, reorganization, stock split or other similar corporate change. The Company filed a registration statement on Form S-8 with the Securities and Exchange Commission with respect to the ESPP. The common stock is offered for purchase through a series of successive offering periods. Each offering period will be three months in duration and will begin on the first day of each calendar quarter, with the first offering period having commenced on January 1, 2008.l The ESPP provides for eligible employees to purchase the common stock at a purchase price equal to 85% of the lesser of (1) the market value of the common stock on the first day of the offering period or (2) the market value of the common stock on the last day of the offering period.

155

Gramercy Capital Corp.
  
Notes To Consolidated Financial Statements
(Amounts in thousands, except share and per share data)
December 31, 2009

15. Stockholders’ Equity  – (continued)

Outperformance Plan

In June 2005, the compensation committee of the board of directors approved a long-term incentive compensation program, the 2005 Outperformance Plan. Participants in the 2005 Outperformance Plan, were to share in a “performance pool” if the Company’s total return to stockholders for the period from June 1, 2005 through May 31, 2008 exceeded a cumulative total return to stockholders of 30% during the measurement period over a base share price of $20.21 per share. The Company recorded the expense of the plan award in accordance with GAAP. Compensation expense of $(2,348), was recorded for the year ended December 31, 2008, related to the 2005 Outperformance Plan. Based on the Company’s total return to stockholders as of the May 31, 2008 measurement period conclusion date, the Company did not meet the minimum 30% return threshold and accordingly, the plan participants automatically forfeited the LTIP Units. That they had been granted and the 2005 Outperformance Plan expired as of that date. In October 2008, Marc Holliday, Gregory Hughes and Andrew Matthias resigned as executives of the Company. In accordance with the 2005 Outperformance Plan, upon resignation, the LTIP Units were forfeited. In accordance with GAAP, the Company recorded a reduction of expense in connection to the forfeitures of the LTIP shares of $2,348, which was offset against management, general and administrative expenses.

Deferred Stock Compensation Plan for Directors

Under the Company’s Independent Director’s Deferral Program, which commenced April 2005, the Company’s independent directors may elect to defer up to 100% of their annual retainer fee, chairman fees and meeting fees. Unless otherwise elected by a participant, fees deferred under the program shall be credited in the form of phantom stock units. The phantom stock units are convertible into an equal number of shares of common stock upon such directors’ termination of service from the Board of Directors or a change in control by the Company, as defined by the program. Phantom stock units are credited to each independent director quarterly using the closing price of the Company’s common stock on the applicable dividend record date for the respective quarter. Each participating independent director who elects to receive fees in the form of phantom stock units has the option to have their account credited for an equivalent amount of phantom stock units based on the dividend rate for each quarter or have dividends paid in cash.

As of December 31, 2009, there were approximately 272,652 phantom stock units outstanding, of which 264,652 units are vested.

156

Gramercy Capital Corp.
  
Notes To Consolidated Financial Statements
(Amounts in thousands, except share and per share data)
December 31, 2009

15. Stockholders’ Equity  – (continued)

Earnings per Share

Earnings per share for the years ended 2009, 2008 and 2007 are computed as follows:

	For the Year Ended December 31,
	2009			2008			2007
Numerator – Income (loss)
Net income (loss) from continuing operations	$	(510,406	)	$	58,116		$	162,998
Net loss from discontinued operations		(9,223	)		1,187			(1,401	)
Net Income (loss)		(519,629	)		59,303			161,597
Preferred stock dividends		(9,414	)		(9,344	)		(6,567	)
Numerator for basic income per share – Net income (loss) available to common stockholders:		(529,043	)		49,959			155,030
Effect of dilutive securities		—			—			—
Diluted Earnings:
Net income (loss) available to common stockholders	$	(529,043	)	$	49,959		$	155,030
Denominator – Weighted Average shares:
Denominator for basic income per share – weighted average shares		49,854			47,205			29,968
Effect of dilutive securities
Stock based compensation plans		—			50			1,380
Phantom stock units		—			75			31
Diluted shares		49,854			47,330			31,379

Accumulated other comprehensive income (loss) for the years ended December 31, 2009 and 2008 is comprised of the following:

	December 31, 2009			December 31, 2008
Net unrealized loss on held to maturity securities	$	(3,906	)	$	(4,986	)
Net realized and unrealized losses on interest rate swap and cap agreements accounted for as cash flow hedges		(92,132	)		(155,753	)
Total accumulated and other comprehensive loss	$	(96,038	)	$	(160,739	)

16. Benefit Plans

In June 2009, the Company implemented a 401(K) Savings/Retirement Plan, or the 401(K) Plan, to cover eligible employees of the Company, and any designated affiliate. The 401(K) Plan permits eligible employees to defer up to 15% of their annual compensation, subject to certain limitations imposed by the Code. The employees’ elective deferrals are immediately vested and non-forfeitable. The 401(K) Plan provides for discretionary matching contributions by the Company. Prior to the implementation of the 401(K) Plan, as an affiliate of SL Green, the Company’s employees were eligible to participate in a 401(K) Savings/Retirement Plan implemented by SL Green. Except for the 401(k) Plan, at December 31, 2009, the Company did not maintain a defined benefit pension plan, post-retirement health and welfare plan or other benefit plans.

157

Gramercy Capital Corp.
  
Notes To Consolidated Financial Statements
(Amounts in thousands, except share and per share data)
December 31, 2009

17. Commitments and Contingencies

The Company and the Operating Partnership are not presently involved in any material litigation nor, to the Company’s knowledge, is any material litigation threatened against the Company or its investments, other than routine litigation arising in the ordinary course of business. Management believes the costs, if any, incurred by the Operating Partnership and the Company related to litigation will not materially affect its financial position, operating results or liquidity.

On December 28, 2009, the Company received a letter from Citigroup Global Markets Realty Corp., or Citigroup Realty, seeking payment by a Company affiliate of approximately $17,500 alleged to be due under a 2005 profit and loss sharing agreement between Citigroup Realty and the Company affiliate. The Company has advised Citigroup Realty that it believes the claim is without merit and that the Company will contest the claim vigorously. An adverse resolution of the claim could have a material adverse effect on the Company’s financial condition and results of operations in the period in which such claim is resolved. The Company is not presently able to estimate potential losses it may incur, if any, relating to this claim. To date, Citigroup Realty has not sought to enforce its claim through legal or other proceedings.

The Company’s corporate offices at 420 Lexington Avenue, New York, New York are subject to an operating lease agreement with SLG Graybar Sublease LLC, an affiliate of SL Green, effective May 1, 2005. The lease is for approximately 7,300 square feet and carries a term of 10 years with rents of approximately $249 per annum for year one rising to $315 per annum in year ten. In May and June 2009, the Company amended its lease with SLG Graybar Sublease LLC to increase the leased premises by approximately 2,260 square feet. The additional premises is leased on a co-terminus basis with the remainder of the Company’s leased premises and carries rents of approximately $103 per annum during the initial lease year and $123 per annum during the final lease year.

As of December 31, 2009, the Company leased certain of its commercial properties from third parties with expiration dates extending to the year 2085 and has various ground leases with expiration dates extending through 2101. These lease obligations generally contain rent increases and renewal options.

Future minimum lease payments under non-cancelable operating leases as of December 31, 2009 are as follows:

	Operating Leases
2010	$	18,661
2011		18,483
2012		18,088
2013		17,578
2014		17,287
Thereafter		137,042
Total minimum lease payments	$	227,139

The Company, through certain of its subsidiaries, may be required in its role in connection with its CDOs, to repurchase loans that it contributed to its CDOs in the event of breaches of certain representations or warranties provided at the time the CDOs were formed and the loans contributed. These obligations do not relate to the credit performance of the loans or other collateral contributed to the CDOs, but only to breaches of specific representations and warranties. Since inception, the Company has not been required to make any repurchases.

Certain real estate assets are pledged as collateral for mortgage loans held by two of its CDOs. Additionally, borrowings secured by these pledges are guaranteed by the Company.

158

Gramercy Capital Corp.
  
Notes To Consolidated Financial Statements
(Amounts in thousands, except share and per share data)
December 31, 2009

18. Financial Instruments: Derivatives and Hedging

The Company to recognizes all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If a derivative is a hedge, depending on the nature of the hedge, changes in the fair value of the derivative will either be offset against the change in fair value of the hedged asset, liability or firm commitment through earnings, or recognized in other comprehensive income until the hedged item is recognized in earnings.l The ineffective portion of a derivative’s change in fair value will be immediately recognized in earnings. Derivative accounting may increase or decrease reported net income and stockholders’ equity prospectively, depending on future levels of LIBOR interest rates and other variables affecting the fair values of derivative instruments and hedged items, but will have no effect on cash flows, provided the contract is carried through to full term.

The following table summarizes the notional and fair value of the Company’s derivative financial instruments at December 31, 2009. The notional value is an indication of the extent of the Company’s involvement in this instrument at that time, but does not represent exposure to credit, interest rate or market risks:

	Benchmark Rate		Notional Value		Strike Rate			Effective Date		Expiration Date		Fair Value
Interest Rate Swap		3 month LIBOR		3,465		5.18	%		Apr-06		Mar-10		(27	)
Interest Rate Swap		3 month LIBOR		12,000		9.85	%		Aug-06		Aug-11		(715	)
Interest Rate Swap		3 month LIBOR		347,908		5.41	%		Aug-07		May-17		(24,086	)
Interest Rate Swap		3 month LIBOR		699,441		5.33	%		Aug-07		Jan-18		(58,338	)
Interest Rate Swap		3 month LIBOR		14,650		4.43	%		Nov-07		Jul-15		(726	)
Interest Rate Swap		3 month LIBOR		12,000		3.06	%		Jan-08		Jul-10		(173	)
Interest Rate Swap		3 month LIBOR		2,000		3.07	%		Jan-08		Jul-10		(26	)
Interest Rate Swap		3 month LIBOR		24,143		5.11	%		Feb-08		Jan-17		(1,692	)
Interest Rate Swap		3 month LIBOR		16,412		5.20	%		Feb-08		May-17		(1,192	)
Interest Rate Swap		3 month LIBOR		4,700		3.17	%		Apr-08		Apr-12		(149	)
Interest Rate Swap		1 month LIBOR		9,375		4.26	%		Aug-08		Jan-15		(455	)
Interest Rate Swap		3 month LIBOR		10,000		3.92	%		Oct-08		Oct-13		(439	)
Interest Rate Swap		3 month LIBOR		17,500		3.92	%		Oct-08		Oct-13		(768	)
Interest Rate Cap		1 month LIBOR		250,000		5.25	%		Apr-08		Mar-10		—
Interest Rate Cap		1 month LIBOR		600,000		5.25	%		Aug-08		Mar-10		—
Total			$	2,023,594								$	(88,786	)

The Company is hedging exposure to variability in future interest payments on its debt facilities. At December 31, 2009, derivative instruments were reported at their fair value as a net liability of $88,786 Offsetting adjustments are represented as deferred gains in Accumulated Other Comprehensive Income of $63,621. For the year ended December 31, 2009, the Company recognized a decrease to interest expense of $9 attributable to any ineffective component of its derivative instruments designated as cash flow hedges. Currently, all derivative instruments are designated as cash flow hedging instruments. Over time, the realized and unrealized gains and losses held in Accumulated Other Comprehensive Income will be reclassified into earnings in the same periods in which the hedged interest payments affect earnings.

159

Gramercy Capital Corp.
  
Notes To Consolidated Financial Statements
(Amounts in thousands, except share and per share data)
December 31, 2009

19. Income Taxes

The Company has elected to be taxed as a REIT, under Sections 856 through 860 of the Internal Revenue Code beginning with its taxable year ended December 31, 2004. To qualify as a REIT, the Company must meet certain organizational and operational requirements, including a requirement to distribute at least 90% of its ordinary taxable income to stockholders. As a REIT, the Company generally will not be subject to U.S. federal income tax on taxable income that it distributes to its stockholders. If the Company fails to qualify as a REIT in any taxable year, it will then be subject to U.S. federal income taxes on taxable income at regular corporate rates and will not be permitted to qualify for treatment as a REIT for U.S. federal income tax purposes for four years following the year during which qualification is lost unless the Internal Revenue Service grants the Company relief under certain statutory provisions. Such an event could materially adversely affect the Company’s net income and net cash available for distributions to stockholders. However, the Company believes that it is organized and will operate in such a manner as to qualify for treatment as a REIT and the Company intends to operate in the foreseeable future in such a manner so that it will qualify as a REIT for U.S. federal income tax purposes. The Company may, however, be subject to certain state and local taxes.

Beginning with the third quarter of 2008, the Company’s board of directors elected to not pay dividend to common stockholders. The Company may elect to pay dividends on its common stock in cash or a combination of cash and shares of common stock as permitted under U.S. federal income tax laws governing REIT distribution requirements. The board of directors also elected not to pay the Series A preferred stock dividend of $0.50781 per share beginning with the fourth quarter of 2008. The unpaid preferred stock dividend has been accrued for five quarters. Based on current estimates of its taxable loss, the Company has no distribution requirements in order to maintain its REIT status for the 2009 tax year and it expects that it will continue to elect to retain capital for liquidity purposes unit the requirements to make a cash distribution on the Company’s common stock in cash or a combination of cash and shares of common stock as permitted under the U.S. federal income tax laws. However, in accordance with the provisions of the Company’s charter, the Company may not pay any dividends on its common stock until all accrued dividends and the dividend for the then current quarter on the Series A preferred stock are paid in full.

For the years ended December 31, 2009, 2008 and 2007, the Company recorded $2,498, $83 and $1,341of income tax expense, respectively, in net income from continuing operations for income attributable to the Company’s wholly-owned TRSs. Tax expense for the year ended December 31, 2009 and 2008 is comprised entirely of state and local taxes. Included in tax expense for the year ended December 31, 2009 is an accrual for state income taxes on the gain of extinguishment of debt of $119,305. Under federal tax law, the Company is allowed to defer this gain until 2014; however not all states follow this federal rule.

20. Environmental Matters

The Company believes that it is in compliance in all material respects with applicable Federal, state and local ordinances and regulations regarding environmental issues. Its management is not aware of any environmental liability that it believes would have a materially adverse impact on the Company’s financial position, results of operations or cash flows.

21. Segment Reporting

Prior to the acquisition of American Financial, the Company was a REIT focused primarily on originating and acquiring loans and securities related to real estate and operated in only one segment. As a result of the acquisition of American Financial, as of April 1, 2008, the Company has determined that it has two reportable operating segments: Finance and Real Estate. The reportable segments were determined based on the management approach, which looks to the Company’s internal organizational structure. These two lines of business require different support infrastructures.

160

Gramercy Capital Corp.
  
Notes To Consolidated Financial Statements
(Amounts in thousands, except share and per share data)
December 31, 2009

21. Segment Reporting  – (continued)

The Real Estate segment includes all of the Company’s activities related to the ownership and leasing of commercial real estate and credit net lease properties. In connection with the Company’s significant increase in the size and scope of its real estate portfolio resulting from the American Financial acquisition, the Company initiated the build-out of an integrated asset management platform within Gramercy Realty to consolidate responsibility for, and control over, leasing, lease administration, property management and tenant relationship management.

The Finance segment includes all of the Company’s activities related to senior and mezzanine real estate debt and senior and mezzanine capital investment activities and the financing thereof, including the Company’s CMBS investments. These include a dedicated management team within Gramercy Finance for real estate lending origination, acquisition and portfolio management.

The Company evaluates performance based on the following financial measures for each segment:

Year Ended December 31, 2009	Real Estate			Finance			Corporate/ Other(1)			Total Company
Total revenues(2)	$	442,567		$	193,539		$	—		$	636,106
Earnings (loss) from unconsolidated joint ventures		(2,637	)		11,073			—			8,436
Total operating and interest expense(3)		(445,833	)		(665,754	)		(43,173	)		(1,154,760	)
Net income (loss) from continuing operations	$	(5,903	)	$	(461,142	)	$	(43,173	)	$	(510,218	)
Total Assets	$	3,883,279		$	3,787,371		$	(905,213	)	$	6,765,437

Year Ended December 31, 2008	Real Estate			Finance			Corporate/ Other(1)			Total Company
Total revenues(2)	$	319,410		$	273,994		$	—		$	593,404
Earnings (loss) from unconsolidated joint ventures		(2,092	)		11,180			—			9,088
Total operating and interest expense(3)		(321,693	)		(172,034	)		(50,264	)		(543,991	)
Net income (loss) from continuing operations	$	(4,375	)	$	113,140		$	(50,264	)	$	58,501
Total Assets	$	4,163,186		$	4,416,284		$	(761,372	)	$	7,818,098

(1) Corporate and Other represents all corporate level items, including general and administrative expenses and any intercompany elimination necessary to reconcile to the consolidated Company totals.

(2) Total revenue represents all revenue earned during the period from the assets in each segment. Revenue from the Finance business primarily represents interest income and revenue from the Real Estate business primarily represents operating lease income.

(3) Total operating and interest expense includes provision for loan losses for the Structured Finance business and operating costs on commercial property assets for the Real Estate business, and interest expense and gain on early extinguishment of debt, specifically related to each segment. General and administrative expense is included in Corporate/Other for all periods. Depreciationl and amortization of $112,232 and $67,072 for the years ended December 31, 2009 and 2008, respectively, is included in the amounts presented above.

(4) Net operating income represents income before provision for taxes, minority interest and discontinued operations.

161

Gramercy Capital Corp.
  
Notes To Consolidated Financial Statements
(Amounts in thousands, except share and per share data)
December 31, 2009

22. Supplemental Disclosure of Non-Cash Investing and Financing Activities

The following table represents non-cash activities recognized in other comprehensive income for the years ended December 31, 2009, 2008 and 2007:

	2009		2008			2007
Deferred gains (losses) and other non-cash activity related to derivatives	$	63,621	$	(85,350	)	$	(62,973	)
Deferred gains (losses) related to securities available-for-sale	$	1,080	$	589		$	(5,575	)

23. Quarterly Financial Data (unaudited)

This unaudited interim financial information has not been adjusted to reflect the effects of the reclassification of assets between held for investment and held for sale.

Quarterly data for the last three years is presented below (in thousands).

2009 Quarter Ended	December 31			September 30			June 30			March 31
Total revenues	$	158,066		$	153,630		$	158,509		$	164,195
Loss from continuing operations before equity in net income from unconsolidated joint ventures, provision for taxes, and non-controlling interest		(103,921	)		(203,612	)		(193,745	)		(125,739	)
Equity in net income of unconsolidated joint ventures		1,852			2,397			1,975			2,212
Loss from continuing operations before provision for taxes, gain on extinguishment of debt and discontinued operations		(102,069	)		(201,215	)		(191,770	)		(123,527	)
Gain on extinguishment of debt		12,076			—			—			107,229
Provision for taxes		(9	)		(88	)		(134	)		(2,267	)
Net loss from continuing operations		(90,002	)		(201,303	)		(191,904	)		(18,565	)
Net income (loss) from discontinued operations		(7,912	)		583			(4,926	)		(6,370	)
Net loss		(97,914	)		(200,720	)		(196,830	)		(24,935	)
Net income (loss) attributable to non-controlling interest		(174	)		(60	)		1,024			(20	)
Net loss attributable to Gramercy Capital Corp.		(98,088	)		(200,780	)		(195,806	)		(24,955	)
Preferred stock dividends		(2,406	)		(2,336	)		(2,336	)		(2,336	)
Net loss available to common stockholders	$	(100,494	)	$	(203,116	)	$	(198,142	)	$	(27,291	)
Basic earnings per share:
Net loss from continuing operations	$	(1.85	)	$	(4.08	)	$	(3.90	)	$	(0.42	)
Net income (loss) from discontinued operations		(0.16	)		0.01			(0.08	)		(0.13	)
Net loss available to common stockholders	$	(2.01	)	$	(4.07	)	$	(3.98	)	$	(0.55	)
Diluted earnings per share:
Net loss from continuing operations	$	(1.85	)	$	(4.08	)	$	(3.90	)	$	(0.42	)
Net income (loss) from discontinued operations		(0.16	)		0.01			(0.08	)		(0.13	)
Net loss available to common stockholders	$	(2.01	)	$	(4.07	)	$	(3.98	)	$	(0.55	)

162

Gramercy Capital Corp.
  
Notes To Consolidated Financial Statements
(Amounts in thousands, except share and per share data)
December 31, 2009

23. Quarterly Financial Data (unaudited)  – (continued)

2008 Quarter Ended	December 31			September 30			June 30			March 31
Total revenues	$	168,990		$	173,181		$	170,913		$	80,396
Income (loss) from continuing operations before equity in net income (loss) from unconsolidated joint ventures, provision for taxes and non-controlling interest		(33,380	)		(4,943	)		(6,803	)		18,766
Equity in net income of unconsolidated joint ventures		1,935			1,752			1,729			3,323
Income (loss) from continuing operations before provision for taxes, gain on extinguishment of debt and discontinued operations		(31,445	)		(3,191	)		(5,074	)		22,089
Gain on extinguishment of debt		43,856			11,681			17,597			3,690
Provision for taxes		(35	)		(36	)		—			(11	)
Net income from continuing operations		12,376			8,454			12,523			25,768
Net income (loss) from discontinued operations		(436	)		1,174			124			(297	)
Net income		11,940			9,628			12,647			25,471
Net income (loss) attributable to non-controlling interest		(165	)		31			(251	)		—
Net income attributable to Gramercy Capital Corp.		11,775			9,659			12,396			25,471
Preferred stock dividends		(2,336	)		(2,336	)		(2,336	)		(2,336	)
Net income available to common stockholders	$	9,439		$	7,323		$	10,060		$	23,135
Net income per common share – Basic	$	0.18		$	0.14		$	0.20		$	0.66
Net income per common share – Diluted	$	0.18		$	0.14		$	0.20		$	0.66

2007 Quarter Ended	December 31			September 30			June 30			March 31
Total revenues	$	84,852		$	90,214		$	78,303		$	68,134
Income from continuing operations before equity in net loss of unconsolidated joint ventures and provision for taxes		19,422			3,989			21,805			18,278
Equity in net income (loss) of unconsolidated joint ventures		2,460			1,264			484			(695	)
Income from continuing operations before gain on extinguishment of debt, provision for taxes and gain from sale of unconsolidated joint venture interest		21,882			5,253			22,289			17,583
Gain on extinguishment of debt		3,806			—
Gain from sale of unconsolidated joint venture interest		—			92,235			—			—
Provision for taxes		(40	)		(338	)		(429	)		(534	)
Net income from continuing operations		25,648			97,150			21,860			17,049
Net loss from discontinued operations		(110	)		—			—			—
Net income attributable to Gramercy Capital Corp.		25,538			97,150			21,860			17,049
Preferred stock dividends		(2,336	)		(2,336	)		(1,895	)		—
Net income available to common stockholders	$	23,202		$	94,814		$	19,965		$	17,049
Net income per common share – Basic	$	0.69		$	3.60		$	0.77		$	0.66
Net income per common share – Diluted	$	0.67		$	3.43		$	0.73		$	0.62

163

Gramercy Capital Corp.
  
Notes To Consolidated Financial Statements
(Amounts in thousands, except share and per share data)
December 31, 2009

24. Subsequent Events

In January 2010, the Company completed the foreclosure of the collateral consisting of approximately 2,100 acres of land located in Contra Costa County, California primarily intended for residential development, which secured a first mortgage loan. As of December 31, 2009, the first mortgage loan was classified as non-performing and had an original unpaid principal balance of $34,884 and a carrying value net of loan loss reserves of $17,196.

On March 9, 2010, certain subsidiaries of the Company amended the Goldman Mortgage Loan to extend the maturity date to March 11, 2011, or the Mortgage Extension Term. An extension fee of approximately $1,810 was paid by the Company to the lenders of the Goldman Mortgage Loan in connection with such extension. In addition, LIBOR used in determining the interest rate of the Goldman Mortgage Loan will be capped at 6.00% during the Mortgage Extension Term. The amendment also added or modified various terms of the Goldman Mortgage Loan, including, among others, (i) a prohibition on distributions from the Goldman Mortgage Loan borrowers to the Company, other than to cover corporate overhead incurred by the Company, subject to a cap of $2,500 per quarter (ii) requirement of $5,000 of available cash on deposit in a designated account on the commencement date of the Mortgage Extension Term, (iii) lender consent requirement with respect to leases that require tenant improvement costs and leasing commissions in excess of $1,000, (iv) delivery by the Goldman Mortgage Loan borrowers to the lenders of a comprehensive long-term business plan and restructuring proposal addressing repayment of the Goldman Mortgage Loan within 90 days after the first day of the Mortgage Extension Term, and (v) mandated additional monthly reporting requirements.

On March 9, 2010, certain subsidiaries of the Company amended the Senior Mezzanine Loan to extend the maturity date to March 11, 2011, or the Senior Mezzanine Extension Term. An extension fee of approximately $3,462 was paid by the Company to the lender in connection with such extension. In addition, LIBOR used in determining the interest rate of the Senior Mezzanine Loan will be capped at 2.00% during the Senior Mezzanine Extension Term. The amendment also added or modified various terms of the Senior Mezzanine Loan, including, among others, (i) a prohibition on distributions from the Senior Mezzanine Loan borrowers to the Company, other than to cover corporate overhead incurred by the Company, subject to a cap of $2,500 per quarter, (ii) requirement of $5,000 of available cash on deposit in a designated account on the commencement date of the Senior Mezzanine Extension Term and agreement, upon request, to grant a security interest in that account to the lender, (iii) lender consent requirement with respect to leases that require tenant improvement costs and leasing commissions in excess of $1,000, (iv) delivery by the Senior Mezzanine Loan borrowers to the lender of a comprehensive long-term business plan and restructuring proposal addressing repayment of the Senior Mezzanine Loan within 90 days after the first day of the Senior Mezzanine Extension Term, and (v) mandated additional monthly reporting requirements.

Also on March 9, 2010, a subsidiary of the Company amended the Junior Mezzanine Loan to extend the maturity date to March 11, 2011, or the Junior Mezzanine Extension Term. An extension fee of approximately $688 was paid by the Company to the lenders in connection with such extension. In addition, LIBOR used in determining the interest rate of the Junior Mezzanine Loan will be capped at 2.00% during the Junior Mezzanine Extension Term. The amendment also added or modified various terms of the Junior Mezzanine Loan, including, among others, (i) a prohibition on distributions from the Junior Mezzanine Loan borrower to the Company, other than to cover corporate overhead incurred by the Company, subject to a cap of $2,500 per quarter, (ii) requirement of $5,000 of available cash on deposit in a designated account on the commencement date of the Junior Mezzanine Extension Term and agreement, upon request, to grant a security interest in that account to the lenders, (iii) lender consent requirement with respect to leases that require tenant improvement costs and leasing commissions in excess of $1,000, (iv) delivery by the Junior Mezzanine Loan borrower to the lenders of a comprehensive long-term business plan and restructuring proposal addressing repayment of the Junior Mezzanine Loan within 90 days after the first day of the Junior Mezzanine Extension Term, and (v) mandated monthly reporting requirements.

164

Gramercy Capital Corp.
  
Notes To Consolidated Financial Statements
(Amounts in thousands, except share and per share data)
December 31, 2009

24. Subsequent Events  – (continued)

In February and March 2010, the Company completed the foreclosures of two land parcels comprising approximately 91 acres and 228 acres, respectively, located in Mesa, Arizona and primarily intended for industrial development. The two parcels secured a first mortgage loan which, as of December 31, 2009, was classified as non-performing, had an original unpaid principal balance of $31,500, and had a carrying value net of loan loss reserves of $20,660.

The Company has hired Edge Rock Realty Advisors, LLC, an FTI Company, to assist in evaluating strategic alternatives with respect to the Goldman Mortgage, Loan and the Goldman Mezzanine Loan.

165

Gramercy Capital Corp.
Schedule III
Real Estate Investments
(Amounts in thousands)

					Encumbrances at December 31, 2009			Initial Costs							Gross Amount at Which Carried December 31, 2009
City	State		Acquisition Date					Land		Building and Improvements		Net Improvements (Retirements) Since Acquisition			Land		Building and Improvements		Total		Accumulated Depreciation 12/31/09			Average Depreciable Life
New York*		NY		7/20/2007	$	59,099		$	70,100	$	—	$	—			70,100	$	—	$	70,100	$	—			—
Aberdeen		WA		4/1/2008		(b)(l)			53		1,312		115			53		1,427		1,480		(68	)		40
Abingdon		VA		4/1/2008		(e)(l)			112		331		—			112		331		443		(76	)		40
Abingdon		VA		4/1/2008		(g)(l)			199		1,177		—			199		1,177		1,376		(51	)		40
Abington		PA		4/1/2008		(g)(l)			169		630		(92	)		169		538		707		(25	)		40
Acworth		GA		4/1/2008		—	(l)		1,235		561		—			1,235		561		1,796		(24	)		40
Addison		IL		4/1/2008		(g)(l)			469		485		(10	)		459		485		944		(21	)		40
Advance		NC		4/1/2008		(g)(l)			543		208		—			543		208		751		(9	)		40
Aiken		SC		4/1/2008		(b)(l)			3,614		8,483		—			3,614		8,483		12,097		(316	)		40
Aiken		SC		4/1/2008		—	(l)		202		1,631		—			202		1,631		1,833		(68	)		40
Albany		NY		4/1/2008		(e)(l)			869		5,319		—			869		5,319		6,188		(235	)		40
Albertville		AL		4/1/2008		—	(l)		107		412		—			107		412		519		(18	)		40
Albuquerque		NM		4/1/2008		(b)(l)			1,618		2,425		—			1,618		2,425		4,043		(103	)		40
Alexandria		VA		4/1/2008		—	(l)		3,092		4,427		33			3,092		4,460		7,552		(184	)		40
Allbany		NY		4/1/2008		(e)(l)			388		5,563		—			388		5,563		5,951		(295	)		40
Alpharetta		GA		4/1/2008		—	(l)		1,234		1,278		—			1,234		1,278		2,512		(55	)		40
Alpharetta		GA		4/1/2008		(j)(l)			698		444		—			698		444		1,142		(20	)		40
Altamont Spring		FL		4/1/2008		(k)(l)			660		681		—			660		681		1,341		(30	)		40
Amherst		VA		4/1/2008		(d)(l)			249		374		—			249		374		623		(17	)		40
Anderson		SC		4/1/2008		—	(l)		495		855		101			495		956		1,451		(45	)		40
Annapolis		MD		4/1/2008		(b)(l)			11,542		7,006		—			11,542		7,006		18,548		(260	)		40
Anniston		AL		4/1/2008		—	(l)		295		1,215		—			295		1,215		1,510		(53	)		40
Apex		NC		4/1/2008		(g)(l)			156		120		—			156		120		276		(4	)		40
Aransas Pass		TX		4/1/2008		(b)(l)			160		439		(21	)		160		418		578		(18	)		40
Arlington		TX		4/1/2008		1,614	(l)		676		1,574		—			676		1,574		2,250		(69	)		40
Arlington		VA		4/1/2008		(a)(l)			805		928		76			805		1,004		1,809		(85	)		40
Arnold		CA		4/1/2008		(e)(l)			1,251		2,466		—			1,251		2,466		3,717		(100	)		40

166

					Encumbrances at December 31, 2009			Initial Costs							Gross Amount at Which Carried December 31, 2009
City	State		Acquisition Date					Land		Building and Improvements		Net Improvements (Retirements) Since Acquisition			Land		Building and Improvements		Total		Accumulated Depreciation 12/31/09			Average Depreciable Life
Arroyo Grande		CA		4/1/2008		(g)(l)			849		423		—			849		423		1,272		(18	)		40
Asheville		NC		4/1/2008		(g)(l)			1,295		4,081		—			1,295		4,081		5,376		(173	)		40
Asheville		NC		4/1/2008		(g)(l)			538		133		—			538		133		671		(6	)		40
Asheville		NC		4/1/2008		(c)(l)			977		1,130		—			977		1,130		2,107		(45	)		40
Asheville		NC		4/1/2008		—	(l)		695		2,278		423			695		2,701		3,396		(142	)		40
Ashtabula		OH		4/1/2008		(g)(l)			609		1,953		—			609		1,953		2,562		(86	)		40
Athens		AL		4/1/2008		—	(l)		454		3,262		—			454		3,262		3,716		(128	)		40
Atlanta		GA		4/1/2008		2,126	(l)		1,615		2,481		—			1,615		2,481		4,096		(107	)		40
Atlanta		GA		4/1/2008		612	(l)		1,138		737		—			1,138		737		1,875		(31	)		40
Atlanta		GA		4/1/2008		(h)(l)			1,031		432		—			1,031		432		1,463		(19	)		40
Atlanta		GA		4/1/2008		(d)(l)			3,200		54,813		1,121			3,200		55,934		59,134		(2,351	)		40
Auburn		CA		4/1/2008		(b)(l)			469		1,505		68			469		1,573		2,042		(76	)		40
Auburn		ME		4/1/2008		(e)(l)			377		373		—			377		373		750		(16	)		40
Auburn		NY		4/1/2008		(e)(l)			230		3,837		—			230		3,837		4,067		(180	)		40
Augusta		GA		4/1/2008		1,043	(l)		1,093		747		—			1,093		747		1,840		(32	)		40
Augusta		GA		4/1/2008		1,194	(l)		637		1,316		—			637		1,316		1,953		(57	)		40
Aurora		MO		4/1/2008		(g)(l)			20		370		—			20		370		390		(16	)		40
Austin		TX		4/1/2008		(g)(l)			260		293		103			260		396		656		(14	)		40
Avon Park		FL		4/1/2008		—	(l)		78		432		(104	)		78		328		406		(5	)		40
Avondale		PA		4/1/2008		(g)(l)			217		276		—			217		276		493		(12	)		40
Bakersfield		CA		4/1/2008		(e)(l)			601		2,216		—			601		2,216		2,817		(95	)		40
Bakersfield		CA		4/1/2008		(b)(l)			954		1,758		—			954		1,758		2,712		(75	)		40
Bakersfield		CA		4/1/2008		(b)(l)			946		1,243		103			946		1,346		2,292		(55	)		40
Ballwin		MO		4/1/2008		(e)(l)			361		329		153			361		482		843		(14	)		40
Baltimore		MD		4/1/2008		(b)(l)			703		2,076		—			703		2,076		2,779		(357	)		40
Baltimore		MD		4/1/2008		(a)(l)			4,888		15,092		—			4,888		15,092		19,980		(660	)		40
Baltimore		MD		4/1/2008		(a)(l)			11,150		29,967		453			11,150		30,420		41,570		(1,338	)		40
Baltimore		MD		4/1/2008		(d)(l)			642		896		—			642		896		1,538		(47	)		40
Banner Elk		NC		4/1/2008		(k)(l)			440		255		—			440		255		695		(11	)		40
Batesville		AR		4/1/2008		—	(l)		217		825		—			217		825		1,042		(35	)		40
Beachwood		OH		4/1/2008		(g)(l)			2,113		546		—			2,113		546		2,659		(24	)		40

167

					Encumbrances at December 31, 2009			Initial Costs							Gross Amount at Which Carried December 31, 2009
City	State		Acquisition Date					Land		Building and Improvements		Net Improvements (Retirements) Since Acquisition			Land		Building and Improvements		Total		Accumulated Depreciation 12/31/09			Average Depreciable Life
Beaumont		TX		4/1/2008		(e)(l)			59		594		—			59		594		653		(26	)		40
Bedford		OH		4/1/2008		(g)(l)			27		1,410		—			27		1,410		1,437		(62	)		40
Bedford		IN		4/1/2008		—	(l)		136		373		(184	)		136		189		325		(1	)		40
Beebe		AR		4/1/2008		—	(l)		29		148		—			29		148		177		(6	)		40
Belle Chasse		LA		4/1/2008		—	(l)		164		518		—			164		518		682		(22	)		40
Belleville		IL		4/1/2008		—	(l)		972		2,870		162			972		3,032		4,004		(262	)		40
Bellingham		WA		4/1/2008		(b)(l)			147		3,344		—			147		3,344		3,491		(146	)		40
Belton		MO		4/1/2008		(e)(l)			222		465		22			222		487		709		(18	)		40
Bennettsville		SC		4/1/2008		(d)(l)			48		362		—			48		362		410		(13	)		40
Bensalem		PA		4/1/2008		(g)(l)			476		928		—			476		928		1,404		(40	)		40
Benton		AR		4/1/2008		(e)(l)			615		355		17			615		372		987		(16	)		40
Berea		OH		4/1/2008		(g)(l)			581		1,815		—			581		1,815		2,396		(80	)		40
Berkeley Height		NJ		4/1/2008		502	(l)		1,164		314		—			1,164		314		1,478		(14	)		40
Bethel		OH		4/1/2008		—	(l)		22		746		—			22		746		768		(33	)		40
Black Mountain		NC		4/1/2008		—	(l)		259		247		—			259		247		506		(11	)		40
Blacksburg		VA		4/1/2008		(d)(l)			232		385		—			232		385		617		(17	)		40
Bloomington		IL		4/1/2008		—	(l)		201		552		11			201		563		764		(3	)		40
Blountstown		FL		4/1/2008		(e)(l)			205		843		36			205		879		1,084		(35	)		40
Blowing Rock		NC		4/1/2008		(g)(l)			579		45		—			579		45		624		(2	)		40
Boca Raron		FL		4/1/2008		717	(l)		1,180		423		—			1,180		423		1,603		(18	)		40
Boca Raton		FL		4/1/2008		—	(l)		2,565		1,732		—			2,565		1,732		4,297		(74	)		40
Bonita Springs		FL		4/1/2008		(h)(l)			959		638		—			959		638		1,597		(28	)		40
Boone		NC		4/1/2008		(c)(l)			935		2,067		—			935		2,067		3,002		(82	)		40
Bordentown		NJ		4/1/2008		—	(l)		149		408		—			149		408		557		(18	)		40
Boyertown		PA		4/1/2008		(g)(l)			389		313		—			389		313		702		(14	)		40
Boynton Beach		FL		4/1/2008		—	(l)		1,633		1,341		1			1,633		1,342		2,975		(55	)		40
Bradenton		FL		4/1/2008		(e)(l)			143		129		—			143		129		272		(5	)		40
Bradenton		FL		4/1/2008		(k)(l)			1,078		1,151		—			1,078		1,151		2,229		(50	)		40
Bradenton		FL		4/1/2008		(h)(l)			728		650		—			728		650		1,378		(29	)		40
Bradentown		FL		4/1/2008		(e)(l)			56		183		—			56		183		239		(8	)		40
Brandon		FL		4/1/2008		(j)(l)			775		161		—			775		161		936		(7	)		40

168

					Encumbrances at December 31, 2009			Initial Costs							Gross Amount at Which Carried December 31, 2009
City	State		Acquisition Date					Land		Building and Improvements		Net Improvements (Retirements) Since Acquisition			Land		Building and Improvements		Total		Accumulated Depreciation 12/31/09			Average Depreciable Life
Brandon		FL		4/1/2008		(k)(l)			923		300		—			923		300		1,223		(13	)		40
Breman		GA		4/1/2008		(g)(l)			211		911		—			211		911		1,122		(40	)		40
Bremen		GA		4/1/2008		—	(l)		113		311		—			113		311		424		(14	)		40
Bremerton		WA		4/1/2008		(b)(l)			73		664		—			73		664		737		(29	)		40
Brevard		NC		4/1/2008		(g)(l)			967		656		—			967		656		1,623		(29	)		40
Brevard		NC		4/1/2008		—	(l)		349		259		—			349		259		608		(11	)		40
Bridgewater		NJ		4/1/2008		(e)(l)			3,483		9,880		61			3,483		9,941		13,424		(521	)		40
Bristol		PA		4/1/2008		(g)(l)			72		214		121			72		335		407		(33	)		40
Broken Arrow		OK		4/1/2008		(e)(l)			357		434		—			357		434		791		(21	)		40
Brookneal		VA		4/1/2008		(d)(l)			92		406		—			92		406		498		(18	)		40
Brooksville		FL		4/1/2008		(e)(l)			200		267		—			200		267		467		(12	)		40
Brownwood		TX		4/1/2008		(b)(l)			88		242		(33	)		88		209		297		(10	)		40
Buford		GA		4/1/2008		—	(l)		333		915		(397	)		333		518		851		(11	)		40
Burbank		CA		4/1/2008		(e)(l)			1,934		3,769		—			1,934		3,769		5,703		(153	)		40
Burgaw		NC		4/1/2008		(c)(l)			497		611		—			497		611		1,108		(26	)		40
Burlingame		CA		4/1/2008		(e)(l)			1,226		603		77			1,226		680		1,906		(34	)		40
Burlington		NC		4/1/2008		(c)(l)			489		1,444		—			489		1,444		1,933		(64	)		40
Burlington		NC		4/1/2008		(d)(l)			1,931		5,162		—			1,931		5,162		7,093		(212	)		40
Calabash		NC		4/1/2008		—	(l)		686		355		—			686		355		1,041		(16	)		40
Callahan		FL		4/1/2008		(g)(l)			1,653		1,923		—			1,653		1,923		3,576		(84	)		40
Camas		WA		4/1/2008		(e)(l)			179		205		53			179		258		437		(11	)		40
Cambelltown		PA		4/1/2008		(g)(l)			65		255		—			65		255		320		(11	)		40
Cameron Park		CA		4/1/2008		(j)(l)			693		1,718		—			693		1,718		2,411		(74	)		40
Candler		NC		4/1/2008		(c)(l)			771		319		—			771		319		1,090		(14	)		40
Canoga Park		CA		4/1/2008		(e)(l)			1,219		828		—			1,219		828		2,047		(35	)		40
Canton		NC		4/1/2008		(g)(l)			254		762		—			254		762		1,016		(33	)		40
Canton		OH		4/1/2008		—	(l)		40		2,383		40			40		2,423		2,463		(112	)		40
Cape Coral		FL		4/1/2008		(k)(l)			802		406		—			802		406		1,208		(18	)		40
Carolina Beach		NC		4/1/2008		(c)(l)			1,330		1,660		—			1,330		1,660		2,990		(68	)		40
Carrollton		TX		4/1/2008		(b)(l)			705		1,353		7			705		1,360		2,065		(66	)		40
Carrolton		GA		4/1/2008		—	(l)		458		1,246		—			458		1,246		1,704		(53	)		40

169

					Encumbrances at December 31, 2009			Initial Costs						Gross Amount at Which Carried December 31, 2009
City	State		Acquisition Date					Land		Building and Improvements		Net Improvements (Retirements) Since Acquisition		Land		Building and Improvements		Total		Accumulated Depreciation 12/31/09			Average Depreciable Life
Cartersville		GA		4/1/2008		(g)(l)			225		164		—		225		164		389		(7	)		40
Cary		NC		4/1/2008		(g)(l)			400		224		—		400		224		624		(10	)		40
Cary		NC		4/1/2008		(c)(l)			755		459		—		755		459		1,214		(19	)		40
Cary		NC		4/1/2008		1,196	(l)		2,028		1,102		—		2,028		1,102		3,130		(48	)		40
Cary		NC		4/1/2008		(g)(l)			754		338		—		754		338		1,092		(15	)		40
Cary		NC		4/1/2008		(i)(l)			514		430		—		514		430		944		(19	)		40
Casselberry		FL		4/1/2008		—	(l)		355		245		—		355		245		600		(11	)		40
Catoosa		OK		4/1/2008		(e)(l)			168		1,331		35		168		1,366		1,534		(62	)		40
Cayce		SC		4/1/2008		(g)(l)			641		541		—		641		541		1,182		(23	)		40
Chapel Hill		NC		4/1/2008		(j)(l)			741		2,382		—		741		2,382		3,123		(103	)		40
Charleston		SC		4/1/2008		(j)(l)			163		142		—		163		142		305		(6	)		40
Charleston		SC		4/1/2008		(d)(l)			1,827		5,394		—		1,827		5,394		7,221		(239	)		40
Charlotte		NC		4/1/2008		(e)(l)			4,651		40,166		119		4,651		40,285		44,936		(2,195	)		40
Charlotte		NC		4/1/2008		(b)(l)			8,119		80,952		—		8,119		80,952		89,071		(3,804	)		40
Charlotte		NC		4/1/2008		73,880	(l)		20,837		105,506		869		20,829		106,383		127,212		(4,958	)		40
Charlotte		NC		4/1/2008		(g)(l)			363		721		—		363		721		1,084		(32	)		40
Charlotte		NC		4/1/2008		418	(l)		818		610		—		818		610		1,428		(25	)		40
Charlotte		NC		4/1/2008		(c)(l)			1,210		428		—		1,210		428		1,638		(18	)		40
Charlotte		NC		4/1/2008		(c)(l)			1,136		524		—		1,136		524		1,660		(22	)		40
Charlotte		NC		4/1/2008		(c)(l)			1,286		457		—		1,286		457		1,743		(19	)		40
Charlotte		NC		4/1/2008		(c)(l)			1,052		836		—		1,052		836		1,888		(36	)		40
Charlotte		NC		4/1/2008		(g)(l)			546		2,748		—		546		2,748		3,294		(104	)		40
Charlotte		NC		4/1/2008		(c)(l)			2,993		1,367		—		2,993		1,367		4,360		(59	)		40
Charlotte		NC		4/1/2008		(c)(l)			1,547		442		—		1,547		442		1,989		(19	)		40
Charlotte		NC		4/1/2008		(c)(l)			1,183		312		—		1,183		312		1,495		(13	)		40
Charlotte		NC		4/1/2008		(c)(l)			923		728		—		923		728		1,651		(31	)		40
Charlotte		NC		4/1/2008		1,094	(l)		1,344		880		—		1,344		880		2,224		(39	)		40
Charlotte		NC		4/1/2008		952	(l)		850		773		—		850		773		1,623		(34	)		40
Charlotte		NC		4/1/2008		(g)(l)			894		942		—		894		942		1,836		(41	)		40
Charlotte		NC		4/1/2008		(h)(l)			1,160		573		—		1,160		573		1,733		(25	)		40
Cherry Hill		NJ		4/1/2008		(g)(l)			661		478		—		661		478		1,139		(21	)		40

170

					Encumbrances at December 31, 2009			Initial Costs							Gross Amount at Which Carried December 31, 2009
City	State		Acquisition Date					Land		Building and Improvements		Net Improvements (Retirements) Since Acquisition			Land		Building and Improvements		Total		Accumulated Depreciation 12/31/09			Average Depreciable Life
Cherryville		NC		4/1/2008		(c)(l)			633		595		—			633		595		1,228		(25	)		40
Chester		VA		4/1/2008		(j)(l)			310		194		—			310		194		504		(8	)		40
Chicago		IL		4/1/2008		(b)(l)			16,379		81,513		1,135			16,379		82,648		99,027		(3,777	)		40
China Grove		NC		4/1/2008		(g)(l)			205		1,152		—			205		1,152		1,357		(51	)		40
Christainsburg		VA		4/1/2008		(d)(l)			246		653		16			246		669		915		(30	)		40
Cincinnati		OH		4/1/2008		(g)(l)			216		544		—			216		544		760		(24	)		40
Cincinnati		OH		4/1/2008		(g)(l)			418		351		—			418		351		769		(15	)		40
Clarksdale		MS		4/1/2008		—	(l)		95		1,050		(360	)		95		690		785		(13	)		40
Clarkson		WA		4/1/2008		(e)(l)			671		840		—			671		840		1,511		(36	)		40
Clearwater		FL		4/1/2008		(b)(l)			1,634		1,371		2			1,634		1,373		3,007		(62	)		40
Clearwater		FL		4/1/2008		(g)(l)			2,364		1,306		—			2,364		1,306		3,670		(57	)		40
Clemmons		NC		4/1/2008		466	(l)		825		469		—			825		469		1,294		(20	)		40
Clemmons		NC		4/1/2008		1,131	(l)		1,424		669		—			1,424		669		2,093		(30	)		40
Clermont		FL		4/1/2008		(b)(l)			131		426		—			131		426		557		(18	)		40
Cleveland		OH		4/1/2008		—	(l)		62		298		18			62		316		378		(15	)		40
Cleveland		OH		4/1/2008		—	(l)		44		482		—			44		482		526		(21	)		40
Cleveland		OH		4/1/2008		(g)(l)			262		330		—			262		330		592		(15	)		40
Cleveland		OH		4/1/2008		(g)(l)			146		690		—			146		690		836		(31	)		40
Cleveland		OH		4/1/2008		(g)(l)			151		834		—			151		834		985		(37	)		40
Cleveland		OH		4/1/2008		(g)(l)			486		1,284		—			486		1,284		1,770		(56	)		40
Cleveland		OH		4/1/2008		(g)(l)			66		1,043		—			66		1,043		1,109		(46	)		40
Cleveland		OH		4/1/2008		(g)(l)			212		1,151		—			212		1,151		1,363		(51	)		40
Cleveland		OH		4/1/2008		(g)(l)			212		1,308		—			212		1,308		1,520		(58	)		40
Clintwood		VA		4/1/2008		(d)(l)			16		304		—			16		304		320		(13	)		40
Clover		SC		4/1/2008		(g)(l)			209		156		—			209		156		365		(7	)		40
Cocoa		FL		4/1/2008		—	(l)		267		732		(992	)		7		—		7		—			40
College Park		GA		4/1/2008		(a)(l)			636		6,723		—			636		6,723		7,359		(294	)		40
Collingswood		NJ		4/1/2008		(g)(l)			417		435		—			417		435		852		(19	)		40
Colombia		SC		4/1/2008		(d)(l)			2,662		23,023		836			2,662		23,859		26,521		(1,040	)		40
Columbia		MO		4/1/2008		(b)(l)			527		1,503		—			527		1,503		2,030		(66	)		40
Columbia		SC		4/1/2008		(a)(l)			377		2,035		—			377		2,035		2,412		(89	)		40

171

					Encumbrances at December 31, 2009			Initial Costs							Gross Amount at Which Carried December 31, 2009
City	State		Acquisition Date					Land		Building and Improvements		Net Improvements (Retirements) Since Acquisition			Land		Building and Improvements		Total		Accumulated Depreciation 12/31/09			Average Depreciable Life
Columbia		SC		4/1/2008		(h)(l)			643		505		—			643		505		1,148		(22	)		40
Columbus		GA		4/1/2008		—	(l)		399		1,096		—			399		1,096		1,495		(48	)		40
Columbus		GA		4/1/2008		(h)(l)			476		62		—			476		62		538		(3	)		40
Columbus		GA		4/1/2008		(d)(l)			4,175		5,459		—			4,175		5,459		9,634		(221	)		40
Columbus		IN		4/1/2008		(g)(l)			460		758		—			460		758		1,218		(33	)		40
Columbus		IN		4/1/2008		(g)(l)			260		400		—			260		400		660		(17	)		40
Columbus		NC		4/1/2008		(c)(l)			352		304		—			352		304		656		(13	)		40
Columbus		GA		4/1/2008		—	(l)		187		513		—			187		513		700		(22	)		40
Compton		CA		4/1/2008		(b)(l)			820		529		—			820		529		1,349		(23	)		40
Conneaut		OH		4/1/2008		(g)(l)			344		1,098		—			344		1,098		1,442		(48	)		40
Conover		NC		4/1/2008		(g)(l)			184		925		—			184		925		1,109		(41	)		40
Conway		AR		4/1/2008		—	(l)		274		839		—			274		839		1,113		(34	)		40
Cookeville		TN		4/1/2008		—	(l)		464		3,144		—			464		3,144		3,608		(133	)		40
Cornelia		GA		4/1/2008		—	(l)		104		1,603		—			104		1,603		1,707		(68	)		40
Cornelius		NC		4/1/2008		(c)(l)			1,392		1,117		—			1,392		1,117		2,509		(48	)		40
Cornelius		NC		4/1/2008		(g)(l)			1,300		1,642		—			1,300		1,642		2,942		(71	)		40
Coronado		CA		4/1/2008		(b)(l)			732		1,692		—			732		1,692		2,424		(74	)		40
Cottonwood		AL		4/1/2008		—	(l)		37		103		—			37		103		140		(4	)		40
Crystal River		FL		4/1/2008		(e)(l)			600		569		—			600		569		1,169		(24	)		40
Dade City		FL		4/1/2008		(d)(l)			225		690		—			225		690		915		(30	)		40
Dade City		FL		4/1/2008		—	(l)		93		256		(49	)		93		207		300		—			40
Dallas		NC		4/1/2008		(c)(l)			1,096		578		—			1,096		578		1,674		(23	)		40
Dallas		TX		4/1/2008		(f)(l)			2,342		843		—			2,342		843		3,185		(35	)		40
Dallas		GA		4/1/2008		—	(l)		294		603		(666	)		190		41		231		(8	)		40
Dalton		GA		4/1/2008		(g)(l)			444		1,470		—			444		1,470		1,914		(64	)		40
Dalton		GA		4/1/2008		(d)(l)			127		1,286		247			127		1,533		1,660		(75	)		40
Davie		FL		4/1/2008		(g)(l)			1,304		970		—			1,304		970		2,274		(43	)		40
Daytona Beach		FL		4/1/2008		(e)(l)			422		1,246		155			422		1,401		1,823		(57	)		40
Daytona Beach		FL		4/1/2008		(g)(l)			1,684		1,585		—			1,684		1,585		3,269		(70	)		40
Daytona Beach		FL		4/1/2008		—	(l)		267		732		(103	)		267		629		896		(4	)		40
Decatur		GA		4/1/2008		(g)(l)			2,225		2,627		20			2,225		2,647		4,872		(99	)		40

172

					Encumbrances at December 31, 2009			Initial Costs							Gross Amount at Which Carried December 31, 2009
City	State		Acquisition Date					Land		Building and Improvements		Net Improvements (Retirements) Since Acquisition			Land		Building and Improvements		Total		Accumulated Depreciation 12/31/09			Average Depreciable Life
Decatur		GA		4/1/2008		—	(l)		160		439		—			160		439		599		(19	)		40
Deer Park		TX		4/1/2008		(f)(l)			437		547		—			437		547		984		(23	)		40
Deerfield Beach		FL		4/1/2008		(k)(l)			758		892		—			758		892		1,650		(40	)		40
Deland		FL		4/1/2008		(g)(l)			1,039		3,705		282			1,039		3,987		5,026		(174	)		40
Deland		FL		4/1/2008		—	(l)		196		766		—			196		766		962		(35	)		40
Delray Beach		FL		4/1/2008		(g)(l)			1,080		450		—			1,080		450		1,530		(20	)		40
Delray Beach		FL		4/1/2008		(d)(l)			892		1,652		49			892		1,701		2,593		(72	)		40
Denison		TX		4/1/2008		(b)(l)			107		293		—			107		293		400		(13	)		40
Denver		NC		4/1/2008		(c)(l)			413		385		—			413		385		798		(16	)		40
Dinuba		CA		4/1/2008		(e)(l)			274		810		26			274		836		1,110		(530	)		40
Dobbs Ferry		NY		4/1/2008		—	(l)		187		513		(380	)		187		133		320		(8	)		40
Dripping Springs		TX		4/1/2008		(g)(l)			208		2,359		—			208		2,359		2,567		(103	)		40
Dumas		TX		4/1/2008		(b)(l)			73		201		(83	)		73		118		191		(8	)		40
Duncanville		TX		4/1/2008		(f)(l)			301		304		—			301		304		605		(13	)		40
Dunedin		FL		4/1/2008		—	(l)		507		1,392		(281	)		507		1,111		1,618		(7	)		40
Dunn		NC		4/1/2008		—	(l)		281		1,117		(581	)		281		536		817		(14	)		40
Dunwoody		GA		4/1/2008		(g)(l)			760		727		—			760		727		1,487		(32	)		40
Durham		NC		4/1/2008		(c)(l)			648		218		—			648		218		866		(9	)		40
Durham		NC		4/1/2008		(c)(l)			649		436		—			649		436		1,085		(19	)		40
East Alton		IL		4/1/2008		—	(l)		26		542		150			26		692		718		(32	)		40
East Brunswick		NJ		4/1/2008		(e)(l)			941		2,162		40			941		2,202		3,143		(100	)		40
East Gadsden		AL		4/1/2008		—	(l)		133		366		—			133		366		499		(16	)		40
East Meadow		NY		4/1/2008		(e)(l)			1,273		5,380		(5,985	)		476		192		668		(192	)		40
East Point		GA		4/1/2008		(e)(l)			479		696		—			479		696		1,175		(29	)		40
Easton		PA		4/1/2008		—	(l)		212		388		(257	)		212		131		343		(15	)		40
Eden		NC		4/1/2008		—	(l)		63		213		—			63		213		276		(9	)		40
Eden		NC		4/1/2008		(c)(l)			1,230		1,148		—			1,230		1,148		2,378		(47	)		40
Edison Twp.		NJ		4/1/2008		603	(l)		1,435		419		—			1,435		419		1,854		(18	)		40
Edmonds		WA		4/1/2008		(e)(l)			359		546		107			359		653		1,012		(24	)		40
El Dorado		AR		4/1/2008		—	(l)		95		3,168		82			95		3,250		3,345		(224	)		40
El Dorado Hills		CA		4/1/2008		(k)(l)			704		1,749		—			704		1,749		2,453		(76	)		40

173

					Encumbrances at December 31, 2009			Initial Costs							Gross Amount at Which Carried December 31, 2009
City	State		Acquisition Date					Land		Building and Improvements		Net Improvements (Retirements) Since Acquisition			Land		Building and Improvements		Total		Accumulated Depreciation 12/31/09			Average Depreciable Life
El Segundo		CA		4/1/2008		(b)(l)			1,052		677		—			1,052		677		1,729		(30	)		40
Elizabethtown		NC		4/1/2008		(c)(l)			448		1,285		—			448		1,285		1,733		(52	)		40
Elmhurst		IL		4/1/2008		—	(l)		929		1,026		—			929		1,026		1,955		(45	)		40
Emmaus		PA		4/1/2008		682	(l)		798		987		—			798		987		1,785		(43	)		40
Ennis		TX		4/1/2008		1,691	(l)		1,348		1,731		—			1,348		1,731		3,079		(75	)		40
Enterprise		AL		4/1/2008		—	(l)		133		1,526		—			133		1,526		1,659		(65	)		40
Escondido		CA		4/1/2008		(b)(l)			4,278		5,664		—			4,278		5,664		9,942		(226	)		40
Euclid		OH		4/1/2008		(g)(l)			355		1,372		—			355		1,372		1,727		(60	)		40
Euclid		OH		4/1/2008		(g)(l)			726		449		—			726		449		1,175		(20	)		40
Eureka		CA		4/1/2008		(e)(l)			84		714		—			84		714		798		(32	)		40
Eustis		FL		4/1/2008		(g)(l)			2,140		3,289		—			2,140		3,289		5,429		(145	)		40
Fairfax		VA		4/1/2008		(e)(l)			675		1,992		32			675		2,024		2,699		(90	)		40
Farmington		CT		4/1/2008		(e)(l)			3,189		9,951		—			3,189		9,951		13,140		(439	)		40
Farmville		NC		4/1/2008		(c)(l)			881		1,937		—			881		1,937		2,818		(79	)		40
Fayetteville		FL		4/1/2008		(g)(l)			545		3,125		—			545		3,125		3,670		(135	)		40
Fayetteville		GA		4/1/2008		(g)(l)			574		427		—			574		427		1,001		(19	)		40
Fayetteville		NC		4/1/2008		(c)(l)			641		261		—			641		261		902		(11	)		40
Fayetteville		NC		4/1/2008		(c)(l)			712		284		—			712		284		996		(12	)		40
Fayetteville		NC		4/1/2008		(c)(l)			559		345		—			559		345		904		(15	)		40
Fayetteville		TN		4/1/2008		—	(l)		206		1,190		—			206		1,190		1,396		(50	)		40
Feasterville		PA		4/1/2008		891	(l)		923		1,702		—			923		1,702		2,625		(75	)		40
Fitzgerald		GA		4/1/2008		—	(l)		100		275		(75	)		100		200		300		—			40
Florence		SC		4/1/2008		—	(l)		80		220		(50	)		80		170		250		—			40
Florissant		MO		4/1/2008		(b)(l)			336		746		—			336		746		1,082		(32	)		40
Folsum		CA		4/1/2008		(e)(l)			257		415		—			257		415		672		(18	)		40
Forest City		NC		4/1/2008		(g)(l)			509		1,822		—			509		1,822		2,331		(80	)		40
Forsyth		MO		4/1/2008		(e)(l)			93		190		—			93		190		283		(9	)		40
Fort Bragg		CA		4/1/2008		(e)(l)			359		904		111			359		1,015		1,374		(52	)		40
Fort Dodge		IA		4/1/2008		(g)(l)			210		822		—			210		822		1,032		(36	)		40
Fort Lauderdale		FL		4/1/2008		(i)(l)			497		1,159		—			497		1,159		1,656		(51	)		40
Fort Myers		FL		4/1/2008		(i)(l)			641		707		—			641		707		1,348		(31	)		40

174

					Encumbrances at December 31, 2009			Initial Costs							Gross Amount at Which Carried December 31, 2009
City	State		Acquisition Date					Land		Building and Improvements		Net Improvements (Retirements) Since Acquisition			Land		Building and Improvements		Total		Accumulated Depreciation 12/31/09			Average Depreciable Life
Fort Myers		FL		4/1/2008		(d)(l)			1,247		1,453		23			1,247		1,476		2,723		(64	)		40
Fort Worth		TX		4/1/2008		(b)(l)			187		513		—			187		513		700		(22	)		40
Frankfort		IN		4/1/2008		—	(l)		198		545		(256	)		198		289		487		(2	)		40
Fresno		CA		4/1/2008		(e)(l)			959		1,983		—			959		1,983		2,942		(83	)		40
Fresno		CA		4/1/2008		(b)(l)			716		1,003		—			716		1,003		1,719		(44	)		40
Fresno		CA		4/1/2008		(b)(l)			782		1,067		—			782		1,067		1,849		(46	)		40
Fresno		CA		4/1/2008		(b)(l)			593		2,178		—			593		2,178		2,771		(95	)		40
Frisco		TX		4/1/2008		(g)(l)			1,155		1,438		—			1,155		1,438		2,593		(63	)		40
Ft Walton Beach		FL		4/1/2008		(e)(l)			872		845		67			872		912		1,784		(37	)		40
Ft. Lauderdale		FL		4/1/2008		(e)(l)			313		804		104			313		908		1,221		(35	)		40
Ft. Lauderdale		FL		4/1/2008		(g)(l)			3,222		1,566		—			3,222		1,566		4,788		(59	)		40
Ft. Myers Beach		FL		4/1/2008		(e)(l)			323		538		15			323		553		876		(25	)		40
Gardena		CA		4/1/2008		(b)(l)			1,426		1,500		—			1,426		1,500		2,926		(66	)		40
Garfield Height		OH		4/1/2008		(g)(l)			132		827		—			132		827		959		(36	)		40
Garner		NC		4/1/2008		(c)(l)			5,784		13,027		—			5,784		13,027		18,811		(444	)		40
Garner		NC		4/1/2008		(j)(l)			307		468		—			307		468		775		(21	)		40
Gastonia		NC		4/1/2008		(c)(l)			1,153		757		—			1,153		757		1,910		(31	)		40
Gastonia		NC		4/1/2008		(c)(l)			594		1,807		—			594		1,807		2,401		(77	)		40
Gastonia		NC		4/1/2008		(c)(l)			5,318		4,073		—			5,318		4,073		9,391		(148	)		40
Geneva		OH		4/1/2008		(g)(l)			378		1,791		—			378		1,791		2,169		(79	)		40
Glen Allen		VA		4/1/2008		(d)(l)			801		6,816		—			801		6,816		7,617		(291	)		40
Glen Allen		VA		4/1/2008		(d)(l)			1,404		7,357		—			1,404		7,357		8,761		(316	)		40
Glendale		CA		4/1/2008		(b)(l)			1,490		3,837		—			1,490		3,837		5,327		(168	)		40
Goldsboro		NC		4/1/2008		(g)(l)			280		545		—			280		545		825		(24	)		40
Goldsboro		NC		4/1/2008		(d)(l)			483		2,233		2			483		2,235		2,718		(97	)		40
Goodlettsville		TN		4/1/2008		—	(l)		546		1,952		51			546		2,003		2,549		(93	)		40
Goodwater		AL		4/1/2008		—	(l)		60		165		—			60		165		225		(7	)		40
Graham		NC		4/1/2008		(g)(l)			555		655		—			555		655		1,210		(28	)		40
Grants Pass		OR		4/1/2008		(g)(l)			256		1,049		—			256		1,049		1,305		(49	)		40
Great Neck		NY		4/1/2008		(e)(l)			4,542		8,970		—			4,542		8,970		13,512		(321	)		40
Green Cove		FL		4/1/2008		(g)(l)			1,395		2,960		—			1,395		2,960		4,355		(129	)		40

175

					Encumbrances at December 31, 2009			Initial Costs							Gross Amount at Which Carried December 31, 2009
City	State		Acquisition Date					Land		Building and Improvements		Net Improvements (Retirements) Since Acquisition			Land		Building and Improvements		Total		Accumulated Depreciation 12/31/09			Average Depreciable Life
Greensboro		NC		4/1/2008		(a)(l)			905		11,601		—			905		11,601		12,506		(507	)		40
Greensboro		NC		4/1/2008		(g)(l)			532		552		—			532		552		1,084		(24	)		40
Greensboro		NC		4/1/2008		(c)(l)			703		802		—			703		802		1,505		(34	)		40
Greensboro		NC		4/1/2008		(c)(l)			820		423		—			820		423		1,243		(18	)		40
Greensboro		NC		4/1/2008		(g)(l)			496		530		—			496		530		1,026		(23	)		40
Greensboro		NC		4/1/2008		(g)(l)			442		539		—			442		539		981		(23	)		40
Greensboro		NC		4/1/2008		(i)(l)			399		368		—			399		368		767		(16	)		40
Greenville		NC		4/1/2008		(g)(l)			685		501		—			685		501		1,186		(22	)		40
Greenville		NC		4/1/2008		(g)(l)			718		3,628		—			718		3,628		4,346		(156	)		40
Greenville		NC		4/1/2008		(c)(l)			522		712		—			522		712		1,234		(31	)		40
Greenville		NC		4/1/2008		(c)(l)			371		546		—			371		546		917		(24	)		40
Greenwich		CT		4/1/2008		(e)(l)			2,380		7,028		—			2,380		7,028		9,408		(311	)		40
Gresham		OR		4/1/2008		(e)(l)			284		353		31			284		384		668		(18	)		40
Grove City		FL		4/1/2008		(j)(l)			621		269		—			621		269		890		(12	)		40
Gulfport*		MS		4/1/2008		(g)(l)			169		—		—			169		—		169		—			40
Hadden Twnship		NJ		4/1/2008		(d)(l)			2,395		10,006		120			2,395		10,126		12,521		(420	)		40
Haddonfield		NJ		4/1/2008		(j)(l)			129		312		—			129		312		441		(14	)		40
Hallandale		FL		4/1/2008		(b)(l)			1,153		3,338		84			1,153		3,422		4,575		(180	)		40
Hamilton Square		NJ		4/1/2008		(i)(l)			1,769		216		—			1,769		216		1,985		(9	)		40
Hammonton		NJ		4/1/2008		(e)(l)			553		692		11			553		703		1,256		(32	)		40
Hampton		VA		4/1/2008		(e)(l)			524		580		—			524		580		1,104		(24	)		40
Hampton		VA		4/1/2008		(b)(l)			1,560		2,368		44			1,560		2,412		3,972		(103	)		40
Hampton		VA		4/1/2008		—	(l)		133		366		(62	)		133		304		437		(2	)		40
Hanford		CA		4/1/2008		(e)(l)			2,888		8,524		—			2,888		8,524		11,412		(314	)		40
Hanover		PA		4/1/2008		—	(l)		107		293		—			107		293		400		(13	)		40
Hapeville		GA		4/1/2008		1,733	(l)		631		1,656		—			631		1,656		2,287		(72	)		40
Hapeville		GA		4/1/2008		—	(l)		81		603		—			81		603		684		(26	)		40
Harriman		TN		4/1/2008		—	(l)		55		981		—			55		981		1,036		(44	)		40
Harrisburg		NC		4/1/2008		(g)(l)			572		514		—			572		514		1,086		(23	)		40
Harrisinburg		VA		4/1/2008		(d)(l)			513		827		97			513		924		1,437		(38	)		40
Harrisonburg		VA		4/1/2008		(g)(l)			598		631		—			598		631		1,229		(28	)		40

176

					Encumbrances at December 31, 2009			Initial Costs						Gross Amount at Which Carried December 31, 2009
City	State		Acquisition Date					Land		Building and Improvements		Net Improvements (Retirements) Since Acquisition		Land		Building and Improvements		Total		Accumulated Depreciation 12/31/09			Average Depreciable Life
Havelock		NC		4/1/2008		(g)(l)			99		213		—		99		213		312		(9	)		40
Havelock		NC		4/1/2008		—	(l)		212		401		—		212		401		613		(18	)		40
Healdsburg		CA		4/1/2008		(e)(l)			1,102		919		—		1,102		919		2,021		(39	)		40
Helmet		CA		4/1/2008		(e)(l)			758		1,303		—		758		1,303		2,061		(57	)		40
Henderson		NC		4/1/2008		(c)(l)			738		2,824		—		738		2,824		3,562		(98	)		40
Henderson		NC		4/1/2008		(c)(l)			824		982		—		824		982		1,806		(38	)		40
Hialeah		FL		4/1/2008		(b)(l)			1,005		574		—		1,005		574		1,579		(25	)		40
HIckory		NC		4/1/2008		597	(l)		674		570		—		674		570		1,244		(24	)		40
Hickory		NC		4/1/2008		(g)(l)			779		599		—		779		599		1,378		(26	)		40
Hickory*		NC		4/1/2008		—	(l)		164		—		—		164		—		164		—			40
High Point		NC		4/1/2008		(c)(l)			689		447		—		689		447		1,136		(19	)		40
High Point		NC		4/1/2008		(c)(l)			766		595		—		766		595		1,361		(26	)		40
High Point		NC		4/1/2008		—	(l)		305		434		—		305		434		739		(19	)		40
Highland Park		NJ		4/1/2008		420	(l)		886		407		—		886		407		1,293		(18	)		40
Highland Sprngs		VA		4/1/2008		(g)(l)			136		454		—		136		454		590		(20	)		40
Hightstown		NJ		4/1/2008		(g)(l)			1,083		589		—		1,083		589		1,672		(26	)		40
Hillsboro		TX		4/1/2008		745	(l)		303		1,322		—		303		1,322		1,625		(57	)		40
Hillsborough		NC		4/1/2008		(c)(l)			53		158		—		53		158		211		(32	)		40
Hilton Head		SC		4/1/2008		(e)(l)			437		484		—		437		484		921		(22	)		40
Hilton Head		SC		4/1/2008		1,889	(l)		925		1,688		—		925		1,688		2,613		(74	)		40
Hilton Head		SC		4/1/2008		2,734	(l)		192		4,086		—		192		4,086		4,278		(181	)		40
Hinsdale		IL		4/1/2008		(g)(l)			538		5,074		—		538		5,074		5,612		(220	)		40
Holiday		FL		4/1/2008		(j)(l)			2,035		632		—		2,035		632		2,667		(28	)		40
Holly Hill		FL		4/1/2008		(k)(l)			953		118		—		953		118		1,071		(5	)		40
Hollywood		FL		4/1/2008		(d)(l)			334		295		—		334		295		629		(13	)		40
Homestead		FL		4/1/2008		(e)(l)			2,072		1,453		—		2,072		1,453		3,525		(59	)		40
Horsham		PA		4/1/2008		(e)(l)			2,505		7,629		—		2,505		7,629		10,134		(330	)		40
Horton		AL		4/1/2008		—	(l)		29		89		—		29		89		118		(4	)		40
Hot Springs		AR		4/1/2008		—	(l)		378		3,524		—		378		3,524		3,902		(161	)		40
Houma		LA		4/1/2008		—	(l)		25		225		223		25		448		473		(17	)		40
Houston		TX		4/1/2008		(e)(l)			316		228		—		316		228		544		(10	)		40

177

					Encumbrances at December 31, 2009			Initial Costs							Gross Amount at Which Carried December 31, 2009
City	State		Acquisition Date					Land		Building and Improvements		Net Improvements (Retirements) Since Acquisition			Land		Building and Improvements		Total		Accumulated Depreciation 12/31/09			Average Depreciable Life
Houston		TX		4/1/2008		(b)(l)			806		5,470		—			806		5,470		6,276		(260	)		40
Houston		TX		4/1/2008		(f)(l)			1,088		3,267		(25	)		1,063		3,267		4,330		(133	)		40
Houston		TX		4/1/2008		(f)(l)			3,736		3,715		—			3,736		3,715		7,451		(142	)		40
Houston		TX		4/1/2008		(f)(l)			720		1,054		—			720		1,054		1,774		(46	)		40
Houston		TX		4/1/2008		(f)(l)			1,152		3,443		—			1,152		3,443		4,595		(137	)		40
Houston		TX		4/1/2008		(f)(l)			1,074		3,172		—			1,074		3,172		4,246		(140	)		40
Houston		TX		4/1/2008		(f)(l)			548		1,701		—			548		1,701		2,249		(73	)		40
Houston		TX		4/1/2008		(f)(l)			589		1,738		—			589		1,738		2,327		(77	)		40
Houston		TX		4/1/2008		(f)(l)			707		1,639		—			707		1,639		2,346		(65	)		40
Houston		TX		4/1/2008		(f)(l)			243		177		—			243		177		420		(8	)		40
Houston		TX		4/1/2008		—	(l)		293		806		—			293		806		1,099		(35	)		40
Houston		TX		4/1/2008		—	(l)		400		1,099		(1,399	)		100		—		100		—			40
Hudson		FL		4/1/2008		(h)(l)			954		415		—			954		415		1,369		(18	)		40
Humble		TX		4/1/2008		(f)(l)			1,402		1,413		—			1,402		1,413		2,815		(60	)		40
Huntersville		NC		4/1/2008		(g)(l)			1,113		1,061		—			1,113		1,061		2,174		(46	)		40
Huntsville		AL		4/1/2008		—	(l)		767		1,407		—			767		1,407		2,174		(58	)		40
Independence		KS		4/1/2008		(b)(l)			42		491		—			42		491		533		(22	)		40
Independence		MO		4/1/2008		(e)(l)			647		1,044		—			647		1,044		1,691		(45	)		40
Independence		MO		4/1/2008		(b)(l)			112		968		123			112		1,091		1,203		(54	)		40
Indianola		IA		4/1/2008		—	(l)		89		586		—			89		586		675		(26	)		40
Inglewood		CA		4/1/2008		(b)(l)			1,290		1,683		—			1,290		1,683		2,973		(74	)		40
Inverness		FL		4/1/2008		—	(l)		559		1,501		(840	)		559		661		1,220		(19	)		40
Irmo		SC		4/1/2008		(i)(l)			575		607		—			575		607		1,182		(27	)		40
Irvington		NJ		4/1/2008		(g)(l)			689		764		—			689		764		1,453		(33	)		40
Jacksonville		FL		4/1/2008		(b)(l)			2,260		33,097		2			2,260		33,099		35,359		(1,450	)		40
Jacksonville		FL		4/1/2008		(b)(l)			1,195		14,942		(17	)		1,195		14,925		16,120		(653	)		40
Jacksonville		FL		4/1/2008		(b)(l)			1,132		14,074		—			1,132		14,074		15,206		(617	)		40
Jacksonville		FL		4/1/2008		(b)(l)			1,523		21,656		242			1,523		21,898		23,421		(975	)		40
Jacksonville		FL		4/1/2008		(b)(l)			1,093		14,509		—			1,093		14,509		15,602		(636	)		40
Jacksonville		FL		4/1/2008		(b)(l)			2,298		36,643		—			2,298		36,643		38,941		(1,606	)		40
Jacksonville		FL		4/1/2008		(b)(l)			1,069		13,368		20			1,069		13,388		14,457		(585	)		40

178

					Encumbrances at December 31, 2009			Initial Costs							Gross Amount at Which Carried December 31, 2009
City	State		Acquisition Date					Land		Building and Improvements		Net Improvements (Retirements) Since Acquisition			Land		Building and Improvements		Total		Accumulated Depreciation 12/31/09			Average Depreciable Life
Jacksonville		FL		4/1/2008		(b)(l)			473		2,431		—			473		2,431		2,904		(107	)		40
Jacksonville		FL		4/1/2008		(b)(l)			4		681		—			4		681		685		(30	)		40
Jacksonville		FL		4/1/2008		(b)(l)			829		2,145		—			829		2,145		2,974		(94	)		40
Jacksonville		FL		4/1/2008		(b)(l)			283		656		—			283		656		939		(29	)		40
Jacksonville		FL		4/1/2008		(g)(l)			2,562		11,801		—			2,562		11,801		14,363		(513	)		40
Jacksonville		FL		4/1/2008		2,379	(l)		2,366		5,636		—			2,366		5,636		8,002		(234	)		40
Jacksonville		FL		4/1/2008		(g)(l)			1,367		692		—			1,367		692		2,059		(30	)		40
Jacksonville		FL		4/1/2008		568	(l)		585		714		—			585		714		1,299		(30	)		40
Jacksonville		FL		4/1/2008		(g)(l)			1,437		2,988		—			1,437		2,988		4,425		(129	)		40
Jacksonville		FL		4/1/2008		1,765	(l)		2,164		4,181		—			2,164		4,181		6,345		(172	)		40
Jacksonville		FL		4/1/2008		(i)(l)			746		317		—			746		317		1,063		(14	)		40
Jacksonville		FL		4/1/2008		—	(l)		160		439		—			160		439		599		(19	)		40
Jacksonville		FL		4/1/2008		—	(l)		267		732		(601	)		267		131		398		(8	)		40
Jamaica		NY		4/1/2008		(e)(l)			4,550		3,846		—			4,550		3,846		8,396		(144	)		40
Jefferson		GA		4/1/2008		—	(l)		154		641		—			154		641		795		(27	)		40
Jefferson		NC		4/1/2008		(g)(l)			215		780		—			215		780		995		(34	)		40
Jefferson		OH		4/1/2008		(g)(l)			483		1,634		—			483		1,634		2,117		(72	)		40
Jenkintown		PA		4/1/2008		14,104	(l)		5,075		14,209		43			5,075		14,252		19,327		(623	)		40
Kalamazoo		MI		4/1/2008		(g)(l)			414		2,824		5			414		2,829		3,243		(129	)		40
Kannapolis		NC		4/1/2008		(g)(l)			642		479		—			642		479		1,121		(21	)		40
Kansas City		MO		4/1/2008		—	(l)		3,965		29,379		38			3,965		29,417		33,382		(1,463	)		40
Kansas City		MO		4/1/2008		(e)(l)			952		920		108			952		1,028		1,980		(47	)		40
Kansas City		KS		4/1/2008		—	(l)		40		110		(150	)		—		—		—		—			40
Kenansville		NC		4/1/2008		(c)(l)			467		523		—			467		523		990		(22	)		40
Kendall Park		NJ		4/1/2008		(g)(l)			860		378		—			860		378		1,238		(16	)		40
Kenilworth		NJ		4/1/2008		412	(l)		1,084		686		—			1,084		686		1,770		(30	)		40
Kennett Square		PA		4/1/2008		(g)(l)			875		2,064		—			875		2,064		2,939		(89	)		40
Kennewick		WA		4/1/2008		(e)(l)			485		435		54			485		489		974		(19	)		40
Kent		OH		4/1/2008		(g)(l)			137		100		—			137		100		237		(4	)		40
Kilgore		TX		4/1/2008		—	(l)		216		420		—			216		420		636		(18	)		40
King		NC		4/1/2008		498	(l)		751		833		—			751		833		1,584		(35	)		40

179

					Encumbrances at December 31, 2009			Initial Costs						Gross Amount at Which Carried December 31, 2009
City	State		Acquisition Date					Land		Building and Improvements		Net Improvements (Retirements) Since Acquisition		Land		Building and Improvements		Total		Accumulated Depreciation 12/31/09			Average Depreciable Life
Kinston		NC		4/1/2008		—	(l)		197		152		—		197		152		349		(7	)		40
Kinston		NC		4/1/2008		(c)(l)			1,400		2,696		—		1,400		2,696		4,096		(108	)		40
Knightdale		NC		4/1/2008		(g)(l)			280		156		—		280		156		436		(7	)		40
Lake Hiawatha		NJ		4/1/2008		(g)(l)			548		366		—		548		366		914		(16	)		40
Lake Mary		FL		4/1/2008		(g)(l)			1,023		1,334		—		1,023		1,334		2,357		(58	)		40
Lakeland		FL		4/1/2008		475	(l)		648		407		—		648		407		1,055		(17	)		40
Lakeland		FL		4/1/2008		(d)(l)			573		1,659		1		573		1,660		2,233		(72	)		40
Lakeport		CA		4/1/2008		(i)(l)			818		3,715		—		818		3,715		4,533		(158	)		40
Lakewood		NJ		4/1/2008		(e)(l)			1,133		943		—		1,133		943		2,076		(40	)		40
Lancaster		PA		4/1/2008		(d)(l)			1,278		7,408		101		1,278		7,509		8,787		(319	)		40
Landing		NJ		4/1/2008		(g)(l)			959		603		—		959		603		1,562		(26	)		40
Lansing		MI		4/1/2008		(g)(l)			38		741		—		38		741		779		(32	)		40
Lantana		FL		4/1/2008		960	(l)		1,600		892		—		1,600		892		2,492		(38	)		40
LaPorte		IN		4/1/2008		—	(l)		101		401		5		101		406		507		(19	)		40
Largo		FL		4/1/2008		(g)(l)			631		243		—		631		243		874		(11	)		40
Largo		FL		4/1/2008		(i)(l)			1,079		974		—		1,079		974		2,053		(42	)		40
Las Cruces		NM		4/1/2008		(e)(l)			134		557		—		134		557		691		(24	)		40
Las Vegas		NV		4/1/2008		(e)(l)			6,660		6,475		—		6,660		6,475		13,135		(300	)		40
Lawrenceville		GA		4/1/2008		(g)(l)			1,109		861		—		1,109		861		1,970		(38	)		40
Lawrenceville		NJ		4/1/2008		(g)(l)			1,623		743		—		1,623		743		2,366		(32	)		40
Lebanon		PA		4/1/2008		(g)(l)			362		1,471		45		362		1,516		1,878		(63	)		40
Lebanon		TN		4/1/2008		(e)(l)			66		180		94		66		274		340		(8	)		40
Leesburg		VA		4/1/2008		(g)(l)			3,221		1,191		—		3,221		1,191		4,412		(52	)		40
Lemnoir		NC		4/1/2008		—	(l)		288		298		—		288		298		586		(13	)		40
Lemoore		CA		4/1/2008		(e)(l)			907		1,132		32		907		1,164		2,071		(50	)		40
Levittown		NY		4/1/2008		(e)(l)			321		949		—		321		949		1,270		(157	)		40
Lexington		MO		4/1/2008		(b)(l)			5		160		—		5		160		165		(7	)		40
Lexington		NC		4/1/2008		(g)(l)			477		3,800		—		477		3,800		4,277		(167	)		40
Lexington		TN		4/1/2008		—	(l)		155		933		—		155		933		1,088		(39	)		40
LighthousePoint		FL		4/1/2008		(b)(l)			710		1,382		21		710		1,403		2,113		(64	)		40
Lilburn		GA		4/1/2008		(k)(l)			777		418		—		777		418		1,195		(18	)		40

180

					Encumbrances at December 31, 2009			Initial Costs							Gross Amount at Which Carried December 31, 2009
City	State		Acquisition Date					Land		Building and Improvements		Net Improvements (Retirements) Since Acquisition			Land		Building and Improvements		Total		Accumulated Depreciation 12/31/09			Average Depreciable Life
Lincoln		IL		4/1/2008		—	(l)		66		530		—			66		530		596		(22	)		40
Lincolnton		NC		4/1/2008		(c)(l)			415		422		—			415		422		837		(18	)		40
Lincolnton		NC		4/1/2008		(g)(l)			58		1,656		—			58		1,656		1,714		(71	)		40
Linden		NJ		4/1/2008		(e)(l)			629		1,857		—			629		1,857		2,486		(82	)		40
Linden		NJ		4/1/2008		(g)(l)			1,397		1,066		—			1,397		1,066		2,463		(47	)		40
Linden		NJ		4/1/2008		(g)(l)			1,580		1,531		—			1,580		1,531		3,111		(66	)		40
Linwood		PA		4/1/2008		—	(l)		98		187		(41	)		98		146		244		(8	)		40
Live Oak		FL		4/1/2008		(e)(l)			181		620		49			181		669		850		(29	)		40
Livermore		CA		4/1/2008		(e)(l)			1,194		1,579		134			1,194		1,713		2,907		(69	)		40
London		KY		4/1/2008		—	(l)		439		1,375		—			439		1,375		1,814		(60	)		40
Long Beach		CA		4/1/2008		(b)(l)			957		697		21			957		718		1,675		(32	)		40
Long Beach		CA		4/1/2008		(b)(l)			1,232		2,990		—			1,232		2,990		4,222		(131	)		40
Long Beach		CA		4/1/2008		(b)(l)			1,983		1,631		—			1,983		1,631		3,614		(68	)		40
Longview		TX		4/1/2008		—	(l)		—		1,254		—			—		1,254		1,254		(54	)		40
Los Angeles		CA		4/1/2008		(e)(l)			2,369		12,153		—			2,369		12,153		14,522		(462	)		40
Los Angeles		CA		4/1/2008		(e)(l)			1,973		3,453		—			1,973		3,453		5,426		(141	)		40
Los Angeles		CA		4/1/2008		(b)(l)			871		913		—			871		913		1,784		(40	)		40
Los Angeles		CA		4/1/2008		(b)(l)			510		777		—			510		777		1,287		(34	)		40
Lufkin		TX		4/1/2008		—	(l)		241		1,158		(665	)		241		493		734		(3	)		40
Lutcher		LA		4/1/2008		—	(l)		45		239		—			45		239		284		(10	)		40
Lutz		FL		4/1/2008		(h)(l)			1,175		678		—			1,175		678		1,853		(30	)		40
Lynden		WA		4/1/2008		(e)(l)			28		61		—			28		61		89		(3	)		40
Lynwood		CA		4/1/2008		(b)(l)			619		924		49			619		973		1,592		(45	)		40
Mabletown		GA		4/1/2008		(g)(l)			936		3,032		—			936		3,032		3,968		(132	)		40
Macon		GA		4/1/2008		1,396	(l)		392		2,330		—			392		2,330		2,722		(101	)		40
Madison Heights		VA		4/1/2008		—	(l)		191		200		—			191		200		391		(9	)		40
Malden		MA		4/1/2008		(e)(l)			9,165		25,032		—			9,165		25,032		34,197		(1,076	)		40
Manakin-Sabot		VA		4/1/2008		(k)(l)			619		94		—			619		94		713		(4	)		40
Manasquan		NJ		4/1/2008		—	(l)		851		649		—			851		649		1,500		(28	)		40
Maplewood		NJ		4/1/2008		(e)(l)			212		1,018		—			212		1,018		1,230		(42	)		40
Marco Island		FL		4/1/2008		(h)(l)			1,222		316		—			1,222		316		1,538		(14	)		40

181

					Encumbrances at December 31, 2009			Initial Costs						Gross Amount at Which Carried December 31, 2009
City	State		Acquisition Date					Land		Building and Improvements		Net Improvements (Retirements) Since Acquisition		Land		Building and Improvements		Total		Accumulated Depreciation 12/31/09			Average Depreciable Life
Marianna		FL		4/1/2008		—	(l)		104		571		—		104		571		675		(24	)		40
Marietta		GA		4/1/2008		(g)(l)			756		451		—		756		451		1,207		(20	)		40
Marietta		GA		4/1/2008		(g)(l)			1,162		722		—		1,162		722		1,884		(32	)		40
Marietta		GA		4/1/2008		(i)(l)			688		329		—		688		329		1,017		(15	)		40
Marion		NC		4/1/2008		764	(l)		944		797		—		944		797		1,741		(34	)		40
Marion		NC		4/1/2008		(c)(l)			748		1,504		—		748		1,504		2,252		(65	)		40
Martinez		GA		4/1/2008		(g)(l)			1,177		1,388		—		1,177		1,388		2,565		(61	)		40
Mason		OH		4/1/2008		(g)(l)			338		230		—		338		230		568		(10	)		40
Media		PA		4/1/2008		(d)(l)			309		913		79		309		992		1,301		(103	)		40
Medina		OH		4/1/2008		(g)(l)			254		977		—		254		977		1,231		(43	)		40
Melbourne		FL		4/1/2008		(g)(l)			638		432		—		638		432		1,070		(19	)		40
Mentor		OH		4/1/2008		(g)(l)			522		643		—		522		643		1,165		(28	)		40
Mentor		OH		4/1/2008		(g)(l)			1,401		441		—		1,401		441		1,842		(19	)		40
Merced		CA		4/1/2008		(g)(l)			835		2,129		—		835		2,129		2,964		(93	)		40
Merrick		NY		4/1/2008		(e)(l)			113		1,110		48		113		1,158		1,271		(56	)		40
Mesa		AZ		4/1/2008		(b)(l)			1,060		1,865		164		1,060		2,029		3,089		(90	)		40
Mexico		MO		4/1/2008		(b)(l)			87		238		—		87		238		325		(10	)		40
Miami		FL		4/1/2008		(e)(l)			50		1,000		—		50		1,000		1,050		(44	)		40
Miami		FL		4/1/2008		(e)(l)			1,161		975		—		1,161		975		2,136		(43	)		40
Miami Lakes		FL		4/1/2008		(b)(l)			7,624		13,408		—		7,624		13,408		21,032		(577	)		40
Midland		NC		4/1/2008		(g)(l)			306		348		—		306		348		654		(15	)		40
Midlothian		VA		4/1/2008		(g)(l)			979		867		—		979		867		1,846		(38	)		40
Midlothian		VA		4/1/2008		—	(l)		160		439		—		160		439		599		(19	)		40
Milford		OH		4/1/2008		(g)(l)			279		1,083		—		279		1,083		1,362		(46	)		40
Millburn		NJ		4/1/2008		838	(l)		1,294		1,136		—		1,294		1,136		2,430		(50	)		40
Mission		TX		4/1/2008		(b)(l)			419		1,395		—		419		1,395		1,814		(60	)		40
Mission Hills		CA		4/1/2008		(b)(l)			1,590		1,216		—		1,590		1,216		2,806		(52	)		40
Monroe		NC		4/1/2008		(c)(l)			1,076		1,047		—		1,076		1,047		2,123		(44	)		40
Monticello		IA		4/1/2008		—	(l)		64		337		—		64		337		401		(15	)		40
Montrose		CA		4/1/2008		(e)(l)			1,329		1,075		—		1,329		1,075		2,404		(45	)		40
Mooresville		NC		4/1/2008		(c)(l)			701		1,717		—		701		1,717		2,418		(70	)		40

182

					Encumbrances at December 31, 2009			Initial Costs							Gross Amount at Which Carried December 31, 2009
City	State		Acquisition Date					Land		Building and Improvements		Net Improvements (Retirements) Since Acquisition			Land		Building and Improvements		Total		Accumulated Depreciation 12/31/09			Average Depreciable Life
Moosic		PA		4/1/2008		(g)(l)			320		244		—			320		244		564		(11	)		40
Morehead City		NC		4/1/2008		(g)(l)			257		458		—			257		458		715		(20	)		40
Morganton		NC		4/1/2008		1,684	(l)		922		3,002		—			922		3,002		3,924		(132	)		40
Morristown		NJ		4/1/2008		(d)(l)			1,401		4,139		—			1,401		4,139		5,540		(227	)		40
Moultrie		GA		4/1/2008		(b)(l)			133		366		—			133		366		499		(16	)		40
Mount Carmel		PA		4/1/2008		—	(l)		40		110		(101	)		40		9		49		—			40
Mount Olive		NC		4/1/2008		(c)(l)			604		546		—			604		546		1,150		(23	)		40
Mount Olive		MS		4/1/2008		—	(l)		56		327		—			56		327		383		(14	)		40
Mountain Home		AR		4/1/2008		(e)(l)			220		489		—			220		489		709		(24	)		40
Mt. Pleasant		TX		4/1/2008		(b)(l)			107		293		—			107		293		400		(13	)		40
Munford		TN		4/1/2008		—	(l)		155		596		—			155		596		751		(25	)		40
Murfreesboro		TN		4/1/2008		(b)(l)			229		1,334		42			229		1,376		1,605		(61	)		40
Muskogee		OK		4/1/2008		(b)(l)			159		1,878		—			159		1,878		2,037		(82	)		40
N. Little Rock		AR		4/1/2008		(j)(l)			331		469		—			331		469		800		(20	)		40
Nacogdoches		TX		4/1/2008		—	(l)		295		900		—			295		900		1,195		(38	)		40
Naples		FL		4/1/2008		—	(l)		44		21		—			44		21		65		—			40
Nashua		NH		4/1/2008		(e)(l)			467		1,070		6			467		1,076		1,543		(49	)		40
Nashville		TN		4/1/2008		(g)(l)			180		406		—			180		406		586		(18	)		40
Nashville		IL		4/1/2008		—	(l)		23		304		(75	)		23		229		252		(4	)		40
Nassau Bay		FL		4/1/2008		2,135	(l)		2,258		3,668		138			2,258		3,806		6,064		(165	)		40
Nederland		TX		4/1/2008		(e)(l)			247		293		105			247		398		645		(15	)		40
New Bern		NC		4/1/2008		(g)(l)			357		1,111		—			357		1,111		1,468		(48	)		40
New Bern		NC		4/1/2008		(c)(l)			575		295		—			575		295		870		(13	)		40
New Port Richey		FL		4/1/2008		(e)(l)			384		439		40			384		479		863		(34	)		40
New Port Richey		FL		4/1/2008		469	(l)		714		260		—			714		260		974		(10	)		40
New Port Richey		FL		4/1/2008		—	(l)		376		224		—			376		224		600		(10	)		40
New Port Richey		FL		4/1/2008		—	(l)		227		623		(359	)		227		264		491		(13	)		40
New Smyrna Bch		FL		4/1/2008		—	(l)		755		665		—			755		665		1,420		(28	)		40
New Smyrna Beac		FL		4/1/2008		(i)(l)			759		398		—			759		398		1,157		(17	)		40
Newark		DE		4/1/2008		(e)(l)			1,355		10,502		—			1,355		10,502		11,857		(458	)		40
Newnan		NC		4/1/2008		(g)(l)			413		5,471		—			413		5,471		5,884		(239	)		40

183

					Encumbrances at December 31, 2009			Initial Costs							Gross Amount at Which Carried December 31, 2009
City	State		Acquisition Date					Land		Building and Improvements		Net Improvements (Retirements) Since Acquisition			Land			Building and Improvements		Total			Accumulated Depreciation 12/31/09			Average Depreciable Life
Newport Beach		CA		4/1/2008		(b)(l)			1,398		1,646		—			1,398			1,646		3,044			(72	)		40
Newport News		VA		4/1/2008		—	(l)		80		220		(22	)		80			198		278			(3	)		40
Newton		NC		4/1/2008		(g)(l)			235		1,455		—			235			1,455		1,690			(64	)		40
Newton		AL		4/1/2008		—	(l)		27		73		—			27			73		100			(3	)		40
Norcorss		GA		4/1/2008		—	(l)		267		732		(27	)		267			705		972			(5	)		40
Norcross		GA		4/1/2008		(g)(l)			1,037		1,827		—			1,037			1,827		2,864			(80	)		40
Norcross		GA		4/1/2008		(g)(l)			1,317		2,083		—			1,317			2,083		3,400			(91	)		40
Norcross		GA		4/1/2008		(g)(l)			620		876		—			620			876		1,496			(38	)		40
Norcross		GA		4/1/2008		—	(l)		460		1,227		—			460			1,227		1,687			(52	)		40
Norfolk		VA		4/1/2008		(a)(l)			3,152		15,857		943			3,152			16,800		19,952			(751	)		40
Norfolk		VA		4/1/2008		(a)(l)			1,309		8,040		—			1,309			8,040		9,349			(364	)		40
Norfolk*		VA		4/1/2008		(a)(l)			473		—		—			473			—		473			—			40
Norristown		PA		4/1/2008		—	(l)		253		1,050		99			253			1,149		1,402			(88	)		40
North Brunswick		NJ		4/1/2008		—	(l)		326		1,805		418			326			2,223		2,549			(99	)		40
North Brunswick		NJ		4/1/2008		—	(l)		3,576		20,135		154			3,576			20,289		23,865			(869	)		40
North Hollywood		CA		4/1/2008		(b)(l)			1,554		1,870		—			1,554			1,870		3,424			(82	)		40
North Kansas City		MO		4/1/2008		(b)(l)			623		1,966		127			623			2,093		2,716			(98	)		40
North Kingstown		RI		4/1/2008		(e)(l)			255		1,568		—			255			1,568		1,823			(67	)		40
North Plainfiel		NJ		4/1/2008		(g)(l)			93		256		(109	)		93			147		240			(3	)		40
North Port		FL		4/1/2008		(g)(l)			2,348		1,387		—			2,348			1,387		3,735			(61	)		40
North Wilkesboro		NC		4/1/2008		(g)(l)			1,806		5,471		—			1,806			5,471		7,277			(236	)		40
North Wilkesboro		NC		4/1/2008		—	(l)		423		326		—			423			326		749			(14	)		40
Norton		VA		4/1/2008		—	(l)		40		110		(151	)		(1	)		—		(1	)		—			40
Ocala		FL		4/1/2008		(b)(l)			205		1,490		813			205			2,303		2,508			(65	)		40
Ocala		FL		4/1/2008		(j)(l)			634		452		—			634			452		1,086			(20	)		40
Ocean City		NJ		4/1/2008		—	(l)		776		334		45			776			379		1,155			(17	)		40
Ontario		CA		4/1/2008		(e)(l)			285		1,413		16			285			1,429		1,714			(62	)		40
Ontario		CA		4/1/2008		(b)(l)			3,002		7,589		—			3,002			7,589		10,591			(320	)		40
Orange		VA		4/1/2008		(e)(l)			216		3,210		—			216			3,210		3,426			(118	)		40
Orange City		FL		4/1/2008		(h)(l)			1,102		473		—			1,102			473		1,575			(21	)		40
Orangevale		CA		4/1/2008		(e)(l)			532		439		30			532			469		1,001			(20	)		40

184

					Encumbrances at December 31, 2009			Initial Costs							Gross Amount at Which Carried December 31, 2009
City	State		Acquisition Date					Land		Building and Improvements		Net Improvements (Retirements) Since Acquisition			Land		Building and Improvements		Total		Accumulated Depreciation 12/31/09			Average Depreciable Life
Orlando		FL		4/1/2008		(g)(l)			1,882		706		—			1,882		706		2,588		(31	)		40
Orlando		FL		4/1/2008		—	(l)		243		667		—			243		667		910		(29	)		40
Ormond Beach		FL		4/1/2008		(g)(l)			521		835		—			521		835		1,356		(40	)		40
Oroville		CA		4/1/2008		(e)(l)			293		415		—			293		415		708		(18	)		40
Overland Park		KS		4/1/2008		(b)(l)			331		1,667		105			331		1,772		2,103		(75	)		40
Oviedo		FL		4/1/2008		(g)(l)			764		435		(884	)		310		5		315		(5	)		40
Palatka		FL		4/1/2008		2,793	(l)		1,233		3,646		—			1,233		3,646		4,879		(158	)		40
Palm Coast		FL		4/1/2008		(h)(l)			858		765		—			858		765		1,623		(34	)		40
Palmdale		CA		4/1/2008		(b)(l)			936		732		—			936		732		1,668		(32	)		40
Paris		TN		4/1/2008		—	(l)		510		1,060		—			510		1,060		1,570		(44	)		40
Paris		TX		4/1/2008		1,055	(l)		1,306		815		—			1,306		815		2,121		(36	)		40
Paso Robles		CA		4/1/2008		(g)(l)			1,533		1,271		—			1,533		1,271		2,804		(55	)		40
Paso Robles		CA		4/1/2008		(g)(l)			1,549		4,042		—			1,549		4,042		5,591		(175	)		40
Peachtree City		GA		4/1/2008		(e)(l)			740		2,611		13			740		2,624		3,364		(113	)		40
Pembroke Pines		FL		4/1/2008		1,355	(l)		1,433		1,132		—			1,433		1,132		2,565		(49	)		40
Pembroke Pines		FL		4/1/2008		—	(l)		3,330		1,461		67			3,330		1,528		4,858		(70	)		40
Pennington		NJ		4/1/2008		(g)(l)			810		623		—			810		623		1,433		(27	)		40
Pennsauken		NJ		4/1/2008		(e)(l)			4,037		6,133		118			4,037		6,251		10,288		(236	)		40
Pensacola		FL		4/1/2008		(g)(l)			13		32		—			13		32		45		(1	)		40
Pensacola		FL		4/1/2008		(b)(l)			159		1,394		—			159		1,394		1,553		(61	)		40
Pensacola		FL		4/1/2008		(k)(l)			467		606		—			467		606		1,073		(26	)		40
Pensacola		FL		4/1/2008		(d)(l)			702		2,417		1			702		2,418		3,120		(110	)		40
Peoria		IL		4/1/2008		(g)(l)			171		4,645		127			171		4,772		4,943		(229	)		40
Pepper Pike		OH		4/1/2008		(g)(l)			1,018		796		—			1,018		796		1,814		(35	)		40
Petersburg		VA		4/1/2008		—	(l)		17		114		1			17		115		132		(5	)		40
Philadelphia		PA		4/1/2008		(e)(l)			373		1,101		12			373		1,113		1,486		(49	)		40
Philadelphia		PA		4/1/2008		(g)(l)			792		648		—			792		648		1,440		(29	)		40
Philadelphia		PA		4/1/2008		39,944	(l)		9,325		32,013		524			9,325		32,537		41,862		(1,391	)		40
Philadelphia		PA		4/1/2008		(g)(l)			277		818		44			277		862		1,139		(42	)		40
Philadelphia		PA		4/1/2008		(d)(l)			13,305		47,583		75			13,305		47,658		60,963		(2,022	)		40
Phoenix		AZ		4/1/2008		(b)(l)			159		212		—			159		212		371		(9	)		40

185

					Encumbrances at December 31, 2009			Initial Costs							Gross Amount at Which Carried December 31, 2009
City	State		Acquisition Date					Land		Building and Improvements		Net Improvements (Retirements) Since Acquisition			Land		Building and Improvements		Total		Accumulated Depreciation 12/31/09			Average Depreciable Life
Phoenix		AZ		4/1/2008		(b)(l)			—		9,263		—			—		9,263		9,263		(407	)		40
Phoenix		AZ		4/1/2008		(b)(l)			—		28,605		—			—		28,605		28,605		(1,257	)		40
Phoenix		AZ		4/1/2008		(b)(l)			—		9,809		—			—		9,809		9,809		(431	)		40
Phoenix		AZ		4/1/2008		(b)(l)			—		9,208		—			—		9,208		9,208		(405	)		40
Phoenix		AZ		4/1/2008		(b)(l)			—		23,504		—			—		23,504		23,504		(1,036	)		40
Phoenixville		PA		4/1/2008		(g)(l)			200		549		(67	)		200		482		682		(21	)		40
Pine Bluff		AR		4/1/2008		(g)(l)			22		90		—			22		90		112		(4	)		40
Pinehurst		NC		4/1/2008		(c)(l)			638		797		—			638		797		1,435		(34	)		40
Pinellas Park		FL		4/1/2008		(g)(l)			1,060		325		—			1,060		325		1,385		(14	)		40
Placerville		CA		4/1/2008		(h)(l)			246		1,096		—			246		1,096		1,342		(47	)		40
Plantation		FL		4/1/2008		(e)(l)			4,397		4,994		19			4,397		5,013		9,410		(192	)		40
Plantation		FL		4/1/2008		(e)(l)			319		410		—			319		410		729		(18	)		40
Plantation		FL		4/1/2008		(g)(l)			1,964		880		—			1,964		880		2,844		(38	)		40
Plantation		FL		4/1/2008		(k)(l)			884		653		—			884		653		1,537		(29	)		40
Pleasant Garden		NC		4/1/2008		(c)(l)			733		568		—			733		568		1,301		(23	)		40
Pleasanton		CA		4/1/2008		(e)(l)			1,905		1,202		—			1,905		1,202		3,107		(53	)		40
Plymouth		NC		4/1/2008		(g)(l)			104		963		—			104		963		1,067		(42	)		40
Point Pleasant		NJ		4/1/2008		(g)(l)			938		581		—			938		581		1,519		(25	)		40
Pomona		CA		4/1/2008		(b)(l)			1,893		2,317		—			1,893		2,317		4,210		(101	)		40
Port Charlotte		FL		4/1/2008		(e)(l)			109		224		—			109		224		333		(10	)		40
Port Charlotte		FL		4/1/2008		(b)(l)			511		701		10			511		711		1,222		(33	)		40
Port Charlotte		FL		4/1/2008		(h)(l)			703		155		—			703		155		858		(7	)		40
Port St. Lucie		FL		4/1/2008		(g)(l)			877		4,583		—			877		4,583		5,460		(199	)		40
Port Townsend		WA		4/1/2008		(e)(l)			49		258		—			49		258		307		(11	)		40
Porterville		CA		4/1/2008		(e)(l)			419		810		—			419		810		1,229		(35	)		40
Portland		OR		4/1/2008		(e)(l)			25		35		—			25		35		60		(2	)		40
Portsmouth		NH		4/1/2008		(e)(l)			3,921		4,062		—			3,921		4,062		7,983		(157	)		40
Pottstown		PA		4/1/2008		(g)(l)			466		1,241		—			466		1,241		1,707		(51	)		40
Providence		RI		4/1/2008		(e)(l)			2,655		12,527		49			2,655		12,576		15,231		(560	)		40
Providence		RI		4/1/2008		43,500	(l)		—		41,413		350			—		41,763		41,763		(1,779	)		40
Quincy		WA		4/1/2008		(e)(l)			192		444		—			192		444		636		(21	)		40

186

					Encumbrances at December 31, 2009			Initial Costs							Gross Amount at Which Carried December 31, 2009
City	State		Acquisition Date					Land		Building and Improvements		Net Improvements (Retirements) Since Acquisition			Land		Building and Improvements		Total		Accumulated Depreciation 12/31/09			Average Depreciable Life
Raleigh		NC		4/1/2008		(c)(l)			1,052		674		—			1,052		674		1,726		(29	)		40
Raleigh		NC		4/1/2008		(c)(l)			686		518		—			686		518		1,204		(22	)		40
Raleigh		NC		4/1/2008		(c)(l)			681		473		—			681		473		1,154		(20	)		40
Raleigh		NC		4/1/2008		(c)(l)			1,066		1,520		—			1,066		1,520		2,586		(64	)		40
Raleigh		NC		4/1/2008		1,262	(l)		1,161		986		—			1,161		986		2,147		(44	)		40
Raleigh		NC		4/1/2008		(k)(l)			598		536		—			598		536		1,134		(24	)		40
Raleigh		NC		4/1/2008		(d)(l)			9,431		49,130		—			9,431		49,130		58,561		(2,087	)		40
Red Bank		NJ		4/1/2008		(d)(l)			679		2,005		—			679		2,005		2,684		(139	)		40
Red Bluff		CA		4/1/2008		(b)(l)			509		980		—			509		980		1,489		(46	)		40
Redding		CA		4/1/2008		(e)(l)			480		652		119			480		771		1,251		(29	)		40
Redding		CA		4/1/2008		(b)(l)			800		1,748		—			800		1,748		2,548		(77	)		40
Redmond		OR		4/1/2008		(e)(l)			121		244		—			121		244		365		(12	)		40
Reedley		CA		4/1/2008		(e)(l)			1,945		3,552		66			1,945		3,618		5,563		(164	)		40
Reidsville		NC		4/1/2008		(c)(l)			1,020		751		—			1,020		751		1,771		(30	)		40
Reno		NV		4/1/2008		1,437	(l)		848		1,235		—			848		1,235		2,083		(52	)		40
Reseda		CA		4/1/2008		(e)(l)			1,545		2,461		—			1,545		2,461		4,006		(103	)		40
Richland		MO		4/1/2008		(b)(l)			282		709		—			282		709		991		(34	)		40
Richland		WA		4/1/2008		(b)(l)			944		1,939		35			944		1,974		2,918		(84	)		40
Richland		PA		4/1/2008		—	(l)		30		170		—			30		170		200		(7	)		40
Richlands		NC		4/1/2008		—	(l)		317		334		—			317		334		651		(15	)		40
Richmond		VA		4/1/2008		(e)(l)			3,395		9,560		—			3,395		9,560		12,955		(347	)		40
Richmond		VA		4/1/2008		(a)(l)			2,877		15,085		623			2,877		15,708		18,585		(750	)		40
Richmond		VA		4/1/2008		(a)(l)			3,035		26,011		—			3,035		26,011		29,046		(1,136	)		40
Richmond		VA		4/1/2008		(g)(l)			533		594		—			533		594		1,127		(26	)		40
Richmond		VA		4/1/2008		(g)(l)			886		311		—			886		311		1,197		(14	)		40
Richmond		VA		4/1/2008		(j)(l)			784		263		—			784		263		1,047		(11	)		40
Richmond*		VA		4/1/2008		(a)(l)			430		—		—			430		—		430		—			40
Ridgecrest		CA		4/1/2008		(e)(l)			2,356		5,003		39			2,356		5,042		7,398		(196	)		40
Ridgewood		NJ		4/1/2008		—	(l)		347		952		(623	)		347		329		676		(14	)		40
Riverdale		GA		4/1/2008		—	(l)		176		293		—			176		293		469		(13	)		40
Riverside		CA		4/1/2008		(b)(l)			2,758		6,449		36			2,758		6,485		9,243		(273	)		40

187

					Encumbrances at December 31, 2009			Initial Costs							Gross Amount at Which Carried December 31, 2009
City	State		Acquisition Date					Land		Building and Improvements		Net Improvements (Retirements) Since Acquisition			Land		Building and Improvements		Total		Accumulated Depreciation 12/31/09			Average Depreciable Life
Roanoke		VA		4/1/2008		(d)(l)			4,554		64,916		288			4,554		65,204		69,758		(2,744	)		40
Robinson		IL		4/1/2008		—	(l)		204		626		—			204		626		830		(25	)		40
Rochester		NY		4/1/2008		—	(l)		41		853		—			41		853		894		(42	)		40
Rock Creek		OH		4/1/2008		(g)(l)			24		174		—			24		174		198		(8	)		40
Rock Hill		SC		4/1/2008		(e)(l)			3,400		8,136		35			3,400		8,171		11,571		(298	)		40
Rock Hill		SC		4/1/2008		(g)(l)			854		828		—			854		828		1,682		(36	)		40
Rockingham		NC		4/1/2008		(g)(l)			66		935		—			66		935		1,001		(41	)		40
Rockledge		FL		4/1/2008		569	(l)		894		501		—			894		501		1,395		(21	)		40
Rocky Mount		NC		4/1/2008		(g)(l)			449		2,646		—			449		2,646		3,095		(114	)		40
Rolla		MO		4/1/2008		(b)(l)			25		124		26			25		150		175		(7	)		40
Rome		GA		4/1/2008		(g)(l)			264		4,109		—			264		4,109		4,373		(179	)		40
Roseville		CA		4/1/2008		(i)(l)			988		1,497		—			988		1,497		2,485		(65	)		40
Roswell		GA		4/1/2008		(g)(l)			629		800		—			629		800		1,429		(35	)		40
Roxboro		NC		4/1/2008		1,167	(l)		751		1,369		—			751		1,369		2,120		(59	)		40
Runnemede		NJ		4/1/2008		(g)(l)			99		41		—			99		41		140		(2	)		40
Russellville		AR		4/1/2008		—	(l)		316		3,161		1			316		3,162		3,478		(125	)		40
Sacramento		CA		4/1/2008		(b)(l)			803		1,202		—			803		1,202		2,005		(53	)		40
Sacramento		CA		4/1/2008		(b)(l)			444		878		—			444		878		1,322		(39	)		40
Salinas		CA		4/1/2008		(b)(l)			592		2,275		115			592		2,390		2,982		(102	)		40
Salisbury		NC		4/1/2008		(c)(l)			603		1,395		—			603		1,395		1,998		(59	)		40
Salisbury		NC		4/1/2008		(c)(l)			369		259		—			369		259		628		(11	)		40
Salisbury		NC		4/1/2008		—	(l)		293		151		—			293		151		444		(6	)		40
San Antonio		TX		4/1/2008		(e)(l)			228		378		126			228		504		732		(24	)		40
San Antonio		TX		4/1/2008		(e)(l)			255		253		18			255		271		526		(13	)		40
San Antonio		TX		4/1/2008		(b)(l)			323		2,430		(110	)		323		2,320		2,643		(106	)		40
San Antonio		TX		4/1/2008		(f)(l)			898		306		—			898		306		1,204		(13	)		40
San Antonio		TX		4/1/2008		—	(l)		320		879		(588	)		320		291		611		(11	)		40
San Bernadino		CA		4/1/2008		(b)(l)			255		5,374		—			255		5,374		5,629		(234	)		40
San Francisco		CA		4/1/2008		(e)(l)			1,317		2,503		—			1,317		2,503		3,820		(104	)		40
San Jose		CA		4/1/2008		(e)(l)			157		1,871		—			157		1,871		2,028		(80	)		40
San Leandro		CA		4/1/2008		(e)(l)			1,571		1,219		—			1,571		1,219		2,790		(82	)		40

188

					Encumbrances at December 31, 2009			Initial Costs							Gross Amount at Which Carried December 31, 2009
City	State		Acquisition Date					Land		Building and Improvements		Net Improvements (Retirements) Since Acquisition			Land		Building and Improvements		Total		Accumulated Depreciation 12/31/09			Average Depreciable Life
San Rafael		CA		4/1/2008		(g)(l)			1,124		563		71			1,124		634		1,758		(29	)		40
Santa Barbara		CA		4/1/2008		(b)(l)			682		2,541		—			682		2,541		3,223		(111	)		40
Santa Fe		NM		4/1/2008		(e)(l)			240		362		55			240		417		657		(16	)		40
Santa Maria		CA		4/1/2008		(b)(l)			1,290		1,574		15			1,290		1,589		2,879		(69	)		40
Santa Maria		CA		4/1/2008		(g)(l)			1,087		883		—			1,087		883		1,970		(39	)		40
Sarasota		FL		4/1/2008		—	(l)		735		1,004		—			735		1,004		1,739		(41	)		40
Sarasota		FL		4/1/2008		(h)(l)			1,166		557		—			1,166		557		1,723		(25	)		40
Savannah		GA		4/1/2008		(b)(l)			120		2,853		—			120		2,853		2,973		(137	)		40
Savannah		GA		4/1/2008		643	(l)		949		528		—			949		528		1,477		(22	)		40
Savannah		GA		4/1/2008		(g)(l)			529		432		—			529		432		961		(19	)		40
Scotch Plains		NJ		4/1/2008		577	(l)		1,174		653		—			1,174		653		1,827		(28	)		40
Sea Bright		NJ		4/1/2008		(g)(l)			1,506		1,078		—			1,506		1,078		2,584		(45	)		40
Seattle		WA		4/1/2008		(e)(l)			112		274		—			112		274		386		(12	)		40
Seattle		WA		4/1/2008		(e)(l)			431		119		—			431		119		550		(5	)		40
Seattle		WA		4/1/2008		(b)(l)			123		2,896		50			123		2,946		3,069		(129	)		40
Selma		AL		4/1/2008		—	(l)		245		2,463		—			245		2,463		2,708		(102	)		40
Sequim		WA		4/1/2008		(e)(l)			235		241		—			235		241		476		(11	)		40
Sesser		IL		4/1/2008		—	(l)		56		214		—			56		214		270		(9	)		40
Seymour		IN		4/1/2008		(g)(l)			418		507		—			418		507		925		(22	)		40
Seymour		IN		4/1/2008		(g)(l)			333		932		—			333		932		1,265		(40	)		40
Shaker Heights		OH		4/1/2008		(g)(l)			1,492		1,538		—			1,492		1,538		3,030		(67	)		40
Shelbyville		TN		4/1/2008		—	(l)		59		686		65			59		751		810		(34	)		40
Shenandoah		TX		4/1/2008		—	(l)		293		806		—			293		806		1,099		(35	)		40
Sherman Oaks		CA		4/1/2008		(e)(l)			1,256		822		—			1,256		822		2,078		(35	)		40
Silver Springs		MD		4/1/2008		(a)(l)			293		930		—			293		930		1,223		(40	)		40
Simpsonville		SC		4/1/2008		(k)(l)			2,686		1,076		—			2,686		1,076		3,762		(43	)		40
Smithfield		NC		4/1/2008		(d)(l)			130		881		—			130		881		1,011		(36	)		40
Smyra		GA		4/1/2008		—	(l)		882		602		(67	)		815		602		1,417		(26	)		40
Sneads		FL		4/1/2008		—	(l)		47		128		—			47		128		175		(6	)		40
Snellville		GA		4/1/2008		—	(l)		871		994		—			871		994		1,865		(43	)		40
Snellville		GA		4/1/2008		—	(l)		120		330		(13	)		120		317		437		(2	)		40

189

					Encumbrances at December 31, 2009			Initial Costs							Gross Amount at Which Carried December 31, 2009
City	State		Acquisition Date					Land		Building and Improvements		Net Improvements (Retirements) Since Acquisition			Land		Building and Improvements		Total		Accumulated Depreciation 12/31/09			Average Depreciable Life
Somerdale		NJ		4/1/2008		(g)(l)			655		438		—			655		438		1,093		(19	)		40
Sonora		CA		4/1/2008		(j)(l)			477		1,410		—			477		1,410		1,887		(62	)		40
South Orange		NJ		4/1/2008		(e)(l)			560		1,678		—			560		1,678		2,238		(70	)		40
South Plainfiel		NJ		4/1/2008		515	(l)		1,214		451		—			1,214		451		1,665		(20	)		40
South Portland		ME		4/1/2008		(e)(l)			3,283		6,732		—			3,283		6,732		10,015		(276	)		40
Southampton		PA		4/1/2008		(g)(l)			910		949		—			910		949		1,859		(41	)		40
Southern Piens		NC		4/1/2008		(c)(l)			691		501		—			691		501		1,192		(22	)		40
Sparta		NC		4/1/2008		(g)(l)			353		593		—			353		593		946		(26	)		40
Sparta		IL		4/1/2008		—	(l)		107		1,035		(805	)		107		230		337		(13	)		40
Spokane		WA		4/1/2008		(b)(l)			1,900		9,799		—			1,900		9,799		11,699		(427	)		40
Spring Hill		FL		4/1/2008		—	(l)		147		403		(400	)		147		3		150		—			40
Spring Lake		NC		4/1/2008		(c)(l)			644		866		—			644		866		1,510		(37	)		40
Spring Lake		NJ		4/1/2008		(g)(l)			864		191		—			864		191		1,055		(8	)		40
Springfield		MO		4/1/2008		(b)(l)			918		1,386		—			918		1,386		2,304		(63	)		40
Springfield		MO		4/1/2008		(b)(l)			600		1,110		—			600		1,110		1,710		(51	)		40
Springfield Twp		OH		4/1/2008		(g)(l)			328		247		(23	)		305		247		552		(11	)		40
Spruce Pine		NC		4/1/2008		(c)(l)			112		330		—			112		330		442		(25	)		40
St. Augustine		FL		4/1/2008		(g)(l)			601		560		—			601		560		1,161		(24	)		40
St. Helena		CA		4/1/2008		(e)(l)			1,317		956		76			1,317		1,032		2,349		(47	)		40
St. Louis		MO		4/1/2008		(b)(l)			612		4,503		25			612		4,528		5,140		(211	)		40
St. Louis		MO		4/1/2008		(b)(l)			1,147		2,137		—			1,147		2,137		3,284		(92	)		40
St. Petersburg		FL		4/1/2008		(g)(l)			925		286		—			925		286		1,211		(12	)		40
St. Petersburg		FL		4/1/2008		—	(l)		—		—		—			—		—		—		—			40
Statesville		NC		4/1/2008		(c)(l)			627		452		—			627		452		1,079		(20	)		40
Statesville		NC		4/1/2008		(c)(l)			353		1,042		—			353		1,042		1,395		(46	)		40
Stephenville		TX		4/1/2008		1,365	(l)		1,199		1,638		—			1,199		1,638		2,837		(71	)		40
Stockbridge		GA		4/1/2008		(g)(l)			509		370		—			509		370		879		(16	)		40
Stockton		CA		4/1/2008		(e)(l)			169		285		47			169		332		501		(15	)		40
Stockton		CA		4/1/2008		(e)(l)			315		600		26			315		626		941		(27	)		40
Stockton		CA		4/1/2008		(b)(l)			198		1,698		—			198		1,698		1,896		(74	)		40
Strongville		OH		4/1/2008		(g)(l)			563		1,261		—			563		1,261		1,824		(55	)		40

190

					Encumbrances at December 31, 2009			Initial Costs							Gross Amount at Which Carried December 31, 2009
City	State		Acquisition Date					Land		Building and Improvements		Net Improvements (Retirements) Since Acquisition			Land		Building and Improvements		Total		Accumulated Depreciation 12/31/09			Average Depreciable Life
Stuart		FL		4/1/2008		(b)(l)			539		3,071		16			539		3,087		3,626		(137	)		40
Succasunna		NJ		4/1/2008		—	(l)		147		123		41			147		164		311		(13	)		40
Summit		NJ		4/1/2008		(e)(l)			445		1,314		—			445		1,314		1,759		(58	)		40
Summit		NJ		4/1/2008		(e)(l)			515		1,520		75			515		1,595		2,110		(68	)		40
Sumter		SC		4/1/2008		—	(l)		33		191		26			33		217		250		(18	)		40
Sun City		AZ		4/1/2008		(e)(l)			903		1,393		—			903		1,393		2,296		(60	)		40
Sunnyvale		CA		4/1/2008		(b)(l)			3,459		1,295		83			3,459		1,378		4,837		(67	)		40
Susanville		CA		4/1/2008		(e)(l)			856		2,312		—			856		2,312		3,168		(94	)		40
Sutter Creek		CA		4/1/2008		(k)(l)			252		640		—			252		640		892		(28	)		40
Swansboro		NC		4/1/2008		(c)(l)			356		335		—			356		335		691		(14	)		40
Sylvania		GA		4/1/2008		(g)(l)			8		613		—			8		613		621		(26	)		40
Tamaqua		PA		4/1/2008		(g)(l)			52		303		—			52		303		355		(13	)		40
Tampa		FL		4/1/2008		(b)(l)			4,008		10,469		—			4,008		10,469		14,477		(511	)		40
Tampa		FL		4/1/2008		(b)(l)			1,134		2,211		—			1,134		2,211		3,345		(95	)		40
Tampa		FL		4/1/2008		(g)(l)			2,851		5,076		—			2,851		5,076		7,927		(220	)		40
Tampa		FL		4/1/2008		(i)(l)			595		823		—			595		823		1,418		(37	)		40
Tarboro		NC		4/1/2008		—	(l)		185		115		—			185		115		300		(5	)		40
Tarboro		NC		4/1/2008		—	(l)		259		913		—			259		913		1,172		(40	)		40
Thomasville		NC		4/1/2008		—	(l)		83		392		—			83		392		475		(17	)		40
Toccoa		GA		4/1/2008		—	(l)		70		686		(434	)		70		252		322		(9	)		40
Toms River		NJ		4/1/2008		(d)(l)			1,572		2,956		20			1,572		2,976		4,548		(130	)		40
Torrance		CA		4/1/2008		(b)(l)			896		1,131		—			896		1,131		2,027		(49	)		40
Trenton		NJ		4/1/2008		(d)(l)			234		1,663		68			234		1,731		1,965		(73	)		40
Troutman		NC		4/1/2008		(c)(l)			602		207		—			602		207		809		(9	)		40
Tryon		NC		4/1/2008		(c)(l)			1,017		4,763		—			1,017		4,763		5,780		(183	)		40
Tucker		GA		4/1/2008		(a)(l)			503		6,472		—			503		6,472		6,975		(283	)		40
Tucker		GA		4/1/2008		(j)(l)			834		682		—			834		682		1,516		(30	)		40
Tulsa		OK		4/1/2008		(e)(l)			166		228		3			166		231		397		(11	)		40
Tulsa		OK		4/1/2008		(b)(l)			531		1,237		—			531		1,237		1,768		(54	)		40
Turlock		CA		4/1/2008		(e)(l)			677		1,087		—			677		1,087		1,764		(47	)		40
Union City		NJ		4/1/2008		(e)(l)			397		1,834		—			397		1,834		2,231		(77	)		40

191

					Encumbrances at December 31, 2009			Initial Costs							Gross Amount at Which Carried December 31, 2009
City	State		Acquisition Date					Land		Building and Improvements		Net Improvements (Retirements) Since Acquisition			Land		Building and Improvements		Total		Accumulated Depreciation 12/31/09			Average Depreciable Life
Vacaville		CA		4/1/2008		(e)(l)			239		538		—			239		538		777		(23	)		40
Valdese		NC		4/1/2008		981	(l)		542		1,870		—			542		1,870		2,412		(78	)		40
Valdosta		GA		4/1/2008		(b)(l)			415		1,287		—			415		1,287		1,702		(53	)		40
Valley Springs		CA		4/1/2008		(i)(l)			159		1,191		—			159		1,191		1,350		(51	)		40
Ventura		CA		4/1/2008		(b)(l)			1,308		917		—			1,308		917		2,225		(40	)		40
Vernon		CA		4/1/2008		(e)(l)			1,457		1,307		—			1,457		1,307		2,764		(56	)		40
Vero Beach		FL		4/1/2008		(k)(l)			799		476		—			799		476		1,275		(21	)		40
Vidalia		GA		4/1/2008		(g)(l)			317		2,275		—			317		2,275		2,592		(99	)		40
Vincennes		IN		4/1/2008		—	(l)		133		366		(14	)		133		352		485		(2	)		40
Virginia Beach		VA		4/1/2008		(i)(l)			554		357		—			554		357		911		(16	)		40
Virginia Beach		VA		4/1/2008		(d)(l)			554		1,610		—			554		1,610		2,164		(70	)		40
Virginia Beach		VA		4/1/2008		—	(l)		299		200		(14	)		299		186		485		(9	)		40
Mobile		AL		4/1/2008		—	(l)		—		—		—			—		—		—		—			40
Voorhees		NJ		4/1/2008		—	(l)		107		293		—			107		293		400		(13	)		40
W. Los Angeles		CA		4/1/2008		(e)(l)			2,061		2,614		—			2,061		2,614		4,675		(108	)		40
Walla Walla		WA		4/1/2008		(b)(l)			280		1,294		99			280		1,393		1,673		(62	)		40
Waltham		MA		4/1/2008		(e)(l)			11,470		30,943		85			11,470		31,028		42,498		(1,446	)		40
Wantagh		NY		4/1/2008		(e)(l)			842		1,010		—			842		1,010		1,852		(42	)		40
Warminster		PA		4/1/2008		682	(l)		867		1,065		—			867		1,065		1,932		(47	)		40
Warrenton		VA		4/1/2008		—	(l)		271		1,423		—			271		1,423		1,694		(59	)		40
Washington		DC		4/1/2008		(a)(l)			5,884		3,793		—			5,884		3,793		9,677		(166	)		40
Washington		NC		4/1/2008		—	(l)		139		134		—			139		134		273		(6	)		40
Waynesboro		GA		4/1/2008		(g)(l)			33		963		—			33		963		996		(41	)		40
Waynesville		NC		4/1/2008		808	(l)		1,926		445		—			1,926		445		2,371		(16	)		40
Wenatchee		WA		4/1/2008		(e)(l)			201		600		10			201		610		811		(35	)		40
West Chester		PA		4/1/2008		—	(l)		525		4,223		—			525		4,223		4,748		(185	)		40
West Chester		PA		4/1/2008		(d)(l)			2,592		4,062		—			2,592		4,062		6,654		(160	)		40
West Hempstead		NY		4/1/2008		(e)(l)			2,031		3,439		19			2,031		3,458		5,489		(149	)		40
West Jefferson		NC		4/1/2008		(g)(l)			478		758		—			478		758		1,236		(33	)		40
West Palm Beach		FL		4/1/2008		(e)(l)			2,453		3,335		28			2,453		3,363		5,816		(133	)		40
West Palm Beach		FL		4/1/2008		(d)(l)			3,390		2,209		—			3,390		2,209		5,599		(89	)		40

192

					Encumbrances at December 31, 2009			Initial Costs						Gross Amount at Which Carried December 31, 2009
City	State		Acquisition Date					Land		Building and Improvements		Net Improvements (Retirements) Since Acquisition		Land		Building and Improvements		Total		Accumulated Depreciation 12/31/09			Average Depreciable Life
West Palm Beach		FL		4/1/2008		(d)(l)			97		72		18		97		90		187		(7	)		40
West Seneca		NY		4/1/2008		(e)(l)			2,142		9,447		32		2,142		9,479		11,621		(417	)		40
Wheaton		MD		4/1/2008		(e)(l)			1,971		2,062		—		1,971		2,062		4,033		(86	)		40
Whittier		CA		4/1/2008		(b)(l)			1,787		4,624		—		1,787		4,624		6,411		(196	)		40
Wichita Falls		TX		4/1/2008		(e)(l)			186		272		23		186		295		481		(16	)		40
Wilkesboro		NC		4/1/2008		515	(l)		566		608		—		566		608		1,174		(26	)		40
Williamsburg		VA		4/1/2008		—	(l)		706		1,252		—		706		1,252		1,958		(50	)		40
Williamston		NC		4/1/2008		—	(l)		53		146		40		53		186		239		(8	)		40
Wilmington		DE		4/1/2008		39,379	(l)		10,664		60,082		—		10,664		60,082		70,746		(2,621	)		40
Wilmington		NC		4/1/2008		(c)(l)			976		739		—		976		739		1,715		(32	)		40
Wilmington		NC		4/1/2008		(g)(l)			262		199		—		262		199		461		(9	)		40
Wilmington		NC		4/1/2008		(c)(l)			1,109		499		—		1,109		499		1,608		(22	)		40
Wilmington		NC		4/1/2008		(g)(l)			939		887		—		939		887		1,826		(39	)		40
Wilson		NC		4/1/2008		(g)(l)			741		11,112		—		741		11,112		11,853		(471	)		40
Wilson		NC		4/1/2008		(g)(l)			1,697		8,854		—		1,697		8,854		10,551		(378	)		40
Wilson		NC		4/1/2008		(g)(l)			700		2,974		—		700		2,974		3,674		(129	)		40
Winder		GA		4/1/2008		(b)(l)			321		453		—		321		453		774		(20	)		40
Winstom Salem		NC		4/1/2008		(d)(l)			548		35,554		—		548		35,554		36,102		(1,522	)		40
Winstom Salem		NC		4/1/2008		(d)(l)			1,733		22,658		—		1,733		22,658		24,391		(964	)		40
Winston-Salem		NC		4/1/2008		(c)(l)			1,250		984		—		1,250		984		2,234		(42	)		40
Winston-Salem		NC		4/1/2008		(c)(l)			843		264		—		843		264		1,107		(11	)		40
Winston-Salem		NC		4/1/2008		(d)(l)			1,762		12,567		—		1,762		12,567		14,329		(524	)		40
Winter Garden		FL		4/1/2008		—	(l)		858		1,135		—		858		1,135		1,993		(48	)		40
Winter Park		FL		4/1/2008		(b)(l)			1,099		1,880		55		1,099		1,935		3,034		(94	)		40
Winter Park		FL		4/1/2008		986	(l)		834		573		—		834		573		1,407		(25	)		40
Winter Park		FL		4/1/2008		657	(l)		694		727		—		694		727		1,421		(32	)		40
Winterville		NC		4/1/2008		(d)(l)			3,215		10,698		7		3,215		10,705		13,920		(457	)		40
Wood River		IL		4/1/2008		—	(l)		67		299		—		67		299		366		(13	)		40
Woodbury		NJ		4/1/2008		(g)(l)			877		2,157		—		877		2,157		3,034		(94	)		40
Woodbury		NJ		4/1/2008		—	(l)		418		1,081		—		418		1,081		1,499		(47	)		40
Woodstock		GA		4/1/2008		(i)(l)			569		659		—		569		659		1,228		(29	)		40

193

					Encumbrances at December 31, 2009			Initial Costs							Gross Amount at Which Carried December 31, 2009
City	State		Acquisition Date					Land		Building and Improvements		Net Improvements (Retirements) Since Acquisition			Land		Building and Improvements		Total		Accumulated Depreciation 12/31/09			Average Depreciable Life
York		PA		4/1/2008		(g)(l)			461		247		—			461		247		708		(11	)		40
York		PA		4/1/2008		(d)(l)			145		2,642		175			145		2,817		2,962		(124	)		40
Yuba City		CA		4/1/2008		(b)(l)			609		1,562		—			609		1,562		2,171		(68	)		40
Cape Coral		FL		7/1/2009		—			1,012		4,049		—			1,012		4,049		5,061		(51	)
Inido*		CA		11/12/2009		—			8,722		—		—			8,722		—		8,722		—
					$	326,666		$	912,266	$	2,428,510	$	(2,236	)	$	910,137	$	2,428,403	$	3,338,540	$	(107,460	)
Assets held for sale:
Nacogdoches		TX		4/1/2008	$	—	(l)	$	145	$	303	$	1		$	146	$	303	$	449	$	(6	)		40
Tampa		FL		4/1/2008		—	(l)		133		366		(104	)		133		262		395		—			40
					$	—		$	278	$	669	$	(103	)	$	279	$	565	$	844	$	(6	)
					$	326,666		$	912,544	$	2,429,179	$	(2,339	)	$	910,416	$	2,428,968	$	3,339,384	$	(107,466	)

NOTES:

(a) These properties collateralize a $180.0 million mortgage note payable of which $180.0 million was outstanding at December 31, 2009.

(b) These properties collateralize a $381.7 million mortgage note payable of which $349.7 million was outstanding at December 31, 2009.

(c) These properties collateralize a $65.0 million mortgage note payable of which $47.2 million was outstanding at December 31, 2009.

(d) These properties collateralize a $240.0 million mortgage note payable of which $234.8 million was outstanding at December 31, 2009.

(e) These properties collateralize a $304.0 million mortgage note payable of which $214.2 million was outstanding at December 31, 2009.

(f) These properties collateralize a $19.9 million mortgage note payable of which $19.9 million was outstanding at December 31, 2009.

(g) These properties collateralize a $250.0 million mortgage note payable of which $241.3 million was outstanding at December 31, 2009.

(h) These properties collateralize a $26.4 million mortgage note payable of which $26.4 million was outstanding at December 31, 2009.

(i) These properties collateralize a $30.0 million mortgage note payable of which $30.0 million was outstanding at December 31, 2009.

(j) These properties collateralize a $22.7 million mortgage note payable of which $22.7 million was outstanding at December 31, 2009.

(k) These properties collateralize a $31.3 million mortgage note payable of which $31.2 million was outstanding at December 31, 2009.

(l) These properties collateralize a $650.0 million mezzanine note payable of which $553.5 million was outstanding at December 31, 2009.

* Denotes land parcel

194

Gramercy Capital Corp.
Schedule IV
Mortgage Loans on Real Estate
(Amounts in thousands)

Type of Loan	Location		Interest Rate(1)		Final Maturity Date(2)		Periodic Payment Terms		Prior Liens		Face Amount of Loans		Carrying Amount of Loans
Land – Commercial		Various, Various		LIBOR + 4.16%		2/11/2011		Interest Only	$	45,958	$	71,103	$	70,784
Office – Suburban		New York, NY		LIBOR + 2.75%		5/9/2011		Interest Only		—		90,288		64,130
Land – Commercial		Mesa, AZ		LIBOR + 6.00%		9/1/2011		Interest Only		—		66,770		42,153
Office – CBD		Las Vegas, NV		LIBOR + 3.50%		3/9/2013		Interest Only		95,000		88,500		84,012
Hotel		Garden Grove, CA		LIBOR + 3.35%		6/1/2011		Interest Only		161,000		69,000		68,640
Office – CBD		New York, NY		LIBOR + 1.48%		7/9/2010		Interest Only		—		71,855		45,501
Multifamily		New York, NY		8.63%		12/8/2016(3)		Interest Only		4,337,576		146,669		(0	)
Office – CBD		Ontario, CA.		LIBOR + 5.00%		2/11/2010		Interest Only		11,228		62,900		63,894
Hotel		New York, NY		LIBOR + 1.75%		11/11/2012		Interest Only		—		60,000		59,950
Whole loans <3%				5.28% – 7.83% LIBOR + 1.75% – 5.75%		January 2010 – April 2017				38,521		545,399		454,399
										4,689,283		1,272,484		953,463
Subordinate Loans <3%				0.00% – 15.40% LIBOR + 1.06% – 9.00%		February 2010 – April 2017				1,439,680		201,760		121,319
Mezzanine loans <3%				8.42% – 15.00% LIBOR + 0.96% – 10.00%		January 2010 – July 2016				2,927,318		358,552		276,566
Preferred equity <3%				10.00% LIBOR + 3.50%		August 2010 – August 2011				1,069,025		60,792		32,484
Total Portfolio									$	10,125,306	$	1,893,588	$	1,383,832

(1) All variable rate loans are based upon one month LIBOR or three month LIBOR and reprice every one or three months respectively

(2) Reflects the current maturity of the investment and does not consider any options to extend beyond the current maturity.

(3) Loan is in Default

1. Reconciliation of Mortgage Loans on Real Estate:

The following table reconciles Mortgage Loans for the years ended December 31, 2009, 2008 and 2007.

	2009			2008			2007
Balance at January 1(1)	$	2,213,473		$	2,636,746		$	2,186,884
Addtions during period:
New mortgage loans		21,990			96,281			1,800,041
Additional funding(2)		35,536			81,975			266,221
Amortization of discount, net(3)		8,691			20,745			37,414
Deductions during period		—			—			—
Collections of principal		(68,345	)		(393,143	)		(1,220,573	)
Transfers to real estate held-for-sale		(89,626	)		(35,836	)		—
Provision for loan losses		(517,784	)		(80,334	)		(9,398	)
Valuation allowance on loans held-for-sale		(138,570	)		—			—
Mortgage loan sold		(81,533	)		(112,961	)		(423,843	)
Loss on sale of mortgage loans		—						—
Balance at December 31	$	1,383,832		$	2,213,473		$	2,636,746

(1) All amounts include both loans receivable and loans held-for-sale.

(2) Includes capitalized interest, which is non-cash addition to the balance of mortgage loans, of $2,100, $10,300 and $9,000 for the years ended December 31, 2009, 2008 and 2007, respectively

(3) Net discount amortization represents an entirely non-cash addition to the balance of mortgage loans.

195

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information 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 based closely on the definition of “disclosure controls and procedures” in Rule 13a-15(e). Notwithstanding the foregoing, a control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that it will detect or uncover failures within our company to disclose material information otherwise required to be set forth in our periodic reports. Also, we may have investments in certain unconsolidated entities. As we do not control these entities, our disclosure controls and procedures with respect to such entities are necessarily substantially more limited than those we maintain with respect to our consolidated subsidiaries.

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

Management’s Annual Report on Internal Control over Financial Reporting

We are responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2009 based on the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on that evaluation, we concluded that our internal control over financial reporting was effective as of December 31, 2009.

Our internal control over financial reporting during the year ended December 31, 2009 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report, appearing on page 0, which expresses an unqualified opinion on the effectiveness of our internal control over financial reporting as of December 31, 2009.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting identified in connection with the evaluation of such internal control that occurred during the year ended December 31, 2009 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B. OTHER INFORMATION

None.

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS OF THE REGISTRANT AND CORPORATE GOVERNANCE

The information required by Item 10 will be set forth in our Definitive Proxy Statement for our 2010 Annual Meeting of Stockholders, expected to be filed pursuant to Regulation 14A under the Securities and Exchange Act of 1934, as amended, on or prior to April 30, 2010 (the “2010 Proxy Statement”), and is incorporated herein by reference.

ITEM 11. EXECUTIVE AND DIRECTOR COMPENSATION

The information required by Item 11 will be set forth in the 2010 Proxy Statement and is incorporated herein by reference.

196

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information required by Item 12 will be set forth in the 2010 Proxy Statement and is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

The information required by Item 13 will be set forth in the 2010 Proxy Statement and is incorporated herein by reference.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

The information regarding principal accounting fees and services and the audit committee’s pre-approval policies and procedures required by this Item 14 is incorporated herein by reference to the 2010 Proxy Statement.

ITEM 15. EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULES, AND REPORTS ON FORM 8-K

(a)(1) Consolidated Financial Statements

GRAMERCY CAPITAL CORP.

Report of Independent Registered Public Accounting Firm		104
Consolidated Balance Sheets as of December 31, 2009 and 2008		106
Consolidated Statements of Operations for the years ended December 31, 2009, 2008 and 2007		107
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2009, 2008 and 2007		108
Consolidated Statements of Cash Flows for the years ended December 31, 2009, 2008 and 2007		109
Notes to Consolidated Financial Statements		111

(a)(2) Financial Statement Schedules

Schedule III — Real Estate and Accumulated Depreciation as of December 31, 2009		166
Schedule IV — Mortgage Loans on Real Estate as of December 31, 2009		195
Schedules other than those listed are omitted as they are not applicable or the required or equivalent information has been included in the financial statements or notes thereto.

(a)(3) Exhibits

See Index to Exhibits on following page

197

INDEX TO EXHIBITS

Exhibit No.	Description
3.1	Articles of Incorporation of the Company, incorporated by reference to the Company’s Registration Statement on Form S-11 (No. 333-114673), filed with the SEC on July 26, 2004.
3.2	Amended and Restated Bylaws of the Company, incorporated by reference to the Company’s Current Report on Form 8-K, filed with the SEC on December 14, 2007.
3.3	Articles Supplementary designating the 8.125% Series A Cumulative Redeemable Preferred Stock, liquidation preference $25.00 per share, par value $0.001 per share, dated April 18, 2007, incorporated by reference to the Company’s Current Report on Form 8-K, filed with the SEC on April 18, 2007.
4.1	Form of specimen stock certificate representing the common stock of the Company, par value $.001 per share, incorporated by reference to the Company’s Current Report on Form 8-K, filed with the Commission on April 18, 2007.
4.2	Form of stock certificate evidencing the 8.125% Series A Cumulative Redeemable Preferred Stock of the Company, liquidation preference $25.00 per share, par value $0.001 per share, incorporated by reference to Exhibit 4.2 of the Company’s Current Report on Form 8-K, filed with the SEC on April 18, 2007.
10.1	Third Amended and Restated Agreement of Limited Partnership of GKK Capital LP, dated April 19, 2006, incorporated by reference to the Company’s Current Report on Form 8-K, dated April 19, 2006, filed with the SEC on April 20, 2006.
10.2	First Amendment to the Third Amended and Restated Agreement of Limited Partnership of GKK Capital LP, dated as of April 18, 2007, incorporated by reference to the Company’s Current Report on Form 8-K, dated April 13, 2007, filed with the SEC on April 18, 2007.
10.3	Second Amendment to the Third Amended and Restated Agreement of Limited Partnership of GKK Capital LP, dated as of October 27, 2008, incorporated by reference to the Company’s Quarterly Report on Form 10-Q, filed with the SEC on November 10, 2008.
10.4	Collateral Management Agreement, by and between Gramercy Real Estate CDO 2005 1, Ltd., as issuer and GKK Manager LLC, as collateral manager, incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2005.
10.5	Collateral Management Agreement, dated as of August 24, 2006, by and between Gramercy Real Estate CDO 2006-1, Ltd., as issuer and GKK Manager LLC, as collateral manager, incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2006.
10.6	Collateral Management Agreement, dated as of August 8, 2007, by and between Gramercy Real Estate CDO 2007-1, Ltd. And GKK Manager LLC, incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2007.
10.7	Indenture, by and among Gramercy Real Estate CDO 2005-1, Ltd., as issuer, Gramercy Real Estate CDO 2005-1 LLC, as co-issuer, GKK Liquidity LLC, as advancing agent and Wells Fargo Bank, National Association, as trustee, paying agent, calculation agent, transfer agent, custodial securities intermediary, backup advancing agent, notes registrar, incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2005.
10.8	Indenture, dated as of August 24, 2006, by and among Gramercy Real Estate CDO 2006-1, Ltd., as issuer, Gramercy Real Estate CDO 2006-1 LLC, as co-issuer, GKK Liquidity LLC, as advancing agent, and Wells Fargo Bank, National Association, as trustee, paying agent, calculation agent, transfer agent, custodial securities intermediary, backup advancing agent and notes registrar, incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2006.

198

Exhibit No.	Description
10.9	Indenture, dated as of August 8, 2007, by and among Gramercy Real Estate CDO 2007-1, Ltd., Gramercy Real Estate CDO 2007-1, LLC, GKK Liquidity LLC and Wells Fargo Bank, National Association, incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2007.
10.10	Gramercy Capital Corp. Director’s Deferral Program, incorporated by reference to the Company’s Quarterly Report on Form 10-Q/A for the fiscal quarter ended June 30, 2005.
10.11	Form of Gramercy Capital Corp. 2005 Long-Term Outperformance Program Award Agreement, incorporated by reference to the Company’s Current Report on Form 8-K, dated December 14, 2005, filed with the SEC on December 20, 2005.
10.12	Form of Employment Agreement, by and between Robert R. Foley and GKK Manager LLC, incorporated by reference to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004.
10.13	Second Amended and Restated Registration Rights Agreement by and between the Company and SL Green Operating Partnership, L.P., incorporated by reference to the Company’s Form 8-K, dated April 19, 2006, filed with the SEC on April 20, 2006.
10.14	Registration Rights Agreement, by and between various holders of the Company’s common stock and the Company, incorporated by reference to the Company’s Form 8-K, dated December 3, 2004, filed with the SEC on December 9, 2004.
10.15	Limited Partnership Unit Purchase Agreement, dated as of November 2, 2007, by and among GKK Capital LP, Nicholas S. Schorsch and Meadowcourt Trust, incorporated by reference to the Company’s Current Report on Form 8-K, dated November 2, 2007, filed with the SEC on November 8, 2007.
10.16	Form of Restricted Stock Award Agreement, incorporated by reference to the Company’s Annual Report on Form 10-K, filed with the SEC on March 17, 2008.
10.17	Form of Option Award Agreement, incorporated by reference to the Company’s Annual Report on Form 10-K, filed with the SEC on March 17, 2008.
10.18	Form of Phantom Share Award Agreement, incorporated by reference to the Company’s Annual Report on Form 10-K, filed with the SEC on March 17, 2008.
10.19	Amendment to Loan Agreement, dated as of August 22, 2008, among Goldman Sachs Mortgage Company, Citicorp North America, Inc. and SL Green Realty Corp., collectively, as lender, and certain subsidiaries of Gramercy Capital Corp., as borrower, incorporated by reference to the Company’s Form 8-K, dated August 22, 2008, filed with the SEC on August 28, 2008.
10.20	Loan Agreement, dated as of April 1, 2008, between Goldman Sachs Commercial Mortgage Capital, L.P., Citicorp North America, Inc. and SL Green Realty Corp., as lenders, the required equity pledgors named therein and GKK Stars Acquisition LLC, American Financial Realty, First States Group, L.P. and various other borrowers named therein, as borrowers, incorporated by reference to the Company’s Form 8-K, dated April 1, 2008, filed with the SEC on April 7, 2008.
10.21	Amended and Restated Senior Mezzanine Loan Agreement, dated as of August 22, 2008, among Goldman Sachs Mortgage Company and Citicorp North America, Inc., collectively, as lender, and American Financial Realty Trust, First States Group, L.P., GKK Stars Acquisition LLC, First States Group, LLC, and certain subsidiaries of Gramercy Capital Corp., as borrower, incorporated by reference to the Company’s Form 8-K, dated August 22, 2008, filed with the SEC on August 28, 2008.
10.22	Junior Mezzanine Loan Agreement, dated as of August 22, 2008, among Goldman Sachs Mortgage Company, Citicorp North America, Inc. and SL Green Realty Corp., collectively, as lender, and GKK Stars Junior Mezz 2 LLC, as borrower, incorporated by reference to the Company’s Form 8-K, dated August 22, 2008, filed with the SEC on August 28, 2008.

199

Exhibit No.	Description
10.23	Loan Agreement, dated as of April 1, 2008, among First States Investors 3300 B, L.P., as borrower, and PB Capital Corporation, as lender and agent, incorporated by reference to the Company’s Form 8-K, dated April 1, 2008, filed with the SEC on April 7, 2008.
10.24	Amended and Restated Loan Agreement, dated as of April 1, 2008, by and among First States Investors DB I, L.P., First States Investors DB I B, L.P., First States Investors 4200, LLC, First States Investors DB I SP, L.P. and First States Investors DB I TRS, L.P., collectively as borrower, Deutsche Bank AG, Cayman Islands Branch, as agent, LaSalle Bank National Association, as collateral agent and each lender signatory thereto, incorporated by reference to the Company’s Form 8-K, dated April 1, 2008, filed with the SEC on April 7, 2008.
10.25	Guaranty, dated as of April 1, 2008, by the Company to Deutsche Bank AG, Cayman Islands Branch, incorporated by reference to the Company’s Form 8-K, dated April 1, 2008, filed with the Commission on April 7, 2008.
10.26	Loan Agreement, dated as of March 28, 2008, among First States Investors HFS, L.P., First States Investors FPC, L.P., and First States Investors TRS, L.P., as borrowers, and Gramercy Investment Trust, as lender, incorporated by reference to the Company’s Form 8-K, dated April 1, 2008, filed with the SEC on April 7, 2008.
10.27	Separation Agreement, dated as of April 16, 2008, by and between the Company and Hugh F. Hall, incorporated by reference to the Company’s Form 8-K, dated April 16, 2008, filed with the SEC on April 22, 2008.
10.28	First Amendment to Employment and Noncompetition Agreement, dated as of April 16, 2008, by and between GKK Manager LLC and Robert R. Foley, and agreed to by the Company as to the obligations of the Company therein, incorporated by reference to the Company’s Form 8-K, dated April 16, 2008, filed with the SEC on April 22, 2008.
10.29	Severance Agreement, dated as of April 16, 2008, by and between the Company and John B. Roche, incorporated by reference to the Company’s Form 8-K, dated April 16, 2008, filed with the SEC on April 22, 2008.
10.30	Severance Agreement, dated as of October 27, 2008, by and between Gramercy Capital Corp. and Roger M. Cozzi, incorporated by reference to the Company’s Form 8-K, dated October 27, 2008, filed with the SEC on October 31, 2008.
10.31	Severance Agreement, dated as of November 13, 2008, by and between Gramercy Capital Corp. and Timothy O’Connor, incorporated by reference to the Company’s Form 8-K, dated November 13, 2008, filed with the SEC on November 17, 2008.
10.32	Employment and Noncompetition Agreement, dated as of October 27, 2008, by and between GKK Manager LLC and Roger Cozzi, incorporated by reference to Exhibit 10.3 of the Company’s Current Report on Form 8-K, filed with the Commission on April 28, 2009.
10.33	Employment and Noncompetition Agreement, dated as of November 13, 2008, by and between GKK Manager LLC and Timothy O’Connor, incorporated by reference to Exhibit 10.4 of the Company’s Current Report on Form 8-K, filed with the Commission on April 28, 2009.
10.34	Employment and Noncompetition Agreement, dated as of July [ ], 2004, by and between GKK Manager LLC and Robert R. Foley, incorporated by reference to Exhibit 10.5 of the Company’s Current Report on Form 8-K, filed with the Commission on April 28, 2009.
10.35	Employment and Noncompetition Agreement, dated as of April 27, 2009, by and between Gramercy Capital Corp. and Jon W. Clark, incorporated by reference to Exhibit 10.6 of the Company’s Current Report on Form 8-K, filed with the Commission on April 28, 2009.
10.36	Amended and Restated 2004 Equity Incentive Plan, dated as of October 27, 2008, incorporated by reference to the Company’s Quarterly Report on Form 10-Q, filed with the SEC on November 10, 2008.

200

Exhibit No.	Description
10.37	First Amendment to Amended and Restated 2004 Equity Incentive Plan, dated as of October 27, 2008, incorporated by reference to the Company’s Quarterly Report on Form 10-Q, filed with the SEC on November 10, 2008.
10.38	Agreement, dated as of December 30, 2008, by and among SL Green Operating Partnership, L.P., GKK Manager LLC, GKK Capital LP and Gramercy Capital Corp., incorporated by reference to the Company’s Form 8-K, dated December 30, 2008, filed with the SEC on January 6, 2009.
10.39	Junior Subordinated Indenture, dated as of January 30, 2009, by and between GKK Capital LP and The Bank of New York Mellon Trust Company, National Association, as Trustee, incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K, filed with the SEC on February 5, 2009.
10.40	Lease Agreement, dated as of April 1, 2003, by and between Wachovia Bank, National Association and First States Investors 4000B, LLC, filed herewith.
10.41	Amended and Restated Lease Agreement, dated as of May 23, 2003, by and between U.S. Bank National Association, and Patrick Thebado, as Lessor, and Bank of America, N.A., as Lessee, filed herewith.
10.42	Lease Agreement, dated as of September 24, 2003, by and between Bank of America, N.A. and First States Investors 4100A, LLC, filed herewith.
10.43	Office Lease, dated as of August 1, 2004, by and between First States Investors 104, LLC and Bank of America, N.A., filed herewith.
10.44	Master Agreement Regarding Leases, dated as of September 22, 2004, by and between Wachovia Bank, National Association and First States Investors 3300, LLC, filed herewith.
10.45	Form of Lease, by and between Wachovia Bank, National Association and First States Investors 3300, LLC, filed herewith.
10.46	Master Lease Agreement, dated of October 1, 2004, by and between First States Investors 5200, LLC and Bank of America, N.A., filed herewith.
10.47	Master Lease Agreement, dated of January 1, 2005, by and between First States Investors 5000A, LLC and Bank of America, N.A., filed herewith.
10.48	Securities Transfer Agreement, dated as of April 24, 2009, by and among Gramercy Capital Corp., GKK Capital LP, SL Green Operating Partnership, L.P., GKK Manager Member Corp. and SL Green Realty Corp. (solely for the purpose of Sections 2.6, 5.4, 5.5, 5.6, 6.3, 6.4, 6.5, 7.1, 7.2, 7.3, 7.4(a), 7.4(b), 7.4(d), 7.4(e), 7.5, 7.6, 7.7 and Article VIII), incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K, filed with the Commission on April 28, 2009.
10.49	Special Rights Agreement, dated as of April 24, 2009, by and between Gramercy Capital Corp. and SL Green Operating Partnership, L.P., incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K, filed with the Commission on April 28, 2009.
10.50	Exchange Agreement, dated as of January 30, 2009, by and among GKK Capital LP, Taberna Preferred Funding II, Ltd., Taberna Preferred Funding III, Ltd., Taberna Preferred Funding IV, Ltd., Taberna Preferred Funding V, Ltd., Taberna Preferred Funding VII, Ltd. and Taberna Preferred Funding VIII, Ltd., incorporated by reference to Exhibit 10.2 of the Company’s Quarterly Report on Form 10-Q, filed with the SEC on May 11, 2009.
10.51	Supplemental Indenture, dated as of October 14, 2009, by and between GKK Capital LP and The Bank of New York Mellon Trust Company, National Association, as Trustee, incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K, filed with the SEC on October 20, 2009.

201

Exhibit No.	Description
10.52	Exchange Agreement, dated as of October 15, 2009, by and among GKK Capital LP, Gramercy Investment QRS Corp., Taberna Capital Management, LLC, Taberna Preferred Funding II, Ltd., Taberna Preferred Funding V, Ltd., Taberna Preferred Funding VII, Ltd., and Taberna Preferred Funding VIII, Ltd., incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K, filed with the SEC on October 20, 2009.
10.53	Termination Agreement, dated as of December 4, 2009, by and among Gramercy Warehouse Funding I LLC, GKK Trading Warehouse Funding I LLC, as borrowers, Gramercy Capital Corp., GKK Capital LP, Gramercy Investment Trust and GKK Trading Corp., as guarantors, and Wachovia Bank, National Association, as administrative agent, incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K, filed with the SEC on December 9, 2009.
21.1	Subsidiaries of the Registrant, filed herewith.
23.1	Consent of Independent Registered Accounting Firm, filed herewith.
31.1	Certification by the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.
31.2	Certification by the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.
32.1	Certification by the Chief Executive Officer pursuant to 18 U.S.C. section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.
32.2	Certification by the Chief Financial Officer pursuant to 18 U.S.C. section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, file herewith.

202

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

	GRAMERCY CAPITAL CORP.
Dated: March 16, 2010	By: /s/ JON W. CLARK Name: Jon W. Clark Title: Chief Financial Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:

Signatures	Title	Date
/s/ ROGER M. COZZI Roger M. Cozzi	Chief Executive Officer, (Principal Executive Officer)	March 16, 2010
/s/ JON W. CLARK Jon W. Clark	Chief Financial Officer, (Principal Financial and Accounting Officer)	March 16, 2010
/s/ ALLAN J. BAUM Allan J. Baum	Director	March 16, 2010
/s/ MARC HOLLIDAY Marc Holliday	Director	March 16, 2010
/s/ JEFFREY E. KELTER Jeffrey E. Kelter	Director	March 16, 2010
/s/ PAUL J. KONIGSBERG Paul J. Konigsberg	Director	March 16, 2010
/s/ CHARLES S. LAVEN Charles S. Laven	Director	March 16, 2010

203