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





FORM
10-K


(Mark
One)




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




For the
fiscal year ended December 31, 2010




OR




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




For the
transition period from ____________to _____________




Commission
file number 001-32039







CAPLEASE,
INC.


(Exact
Name of Registrant as Specified in its Charter)




Maryland
                  (State
      or Other Jurisdiction of
                  Incorporation
      or Organization)
                
                52-2414533
                  (I.R.S.
      Employer Identification No.)1065
      Avenue of the Americas, New York, NY
                  (Address
      of Principal Executive Offices)
                
                10018
                  (Zip
      code)





(212) 217-6300


(Registrant’s
Telephone Number, Including Area Code)




Securities
registered pursuant to Section 12(b) of the Act:




Title of each Class
                  Common
      Stock, $0.01 par value
                
                Name of each exchange on which
      registered
                  New
      York Stock Exchange8.125%
      Series A Cumulative Redeemable
                  Preferred Stock, $0.01
      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   ̈ 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   ̈ 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
 ̈




Indicate by check mark whether the
registrant has submitted electronically and posted on its corporate Web site, if
any, every Interactive Data File required to be submitted and posted pursuant to
Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such files).
Yes ̈No ̈




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 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. x




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




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




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




As of
June 30, 2010, the aggregate market value of the common stock, $0.01 par
value per share, of CapLease, Inc. (“Common Stock”), held by non-affiliates
(outstanding shares, excluding shares held by executive officers and directors)
of the registrant was approximately $251 million, based upon the closing
price of $4.61 on the New York Stock Exchange on such date.




As of
February 18, 2011, there were 57,513,165 shares of Common Stock
outstanding.




DOCUMENTS
INCORPORATED BY REFERENCE




Portions
of the registrant's definitive proxy statement for the registrant's 2011 Annual
Meeting, 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.









TABLE
OF CONTENTS




PART
      I.
                  
                  1Item
      1.
                  Business.
                  
                  1Item
      1A.
                  Risk
      Factors.
                  
                  16Item
      1B.
                  Unresolved
      Staff Comments.
                  
                  31Item
      2.
                  Properties.
                  
                  31Item
      3.
                  Legal
      Proceedings.
                  
                  31Item
      4.
                  [Removed
      and Reserved.]
                  
                  31PART
      II.
                  
                  32Item
      5.
                  Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities.
                  
                  32Item
      6.
                  Selected
      Financial Data.
                  
                  34Item
      7.
                  Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations.
                  
                  36Item
      7A.
                  Quantitative
      and Qualitative Disclosures about Market Risk.
                  
                  49Item
      8.
                  Financial
      Statements and Supplementary Data.
                  
                  54Item
      9.
                  Changes
      in and Disagreements With Accountants on Accounting and Financial
      Disclosure.
                  
                  100Item
      9A.
                  Controls
      and Procedures.
                  
                  100Item
      9B.
                  Other
      Information.
                  
                  100PART
      III.
                  
                  101Item
      10.
                  Directors,
      Executive Officers and Corporate Governance.
                  
                  101Item
      11.
                  Executive
      Compensation.
                  
                  101Item
      12.
                  Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters.
                  
                  101Item
      13.
                  Certain
      Relationships and Related Transactions, and Director
      Independence.
                  
                  101Item
      14.
                  Principal
      Accounting Fees and Services.
                  
                  101PART
      IV.
                  
                  102Item
      15.
                  Exhibits
      and Financial Statement Schedules.
                  
                  102PART
      V.
                  
                  105SIGNATURES
                  
                  105





Note:
Items 10, 11, 12, 13 and 14 are incorporated by reference herein from the Proxy
Statement.





Except
where otherwise indicated or where the context is clear, the portfolio
statistics in Items 1 and 1A of this Form 10-K represent or are calculated from
our carry value for financial reporting purposes before depreciation and
amortization. With respect to our loan portfolio, we have adjusted our carry
value to exclude a $0.5 million general loss reserve.





Throughout
this Form 10-K, we disclose the credit rating of the tenants (or lease
guarantors) underlying our investments and the actual rating on most of our CMBS
securities.  Credit ratings are one of the factors we evaluate in
assessing the likelihood of receipt of expected cash flows on our
investments.





PART
I.




Item
1.    Business.




Explanatory
Note for Purposes of the “Safe Harbor Provisions” of Section 21E of the
Securities Exchange Act of 1934, as amended




This
Annual Report on Form 10-K contains forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934, as amended, which
involve certain risks and uncertainties. Our actual results or outcomes may
differ materially from those projected. Important factors that we believe might
cause such differences are discussed in Item 1A (Risk Factors) of this Form 10-K
or otherwise accompany the forward-looking statements contained in this Form
10-K. In assessing all forward-looking statements, readers are urged to read
carefully all cautionary statements contained in this Form 10-K. We undertake no
obligation to publicly release the results of any revisions to these
forward-looking statements to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.




Overview




We are a
real estate investment trust, or REIT, that invests primarily in single tenant
commercial real estate assets subject to long-term leases to high credit quality
tenants. We focus on properties that are subject to a net lease, or a lease that
requires the tenant to pay all or substantially all property operating expenses,
such as utilities, real estate taxes, insurance and routine maintenance. We also
continue to be opportunistic and have made and expect to continue to make
investments in single tenant properties where the owner has exposure to property
operating expenses when we determine we can sufficiently underwrite that
exposure and isolate a predictable cash flow.




Our
primary business line is and we expect will continue to be the ownership of
single tenant properties. We also have a portfolio of first mortgage loans and
other debt investments on single tenant properties and may continue to make such
debt investments from time to time on an opportunistic basis in the
future.




Our
tenants, including those underlying our debt investments, are primarily large
public companies or their significant operating subsidiaries and governmental
entities with investment grade credit ratings, defined as a published senior
unsecured credit rating of BBB-/Baa3 or above from one or both of Standard &
Poor’s (“S&P”) and Moody’s Investors Service (“Moody’s”). We also imply an
investment grade credit rating for tenants that are not publicly rated by
S&P or Moody’s but (i) are 100% owned by an investment grade parent, (ii)
for which we have obtained a private investment grade rating from either S&P
or Moody’s, or (iii) are governmental entity branches or units of another
investment grade rated governmental entity.




Our
portfolio produces stable, high quality cash flows generated by long-term leases
to primarily investment grade tenants. As of December 31, 2010, we had an
approximately $2.0 billion investment portfolio, including the following assets
by type:




Investment(1)(in thousands)
                                    
                                    
                                    PercentageOwned
      properties
                                    
                                    $
                                    1,648,892
                                    
                                    
                                    
                                    82.2
                                    %Debt
      investmentsLoansLong-term
      mortgage loans
                                    
                                    
                                    190,837
                                    
                                    
                                    
                                    9.5
                                    %Corporate
      credit notes
                                    
                                    
                                    19,117
                                    
                                    
                                    
                                    1.0
                                    %Mezzanine
      and other investments
                                    
                                    
                                    988
                                    
                                    
                                    
                                    0.0
                                    %Commercial
      mortgage loan securitizations
                                    
                                    
                                    66,830
                                    
                                    
                                    
                                    3.3
                                    %Certificated
      mortgage loan investments
                                    
                                    
                                    79,134
                                    
                                    
                                    
                                    3.9
                                    %Other
                                    
                                    
                                    326
                                    
                                    
                                    
                                    0.0
                                    %Total
                                    
                                    $
                                    2,006,124
                                    
                                    
                                    
                                    100.0
                                    %


(1)  Here
and elsewhere in Item 1 of this Form 10-K, references to our “Investment”
represent our carry value for financial reporting purposes before depreciation
and amortization. With respect to our loan portfolio, we have adjusted our carry
value to exclude a $0.5 million general loss reserve.





Our
primary business objective is to generate stable, long-term and attractive
returns based on the spread between the yields generated by our assets and the
cost of financing our portfolio. We reinitiated portfolio growth during the
second half of 2010, as we purchased one property for a purchase price of $32.5
million and funded $3.2 million toward our first development joint venture which
has an expected net investment of $8.1 million. We also continued to strengthen
our balance sheet through debt reduction, with $74.0 million of principal
retired during the year. Since the beginning of 2008, we have retired an
aggregate of $260.3 million of principal on our debt, including $167.5 million
of recourse borrowings. During 2011, we expect to continue our portfolio growth
momentum and continue to reduce our leverage.


1




We have
been in the net lease business since 1994 and completed our initial public
offering in March 2004. Prior to our initial public offering, we were primarily
a lender focused on originating first mortgage loans on net lease properties and
selling substantially all of the loans we originated, either through whole-loan
or small pool sales or through gain-on-sale commercial mortgage-backed
securitizations.




Multi-Tenant
Properties




As
described above and throughout this Annual Report on Form 10-K, we invest
primarily in single tenant commercial real estate assets. However, as a result
of lease non-renewals or lease terminations, we have classified three properties
as “multi-tenant properties,” as each is no longer leased primarily by a single
tenant. The first property is located in Johnston, Rhode Island, and is
currently vacant. The other two properties are located in Omaha, Nebraska: one
on West Dodge Road, which we call the “Dodge Building,” and the other on Farnam
Street, which we call the “Landmark Building.” We refer to these three
properties as the “Multi-Tenant Properties” in this Form 10-K and have excluded
them from certain of our statistical measures. When we refer to our “Single
Tenant Portfolio” in this Form 10-K, we mean our entire portfolio (e.g., all
owned properties, loans and securities) other than the three Multi-Tenant
Properties, and when we refer to our “Single Tenant Owned Property Portfolio” in
this Form 10-K, we mean our owned property portfolio other than the three
Multi-Tenant Properties. See “Our Portfolio—Owned Properties—Multi-Tenant
Properties” for additional information about the Multi-Tenant
Properties.




Investment
Strategy




We focus
on the following core business strategies:




·
            High Credit Quality
      Tenants. We invest primarily in owned real properties and real
      estate loans where the underlying tenant is of high credit quality. As of
      December 31, 2010, approximately 90% of our Single Tenant Portfolio was
      invested in properties leased to investment grade or implied investment
      grade tenants and the weighted average underlying tenant credit rating on
      our Single Tenant Portfolio was A-. Further, our top ten tenant exposures,
      which comprise approximately 49% of our entire portfolio, were all rated
      investment grade or implied investment grade and had a weighted average
      credit rating of A+. As of December 31, 2010, our Single Tenant Portfolio
      had the following credit
characteristics:




Credit Rating(1) (2)
                        
                        Investment
                          (in thousands)
                        
                        
                        PercentageInvestment
      grade rating of A- or A3 and above
                        
                        $
                        774,506
                        
                        
                        
                        40.5
                        %Investment
      grade rating of below A- or A3
                        
                        
                        709,967
                        
                        
                        
                        37.1
                        %Implied
      investment grade rating
                        
                        
                        245,715
                        
                        
                        
                        12.8
                        %Non-investment
      grade rating
                        
                        
                        180,852
                        
                        
                        
                        9.5
                        %Unrated
      (3)
                        
                        
                        1,723
                        
                        
                        
                        0.1
                        %$
                        1,912,763
                        
                        
                        
                        100.00
                        %




(1)
            Reflects
      the tenant’s or lease guarantor’s actual or implied S&P rating or
      equivalent rating if rated only by Moody’s, or in the case of most of our
      CMBS securities, actual ratings of the securities. In addition to the
      Multi-Tenant Properties, table does not include two development properties
      with an aggregate investment of
$4,247.




(2)
            Four
      of our owned real properties within the Single Tenant Owned Property
      Portfolio where our aggregate investment is $270,983 are leased to more
      than one tenant and, for purposes of determining the underlying tenant’s
      credit rating on these properties, we have considered the credit rating of
      only our primary tenant.




(3)
            Includes
      primarily our mezzanine and other investments as described under “Our
      Portfolio—Loan Investments.”





·
            Long-Term Assets Held for
      Investment. We invest in commercial real estate assets subject to
      long-term leases. As of December 31, 2010, the weighted average underlying
      tenant remaining lease term on our Single Tenant Portfolio was
      approximately 8 years, including approximately 7 years in the Single
      Tenant Owned Property Portfolio. We intend to hold our assets for the
      long-term, capturing the stable cash flows that will be produced from the
      underlying high credit quality
tenants.




·
            Net Lease Focus. We
      focus on properties that are subject to a net lease where the tenant is
      typically responsible for all or substantially all of the property’s
      operating expenses. We believe that this asset class offers more stable
      and predictable returns than non-net leased properties and will allow us
      to grow our business more rapidly than we need to expand our general and
      administrative costs and headcount.




·
            Match-Fund with Long-Term,
      Fixed Rate, Non-Recourse Debt. We seek to “match-fund” or
      substantially “match-fund” our assets with long-term, fixed rate,
      non-recourse financing. By “match-funded” debt, we mean the maturity of
      the debt matches as closely as possible the lease maturity of the asset
      financed. Our financing strategy allows us to invest in a greater number
      of assets and enhance our asset returns. The use of non-recourse debt
      enables us to isolate the default risk to solely the asset or assets
      financed. We also seek to employ amortizing debt on our assets, or debt
      that will diminish over time as we make scheduled principal
      payments.


2




Our
Competitive Strengths




·
            Established Investment and
      Portfolio Management Capabilities. We have an experienced in-house
      team of investment professionals that source, structure, underwrite and
      close our transactions. In addition, we have developed an extensive
      national network of property owners, developers, investment sale brokers,
      tenants, borrowers, mortgage brokers, lenders, institutional investors and
      other market participants that helps us to identify and evaluate a variety
      of single tenant investment opportunities. We have developed a highly
      skilled asset management function for our assets which among other things
      monitors lease expirations and property operations and manages the renewal
      or re-let process on our
investments.




·
            Experienced Senior Management
      Team. Our senior management team is comprised of individuals with
      expertise in commercial real estate, credit capital markets, asset
      management and legal, and has worked together for many years through
      various business cycles. We have substantial experience investing at all
      levels of the capital structure of single tenant properties. Since 1996,
      we have originated and underwritten more than $4.0 billion in single
      tenant transactions, including debt, equity and mezzanine and involving
      more than 500 properties with more than 100 different tenants. Since our
      initial public offering in March 2004, we have purchased more than $1.6
      billion of single tenant
properties.




·
            Stringent Underwriting
      Process. Since the founding of our predecessor entity in 1994, we
      have built and maintain today a strong credit philosophy and underwriting
      discipline. We have a comprehensive underwriting and due diligence process
      that is overseen by our investment committee, which consists of our key
      employees, including the chief executive officer, president, chief
      financial officer and chief investment officer. Our investment committee
      formally reviews and approves each investment we make prior to funding and
      all portfolio divestitures. We also have an investment oversight committee
      of the board of directors that approves investments in excess of $50
      million.




·
            Financing Expertise. We
      have substantial experience in financing single tenant assets. We have
      developed various financing structures that have enabled us to efficiently
      finance our assets, and we expect to continue to do so in the future as
      credit markets recover. The structures we have created have enabled us to
      enhance the returns on our portfolio without reducing credit quality in
      search of yield.




·
            Market Expertise. We
      have recognized expertise in the net lease marketplace. We are highly
      skilled in analyzing single tenant leases and have developed since 1994 a
      market leading franchise in our
sector.




Our
Portfolio




Owned
Properties




Owned
properties comprise approximately 82% of our current portfolio on an investment
basis. All of our owned properties have been acquired since the closing of our
initial public offering. We invest in most commercial property types (e.g.,
office, warehouse, GSA and retail), and our investment underwriting includes a
thorough analysis of the credit quality of the underlying tenant and the
strength of the related lease. We also analyze the property’s real estate
fundamentals, including location and type of the property, vacancy rates and
trends in vacancy rates in the property’s market, rental rates within the
property’s market, recent sales prices and demographics in the property’s
market. We believe that over time, the value of our owned real estate will
appreciate. For more detail on our underwriting process, please see
“Underwriting Process” below. We target properties that have one or more of the
following characteristics:




·
            included
      in primary metropolitan markets such as Philadelphia, Washington D.C.,
      Chicago and New York/New Jersey;




·
            fungible
      asset type that will facilitate a re-let of the property if the tenant
      does not renew;




·
            barriers
      to entry in the property’s market, such as zoning restrictions or limited
      land for future development; and




·
            core
      facility of the tenant.




As of
December 31, 2010, we had an approximately $1.6 billion owned property
portfolio. We believe the strength of this portfolio is exhibited by the
following:




·
            approximately
      11.2 million rentable square feet with 95.9%
  occupancy;




·
            62
      properties in 25 states and leases with 32 different tenants across the
      Single Tenant Owned Property
Portfolio;


3




·
            no
      tenant represents more than five percent of our entire portfolio, except
      Nestlé Holdings, Inc. at 9.9% (three properties) and the United States
      Government at 9.7% (seven
properties);




·
            95%
      investment grade or implied investment grade tenants in the Single Tenant
      Owned Property Portfolio;




·
            weighted
      average tenant credit rating of A in the Single Tenant Owned Property
      Portfolio;




·
            weighted
      average remaining lease term of approximately 7 years in the Single Tenant
      Owned Property Portfolio; and




·
            well
      diversified portfolio by property type, geography, tenant and tenant
      industry.




The
occupancy rate (at each year end) and average annual rent per square foot (for
each of the years) for our owned property portfolio for each of the last three
years were as follows:




2010
                      
                      
                      2009
                      
                      
                      2008Occupancy
      rate
                      
                      
                      95.9
                      %
                      
                      
                      95.3
                      %
                      
                      
                      99.8
                      %Average
      annual rent per square foot
                      
                      $
                      11.78
                      
                      
                      $
                      12.85
                      
                      
                      $
                      12.55





Property Type
Diversification




The
following pie chart summarizes the property types comprising our owned property
portfolio as of December 31, 2010.







4





Tenant Industry
Diversification




The
following table sets forth certain information regarding the tenant industry
concentrations in our owned property portfolio as of December 31,
2010.




Weighted Average
                          
                          
                          Investment (2)Industry
                          
                          Number of Tenants
                          
                          
                          Credit Rating(1)
                          
                          
                          (in thousands)
                          
                          
                          Percent of TotalInsurance
                          
                          9
                          
                          
                          A
                          
                          
                          $
                          298,907
                          
                          
                          
                          18.8
                          %Food
      & Beverage
                          
                          3
                          
                          
                          AA-
                          
                          
                          
                          258,724
                          
                          
                          
                          16.3
                          %Government
                          
                          2
                          
                          
                          AAA
                          
                          
                          
                          211,306
                          
                          
                          
                          13.3
                          %Financial
                          
                          4
                          
                          
                          BBB-
                          
                          
                          
                          145,828
                          
                          
                          
                          9.2
                          %Grocery
                          
                          2
                          
                          
                          BBB
                          
                          
                          
                          108,986
                          
                          
                          
                          6.9
                          %Retail
      Department Stores
                          
                          1
                          
                          
                          A
                          
                          
                          
                          93,016
                          
                          
                          
                          5.8
                          %Retail
      Jewelry
                          
                          1
                          
                          
                          A-
                          
                          
                          
                          77,640
                          
                          
                          
                          4.9
                          %Automotive
                          
                          2
                          
                          
                          BB+
                          
                          
                          
                          59,828
                          
                          
                          
                          3.8
                          %Engineering
                          
                          2
                          
                          
                          BBB+
                          
                          
                          
                          57,417
                          
                          
                          
                          3.6
                          %Building
      Materials
                          
                          1
                          
                          
                          A
                          
                          
                          
                          52,879
                          
                          
                          
                          3.3
                          %Healthcare
                          
                          3
                          
                          
                          AA-
                          
                          
                          
                          49,084
                          
                          
                          
                          3.1
                          %Communications
                          
                          2
                          
                          
                          BBB
                          
                          
                          
                          47,499
                          
                          
                          
                          3.0
                          %Hotel
                          
                          1
                          
                          
                          BBB
                          
                          
                          
                          47,325
                          
                          
                          
                          3.0
                          %Retail
      Drug
                          
                          2
                          
                          
                          A-
                          
                          
                          
                          21,720
                          
                          
                          
                          1.4
                          %Publishing
                          
                          1
                          
                          
                          BBB+
                          
                          
                          
                          20,837
                          
                          
                          
                          1.3
                          %Telecommunications
                          
                          1
                          
                          
                          BBB+
                          
                          
                          
                          16,250
                          
                          
                          
                          1.0
                          %Other
                          
                          14
                          
                          
                          NR
                          
                          
                          
                          23,163
                          
                          
                          
                          1.5
                          %Total
                          
                          51
                          
                          
                          A
                          
                          
                          $
                          1,590,409
                          
                          
                          
                          100.0
                          %




(1)
            Reflects
      actual or implied S&P rating (or equivalent rating if rated only by
      Moody’s) of tenant(s) or lease
guarantor(s).




(2)
            Does
      not include our Johnston, Rhode Island property or two development
      properties (Louisville, Kentucky and Simi Valley, California), none of
      which are currently occupied by a tenant. Also does not include a portion
      of our investment attributed to vacant space in the Omaha, Nebraska
      properties.


5




Geographic
Diversification




The
following table sets forth certain information regarding the top twenty states
where our owned properties are located as of December 31, 2010.




State
                        
                        Number of
                          Properties
                        
                        
                        Investment
                          (inthousands)
                        
                        
                        Percent of TotalPennsylvania
                        
                        4
                        
                        
                        $
                        205,937
                        
                        
                        
                        12.5
                        %California
                        
                        7
                        
                        
                        
                        202,479
                        
                        
                        
                        12.3
                        %New
      Jersey
                        
                        3
                        
                        
                        
                        131,123
                        
                        
                        
                        8.0
                        %Maryland
                        
                        4
                        
                        
                        
                        130,003
                        
                        
                        
                        7.9
                        %Texas
                        
                        5
                        
                        
                        
                        110,166
                        
                        
                        
                        6.7
                        %Illinois
                        
                        2
                        
                        
                        
                        108,462
                        
                        
                        
                        6.6
                        %Indiana
                        
                        3
                        
                        
                        
                        91,477
                        
                        
                        
                        5.5
                        %Virginia
                        
                        3
                        
                        
                        
                        90,049
                        
                        
                        
                        5.5
                        %Colorado
                        
                        2
                        
                        
                        
                        70,004
                        
                        
                        
                        4.2
                        %Kansas
                        
                        3
                        
                        
                        
                        54,143
                        
                        
                        
                        3.3
                        %Nebraska
                        
                        2
                        
                        
                        
                        46,157
                        
                        
                        
                        2.8
                        %Rhode
      Island
                        
                        1
                        
                        
                        
                        42,956
                        
                        
                        
                        2.6
                        %Alabama
                        
                        2
                        
                        
                        
                        40,406
                        
                        
                        
                        2.5
                        %Washington
                        
                        1
                        
                        
                        
                        39,612
                        
                        
                        
                        2.4
                        %Connecticut
                        
                        1
                        
                        
                        
                        37,685
                        
                        
                        
                        2.3
                        %Kentucky
                        
                        6
                        
                        
                        
                        36,836
                        
                        
                        
                        2.2
                        %Georgia
                        
                        4
                        
                        
                        
                        36,348
                        
                        
                        
                        2.2
                        %Tennessee
                        
                        3
                        
                        
                        
                        34,169
                        
                        
                        
                        2.1
                        %Wisconsin
                        
                        1
                        
                        
                        
                        29,165
                        
                        
                        
                        1.8
                        %Florida
                        
                        1
                        
                        
                        
                        27,266
                        
                        
                        
                        1.7
                        %Other
                        
                        4
                        
                        
                        
                        84,449
                        
                        
                        
                        5.1
                        %Total
                        
                        62
                        
                        
                        $
                        1,648,892
                        
                        
                        
                        100.0
                        %




Lease
Expirations




The
following table sets forth certain information regarding scheduled lease
expirations in our owned property portfolio as of December 31,
2010.




Year of Lease
                      Expiration
                    
                    Number of
                      Expiring
                      Leases(1)
                    
                    
                    Square Feet
                      Subject to
                      Expiring Lease
                    
                    
                    2010 Actual
                      Annual Rent
                      (in thousands)
                    
                    
                    Percent
                      of Annual
                      Rent(2)2011
                    
                    
                    3
                    
                    
                    
                    137,820
                    
                    
                    $
                    6,259
                    
                    
                    
                    5.1
                    %2012
                    
                    
                    6
                    (3)
                    
                    
                    2,834,736
                    
                    
                    
                    21,775
                    
                    
                    
                    17.8
                    %2013
                    
                    
                    14
                    (4)
                    
                    
                    421,804
                    
                    
                    
                    7,174
                    
                    
                    
                    5.9
                    %2014
                    
                    
                    2
                    
                    
                    
                    90,420
                    
                    
                    
                    843
                    
                    
                    
                    0.7
                    %2015
                    
                    
                    10
                    
                    
                    
                    651,309
                    
                    
                    
                    8,514
                    
                    
                    
                    7.0
                    %2016
                    
                    
                    9
                    
                    
                    
                    1,192,035
                    
                    
                    
                    15,036
                    
                    
                    
                    12.3
                    %2017
                    
                    
                    5
                    
                    
                    
                    1,122,727
                    
                    
                    
                    15,953
                    
                    
                    
                    13.1
                    %2018
                    
                    
                    3
                    
                    
                    
                    130,303
                    
                    
                    
                    1,773
                    
                    
                    
                    1.5
                    %2019
                    
                    
                    2
                    
                    
                    
                    189,993
                    
                    
                    
                    5,693
                    
                    
                    
                    4.7
                    %2020
                    
                    
                    4
                    
                    
                    
                    290,659
                    
                    
                    
                    6,666
                    
                    
                    
                    5.5
                    %Thereafter
                    
                    
                    12
                    
                    
                    
                    3,694,780
                    
                    
                    
                    32,366
                    
                    
                    
                    26.5
                    %




(1)  On
six of our owned properties, we have more than one tenant.




(2)  Represents
lease expiration dates as a percentage of 2010 actual annual rent on all
properties other than the Johnston, Rhode Island property which is currently
vacant.




(3)  97%
of the leases expiring in 2012 (by square footage) represent the three Nestlé
properties and the US Government (NIH) property.




(4)  77%
of the leases expiring in 2013 (by square footage) represent the Choice property
in Silver Spring, MD and Omnicom property in Irving, Texas.


6




The
following is a tabular presentation of our owned property portfolio as of
December 31, 2010:




(in thousands)Tenant or Guarantor
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      Location
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      Property Type
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      Square
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        Feet
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      Purchase
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        Date
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      Lease
      Maturity
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        (1)
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      Form of
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        Ownership
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      2011
      Estimated
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        Annual Rent
      (2)
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      Purchase
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        Price
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      Investment (3)Abbott
      Laboratories
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      6480 Busch Blvd,
      Columbus, OH
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      Office
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      111,776
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      11/2004
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      10/2016
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      Fee
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      $
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      1,010
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      $
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      12,025
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      $
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      12,065Abbott
      Laboratories
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      1850
      Norman Drive North, Waukegan, IL
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      Office
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      131,341
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      8/2005
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      8/2017
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      Fee
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      1,616
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      20,325
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      20,362Aetna
      Life Insurance Company
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      1333
      - 1385 East Shaw Avenue, Fresno, CA
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      Office
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      122,605
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      10/2006
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      11/2016
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      Fee
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      1,829
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      24,255
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      25,688Allstate
      Insurance Company
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      401
      McCullough Drive, Charlotte, NC
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      Office
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      191,681
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      12/2005
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      12/2015
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      Fee
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      2,114
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      27,172
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      27,236Allstate
      Insurance Company
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      1819
      Electric Road (aka State Hwy. 419), Roanoke, VA
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      Office
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      165,808
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      12/2005
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      12/2015
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      Fee
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      2,251
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      28,928
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      28,935AMVESCAP
      PLC
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      4340,
      4346 & 4350 South Monaco St., Denver, CO
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      Office
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      263,770
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      3/2006
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      10/2016
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      Fee
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      5,288
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      69,300
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      70,004Aon
      Corporation(4)
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      1000
      Milwaukee Ave, Glenview, IL
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      Office
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      412,409
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      8/2004
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      4/2017
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      Fee
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      6,982
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      85,750
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      88,100Baxter
      International, Inc.
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      555
      North Daniels Way, Bloomington, IN
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      Warehouse
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      125,500
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      10/2004
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      9/2016
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      Fee
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      810
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      10,500
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      10,779Bunge
      North America, Inc.
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      6700
      Snowden Road, Fort Worth, TX
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      Industrial
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      107,520
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      4/2007
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      4/2026
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      Fee
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      667
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      10,100
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      10,268Cadbury
      Holdings Limited
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      945
      Route 10, Whippany, NJ
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      Office
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      149,475
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      1/2005
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      3/2021
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      Fee
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      3,740
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      48,000
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      50,231Capital
      One Financial Corporation
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      3905
      N. Dallas Parkway, Plano, TX
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      Office
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      159,000
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      6/2005
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      2/2015
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      Fee
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      2,287
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      27,900
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      31,175Choice
      Hotels International, Inc.(5)
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      10720,
      10750 & 10770 Columbia Pike, Silver Spring, MD
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      Office
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      223,912
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      11/2004
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      5/2013
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      Fee
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      5,545
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      43,500
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      47,325Cooper
      Tire & Rubber Company
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      500
      Bartram Parkway, Franklin, IN
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      Warehouse
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      807,042
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      12/2010
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      5/2021
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      Fee
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      2,520
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      32,500
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      32,562County
      of Yolo, California
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      25
      North Cottonwood Street, Woodland, CA
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      Office
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      63,000
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      1/2007
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      6/2023
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      Fee
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      1,057
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      16,400
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      16,857Crozer-Keystone
      Health System
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      8
      Morton Avenue, Ridley, PA
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      Medical
      Office
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      22,708
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      8/2004
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      4/2019
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      Ground
      Lease
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      446
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      4,477
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      5,879CVS
      Corporation
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      100
      Mazzeo Drive, Randolph, MA
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      Retail
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      88,420
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      9/2004
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      1/2014
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      Fee
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      771
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      10,450
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      14,101Farmers
      Group, Inc.
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      3039-3041
      Cochran Street, Simi Valley, CA
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      Office
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      271,000
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      1/2007
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      1/2017
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      Fee
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      3,099
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      41,812
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      41,879Farmers
      New World Life Insurance Company
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      3003
      77th Avenue Southeast, Mercer Island, WA
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      Office
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      155,200
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      12/2005
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      12/2020
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      Fee
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      2,666
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      39,550
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      39,612General
      Motors Financial Company, Inc.
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      4001
      Embarcadero Drive, Arlington, TX
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      Office
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      246,060
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      12/2006
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      8/2017
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      Fee
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      3,209
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      43,000
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      43,374ITT
      Industries, Inc.
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      12975
      Worldgate Drive, Herndon, VA
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      Office
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      167,285
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      5/2005
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      3/2019
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      Fee
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      5,387
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      46,081
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      56,747Johnson
      Controls, Inc.
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      6750
      Bryan Dairy Road, Largo, FL
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      Warehouse
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      307,275
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      12/2006
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      8/2016
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      Fee
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      2,096
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      27,000
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      27,266Koninklijke
      Ahold, N.V.
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      4001
      New Falls Road, Levittown, PA
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      Retail
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      70,020
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      6/2006
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      4/2026
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      Fee
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      1,439
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      18,575
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      21,104Lowes
      Companies, Inc.(6)
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      26501
      Aliso Creek Rd., Aliso Viejo, CA
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      Retail
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      181,160
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      5/2005
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      8/2024
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      Fee
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      3,467
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      52,860
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      52,879Michelin
      North America, Inc. (Development Property)(7)
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      5600
      Cane Run Rd, Louisville, KY
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      Warehouse
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      N/A
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      9/2010
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      N/A
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      Joint
      Venture/Fee
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      664
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      3,222
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      3,222Multi-Tenant
      (currently vacant)
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      1301
      Atwood Avenue, Johnston, RI
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      Office
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      345,842
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      4/2007
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      N/A
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      Ground
      Lease
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      –
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      55,443
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      42,956Multi-Tenant
      (Dodge building)
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      9394
      West Dodge Road, Omaha, NE
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      Office
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      133,685
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      4/2007
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      Various
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      Ground
      Lease
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      1,786
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      10,785
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      13,235Multi-Tenant
      (Landmark building)
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      1299
      Farnam Street, Omaha, NE
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      Office
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      292,714
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      4/2007
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      Various
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      Ground
      Lease
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      3,003
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      30,097
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      32,922N/A
      (Development Property)
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      2423
      Galena Avenue, Simi Valley, CA
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      Undeveloped
      Land
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      N/A
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      5/2007
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      N/A
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      Fee
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      –
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      1,000
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      1,025Nestle
      Holdings, Inc.
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      555
      Nestle Way, Breinigsville, PA
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      Warehouse
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      1,045,150
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      4/2007
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      12/2012
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      Estate
      for Years
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      6,301
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      74,215
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      85,938Nestle
      Holdings, Inc.(8)
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      2909
      Pleasant Center Road, Fort Wayne, IN
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      Warehouse
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      764,177
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      4/2007
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      12/2012
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      Estate
      for Years
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      3,762
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      43,837
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      48,136Nestle
      Holdings, Inc.(9)
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      2
      Nestle Way, Lathrop, CA
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      Warehouse
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      751,021
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      4/2007
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      12/2012
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      Estate
      for Years
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      4,007
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      52,357
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      64,151Omnicom
      Group, Inc.
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      1660
      North Westridge Circle, Irving, TX
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      Office
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      101,120
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      6/2005
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      5/2013
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      Fee
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      1,409
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      18,100
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      18,333Pearson
      Plc.
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      3833
      Greenway and 2201 Noria Road, Lawrence, KS
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      Office
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      194,665
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      4/2006
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      4/2021
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      Fee
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      1,492
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      20,750
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      20,837T-Mobile
      USA, Inc.
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      695
      Grassmere Park, Nashville, TN
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      Office
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      69,287
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      11/2006
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      1/2017
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      Fee
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      1,405
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      16,195
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      16,250The
      Kroger Co.
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      Various
      locations in KY (five), GA (four), and TN (two)
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      Retail
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      685,135
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      4/2007
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      1/2022
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      Estate
      for Years
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      5,208
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      64,037
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      87,882The
      Travelers Corporation
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      200
      Constitution Plaza, Hartford, CT
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      Office
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      130,000
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      4/2007
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      10/2011
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      Fee
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      5,625
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      33,628
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      37,685Tiffany
      & Co.
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      15
      Sylvan Way, Parsippany, NJ
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      Office/Warehouse
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      367,740
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      9/2005
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      9/2025
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      Fee
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      4,982
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      75,000
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      77,640Time
      Warner Entertainment Company, L.P.
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      1320
      North  Dr. Martin Luther King Jr. Drive, Milwaukee,
      WI
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      Office
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      154,849
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      11/2006
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      12/2016
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      Fee
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      2,144
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      28,530
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      29,165TJX
      Companies, Inc.
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      2760
      Red Lion Road, Philadelphia, PA
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      Warehouse
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      1,015,500
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      3/2006
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      6/2021
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      Fee
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      6,215
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      90,125
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      93,016United
      States Government (DEA)
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      1003
      17th Street North, Birmingham, AL
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      GSA
      (US Government)
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      35,616
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      8/2005
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      12/2020
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      Fee
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      1,297
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      13,369
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      13,770United
      States Government (EPA)
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      300
      Minnesota Avenue, Kansas City, KS
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      GSA
      (US Government)
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      71,979
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      8/2005
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      3/2023
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      Fee
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      2,652
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      29,250
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      33,306United
      States Government (FBI)
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      200
      McCarty Avenue, Albany, NY
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      GSA
      (US Government)
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      98,184
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      10/2006
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      9/2018
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      Fee
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      1,312
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      16,350
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      17,285United
      States Government (FBI)
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      1100
      18th Street, North, Birmingham, AL
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      GSA
      (US Government)
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      96,278
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      8/2005
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      4/2020
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      Fee
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      2,797
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      21,850
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      26,636United
      States Government (NIH)(10)
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      6116
      Executive Bvd, N. Bethesda, MD
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      GSA
      (US Government)
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      207,055
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      9/2005
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      12/2015
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      Fee
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      7,673
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      81,500
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      82,678United
      States Government (SSA)
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      1029
      Camino La Costa, Austin, TX
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      GSA
      (US Government)
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      23,311
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      8/2005
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      2/2016
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      Fee
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      710
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      6,900
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      7,016United
      States Government (VA)
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      Lot
      37, Santiago De los Caballeros Avenue, Ponce, PR
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      GSA
      (US Government)
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      56,500
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      11/2004
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      2/2015
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      Fee
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      1,300
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      13,218
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      13,758Walgreen
      Co.
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      4601
      Westfield Avenue, Pennsauken, NJ
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      Retail
      Drug
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      18,500
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      11/2004
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      10/2021
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      Fee
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      297
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      3,089
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      3,252Walgreen
      Co.
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      700
      Frederick Blvd, Portsmouth, VA
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      Retail
      Drug
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      13,905
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      11/2004
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      7/2018
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      Fee
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      358
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      4,167
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      4,370Total
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      11,216,180
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      $
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      126,695
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      $
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      1,547,474
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      $
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      1,648,892





(1)
            Except
      in the case of our Multi-Tenant Properties, includes lease maturity for
      our primary tenant. Four of our owned properties within the Single Tenant
      Owned Property Portfolio are leased to more than one tenant (see footnotes
      (4) through (6) and (10) below).


(2)
            Reflects
      scheduled base rent due for 2011 under our lease with the tenant or
      tenants. Does not reflect straight-line rent adjustments required under
      generally accepted accounting principles (“GAAP”). Also does not include
      expense recoveries or above or below market rent amortization adjustments
      required by GAAP.


(3)
            Includes
      carry value of any related intangible assets under
  GAAP.


(4)
            As
      of December 31, 2010, approximately 2% of the property was leased to one
      other tenant.


(5)
            As
      of December 31, 2010, approximately 22% of the property was leased to six
      other tenants.


(6)
            As
      of December 31, 2010, approximately 18% of the property was leased to two
      other tenants.


(7)
            We
      are currently funding construction of the property through a joint venture
      with the developer. We will acquire the developer’s interest in the joint
      venture upon completion of construction (estimated in beginning of second
      quarter 2011), at which time the lease with the tenant, which is for a ten
      year term, will commence.


(8)
            Property
      is 100% subleased to General Mills Operations, Inc. through and until the
      scheduled lease maturity.


(9)
            Property
      is 100% subleased to Del Monte Corporation through and until the scheduled
      lease maturity.


(10)
            As
      of December 31, 2010, approximately 6% of the property was leased to three
      other tenants.


7





Estate for Years and Ground
Leased Properties





With
respect to certain of our owned properties, we own the improvements on the land
and control the land through an estate for years with an option to enter into a
ground lease at the expiration of the estate for years (Nestlé and Kroger
properties). For each of these properties, we also have an option to purchase
the land at the expiration of the estate for years and on the last day of the
primary term and each renewal term of the ground lease for fair market value. If
we exercise the purchase option, the fair market value will be agreed to by us
and the seller or if the parties cannot agree determined through an appraisal
process. For certain of our other owned properties, we own the improvements on
the land and control the land through a ground lease (Crozer-Keystone Health
System, Omaha, Nebraska properties and Johnston, Rhode Island property). We have
the right to transfer our interest in all of these properties at any time and
our interest in all of these properties will revert to the land owner at the
expiration of the ground lease estate unless we have purchased the land or
extended the leasehold estate. The approximate duration of our interest in these
properties assuming the full estate for years term, if any, and all ground lease
options are exercised, is as follows: Nestlé properties, 62 years; Kroger
properties, 71 years; Omaha, Nebraska properties, 65 years; Crozer-Keystone
Health System property, 36 years; and Johnston, Rhode Island property, 49
years.




Multi-Tenant
Properties




We have
classified three owned properties within our portfolio as Multi-Tenant
Properties, one in Johnston, Rhode Island, and two in Omaha,
Nebraska.




The
property in Johnston, Rhode Island is currently vacant and has been so since the
prior tenant vacated in October 2009. We are actively marketing the building to
prospective tenants and expect to re-let the property over time on a
multi-tenant basis, though we cannot make any assurance as to when and on what
terms we will be able to do so.




The
following table summarizes certain additional information about the two Omaha,
Nebraska properties (the Dodge Building and the Landmark Building) as of
December 31, 2010:




Location
                        
                        Pct Leased
                        
                        
                        Number of
                          Tenants
                        
                        Major Tenants (Lease Maturity (1))1299 Farnam Street, Omaha, NE
                        
                        
                        67
                        %
                        
                        13
                        
                        Pacific Life Insurance Company (Jun 2012), Adesta, LLC
      (Aug 2013), Stinson Morrison Hecker LLP (Jun 2015), Booz Allen Hamilton
      Inc. (Jun 2013)9394
      West Dodge Road, Omaha, NE
                        
                        
                        97
                        %
                        
                        6
                        
                        Hayneedle
      Inc. (Feb 2016), The Maids International, Inc. (Aug 2016), Union Pacific
      Railroad Company (Jun 2018), Dex Media, Inc. (Jun
  2013)




(1)
            Reflects
      the date of the tenant’s early termination option where applicable, which
      if exercised would require the tenant to pay an early termination
      fee.





We
continue to actively market the remaining space in the Dodge Building and the
Landmark Building to prospective tenants and expect to fill that space over
time, though we cannot make any assurance as to when and on what terms will be
able to do so.




Loan
Investments




Loan
investments comprise approximately 11% of our current portfolio. Our existing
loan investments are described in greater detail below and include long-term
mortgage loans, corporate credit notes and a single mezzanine investment. With
the exception of the one mezzanine investment, all of our loans are secured by a
first mortgage on the related property and an assignment of the tenant’s lease
and rents. Most of the loans we hold in portfolio are fully amortizing over the
primary lease term of the underlying tenant, thus reducing our risk over time
and eliminating the refinance risk associated with a balloon payment at
maturity. The following summarizes each type of loan we have made.




Long-Term Mortgage Loans. We
have made long-term fully or nearly fully amortizing loans secured by first
mortgages on properties subject to long-term net leases (typically at least 15
years). As of December 31, 2010, our portfolio included $190.8 million of
long-term mortgage loans.




Corporate Credit Notes. Our
corporate credit notes represent one of two notes comprising a single first
mortgage loan on a net lease property. Through a process we have patented, we
split the loan cash flows and establish priorities to the collateral among the
two notes. The corporate credit note generally ranges from 10% to 20% of the
full initial loan amount, is fully amortizing and has a junior claim on the real
estate mortgage, but a senior claim on the rents in the event of a tenant
bankruptcy and lease rejection. We have retained the corporate credit note in
our portfolio and typically sold the related real estate note to a third party
such as a securitization vehicle or an insurance company. As of December 31,
2010, our portfolio included $19.1 million of corporate credit
notes.




Mezzanine and Other
Investments. Our only mezzanine investment as of December 31, 2010, was
$1.4 million of remaining principal on our indirect investment in franchise
loans to YUM! Brands, Inc. franchisees.


8




We may
make long-term mortgage loans and corporate credit notes from time to time in
the future. We may also make in the future a variety of other loan and loan type
products primarily to owners of single tenant properties, including mezzanine
loans, bridge loans, development loans and preferred equity financings. We
expect these investments will be shorter term in nature than our other loan
products and will be subordinate to other financing.




As of
December 31, 2010, we had an approximately $210.9 million loan portfolio. We
believe the strength of our loan portfolio is exhibited by the
following:




·
            weighted
      average remaining lease term on the underlying leases of approximately 16
      years;




·
            91%
      investment grade or implied investment grade underlying
      tenants;




·
            loan
      investments on 63 properties in 25 states with 22 different underlying
      tenant obligors; and




·
            weighted
      average underlying tenant credit rating of
BBB+.


9


The
following is a tabular presentation of our loan portfolio as of December 31,
2010:




(in thousands)OriginalTenant or Guarantor
                                                              
                                                              Location
                                                              
                                                              Property
                                                                Type
                                                              
                                                              Square
                                                                Feet
                                                              
                                                              Coupon
                                                              
                                                              Lease
                                                                Expiration
                                                              
                                                              Loan
                                                                Maturity
                                                              
                                                              Principal
                                                                Balance
                                                              
                                                              Principal
                                                                Balance
                                                              
                                                              Carry
                                                                Value
                                                              
                                                              Loan to Realty
                                                                Value (1)Long-Term Mortgage
      LoansAutozone,
      Inc.
                                                              
                                                              Douglas
      and Valdosta, GA
                                                              
                                                              Retail
                                                              
                                                              13,383
                                                              
                                                              6.50
                                                              %
                                                              4/2024
                                                              
                                                              11/2022
                                                              
                                                              $
                                                              2,108
                                                              
                                                              $
                                                              1,650
                                                              
                                                              $
                                                              1,650
                                                              
                                                              61
                                                              %Bank
      of America, N.A.
                                                              
                                                              Glenview,
      IL
                                                              
                                                              Bank
      Branch
                                                              
                                                              4,500
                                                              
                                                              6.34
                                                              %
                                                              12/2028
                                                              
                                                              12/2028
                                                              
                                                              
                                                              4,317
                                                              
                                                              
                                                              4,247
                                                              
                                                              
                                                              4,247
                                                              
                                                              75
                                                              %Bank
      of America, N.A.
                                                              
                                                              Mt.
      Airy, MD
                                                              
                                                              Bank
      Branch
                                                              
                                                              4,500
                                                              
                                                              6.42
                                                              %
                                                              12/2026
                                                              
                                                              12/2026
                                                              
                                                              
                                                              3,469
                                                              
                                                              
                                                              3,249
                                                              
                                                              
                                                              3,249
                                                              
                                                              73
                                                              %Best
      Buy Co., Inc.
                                                              
                                                              Chicago,
      IL
                                                              
                                                              Retail
                                                              
                                                              45,720
                                                              
                                                              6.40
                                                              %
                                                              3/2025
                                                              
                                                              3/2025
                                                              
                                                              
                                                              18,522
                                                              
                                                              
                                                              16,691
                                                              
                                                              
                                                              16,691
                                                              
                                                              86
                                                              %City
      of Jasper, Texas
                                                              
                                                              Jasper,
      TX
                                                              
                                                              Office
                                                              
                                                              12,750
                                                              
                                                              7.00
                                                              %
                                                              12/2024
                                                              
                                                              11/2024
                                                              
                                                              
                                                              1,736
                                                              
                                                              
                                                              1,498
                                                              
                                                              
                                                              1,462
                                                              
                                                              75
                                                              %CVS
      Corporation
                                                              
                                                              Asheville,
      NC
                                                              
                                                              Retail
      Drug
                                                              
                                                              10,880
                                                              
                                                              6.53
                                                              %
                                                              1/2026
                                                              
                                                              1/2026
                                                              
                                                              
                                                              2,360
                                                              
                                                              
                                                              2,034
                                                              
                                                              
                                                              2,080
                                                              
                                                              80
                                                              %CVS
      Corporation
                                                              
                                                              Athol,
      MA
                                                              
                                                              Retail
      Drug
                                                              
                                                              13,013
                                                              
                                                              6.46
                                                              %
                                                              1/2025
                                                              
                                                              1/2025
                                                              
                                                              
                                                              1,502
                                                              
                                                              
                                                              1,235
                                                              
                                                              
                                                              1,235
                                                              
                                                              65
                                                              %CVS
      Corporation
                                                              
                                                              Bangor,
      PA
                                                              
                                                              Retail
      Drug
                                                              
                                                              13,013
                                                              
                                                              6.28
                                                              %
                                                              1/2026
                                                              
                                                              1/2026
                                                              
                                                              
                                                              2,521
                                                              
                                                              
                                                              2,064
                                                              
                                                              
                                                              2,035
                                                              
                                                              74
                                                              %CVS
      Corporation
                                                              
                                                              Bluefield,
      WV
                                                              
                                                              Retail
      Drug
                                                              
                                                              10,125
                                                              
                                                              8.00
                                                              %
                                                              1/2021
                                                              
                                                              1/2021
                                                              
                                                              
                                                              1,439
                                                              
                                                              
                                                              1,087
                                                              
                                                              
                                                              1,161
                                                              
                                                              64
                                                              %CVS
      Corporation
                                                              
                                                              Evansville,
      IN
                                                              
                                                              Retail
      Drug
                                                              
                                                              12,900
                                                              
                                                              6.22
                                                              %
                                                              1/2033
                                                              
                                                              1/2033
                                                              
                                                              
                                                              3,351
                                                              
                                                              
                                                              3,149
                                                              
                                                              
                                                              3,149
                                                              
                                                              72
                                                              %CVS
      Corporation
                                                              
                                                              Greensboro,
      GA
                                                              
                                                              Retail
      Drug
                                                              
                                                              11,970
                                                              
                                                              6.52
                                                              %
                                                              1/2030
                                                              
                                                              1/2030
                                                              
                                                              
                                                              1,395
                                                              
                                                              
                                                              1,241
                                                              
                                                              
                                                              1,241
                                                              
                                                              73
                                                              %CVS
      Corporation
                                                              
                                                              Oak
      Ridge, NC
                                                              
                                                              Retail
      Drug
                                                              
                                                              10,880
                                                              
                                                              6.99
                                                              %
                                                              1/2025
                                                              
                                                              8/2024
                                                              
                                                              
                                                              3,243
                                                              
                                                              
                                                              2,762
                                                              
                                                              
                                                              2,762
                                                              
                                                              71
                                                              %CVS
      Corporation
                                                              
                                                              Shelby
      Twp., MI
                                                              
                                                              Retail
      Drug
                                                              
                                                              11,970
                                                              
                                                              5.98
                                                              %
                                                              1/2031
                                                              
                                                              1/2031
                                                              
                                                              
                                                              2,540
                                                              
                                                              
                                                              2,401
                                                              
                                                              
                                                              2,401
                                                              
                                                              84
                                                              %CVS
      Corporation
                                                              
                                                              Southington,
      CT
                                                              
                                                              Retail
      Drug
                                                              
                                                              10,125
                                                              
                                                              8.26
                                                              %
                                                              1/2020
                                                              
                                                              1/2020
                                                              
                                                              
                                                              1,768
                                                              
                                                              
                                                              1,530
                                                              
                                                              
                                                              1,665
                                                              
                                                              75
                                                              %CVS
      Corporation
                                                              
                                                              Stow,
      OH
                                                              
                                                              Retail
      Drug
                                                              
                                                              10,125
                                                              
                                                              8.26
                                                              %
                                                              1/2020
                                                              
                                                              1/2020
                                                              
                                                              
                                                              2,407
                                                              
                                                              
                                                              2,029
                                                              
                                                              
                                                              2,205
                                                              
                                                              71
                                                              %CVS
      Corporation
                                                              
                                                              Sunbury,
      PA
                                                              
                                                              Retail
      Drug
                                                              
                                                              10,125
                                                              
                                                              7.50
                                                              %
                                                              1/2021
                                                              
                                                              1/2021
                                                              
                                                              
                                                              1,829
                                                              
                                                              
                                                              1,341
                                                              
                                                              
                                                              1,316
                                                              
                                                              64
                                                              %CVS
      Corporation
                                                              
                                                              Washington,
      DC
                                                              
                                                              Retail
      Drug
                                                              
                                                              7,920
                                                              
                                                              8.10
                                                              %
                                                              1/2023
                                                              
                                                              1/2023
                                                              
                                                              
                                                              2,781
                                                              
                                                              
                                                              2,089
                                                              
                                                              
                                                              2,201
                                                              
                                                              63
                                                              %CVS
      Corporation
                                                              
                                                              Willimantic,
      CT
                                                              
                                                              Retail
      Drug
                                                              
                                                              10,125
                                                              
                                                              8.26
                                                              %
                                                              1/2023
                                                              
                                                              1/2023
                                                              
                                                              
                                                              2,028
                                                              
                                                              
                                                              1,804
                                                              
                                                              
                                                              1,982
                                                              
                                                              74
                                                              %Harris
      Bankcorp, Inc.
                                                              
                                                              Chicago,
      IL
                                                              
                                                              Bank
      Branch
                                                              
                                                              4,750
                                                              
                                                              6.81
                                                              %
                                                              8/2025
                                                              
                                                              8/2025
                                                              
                                                              
                                                              4,467
                                                              
                                                              
                                                              3,943
                                                              
                                                              
                                                              3,943
                                                              
                                                              65
                                                              %Home
      Depot USA, Inc.
                                                              
                                                              Chelsea,
      MA
                                                              
                                                              Retail
                                                              
                                                              117,034
                                                              
                                                              5.36
                                                              %
                                                              1/2036
                                                              
                                                              1/2031
                                                              
                                                              
                                                              8,501
                                                              
                                                              
                                                              7,807
                                                              
                                                              
                                                              7,807
                                                              
                                                              85
                                                              %Home
      Depot USA, Inc.
                                                              
                                                              Tullytown,
      PA
                                                              
                                                              Retail
                                                              
                                                              116,016
                                                              
                                                              6.62
                                                              %
                                                              1/2033
                                                              
                                                              1/2033
                                                              
                                                              
                                                              8,447
                                                              
                                                              
                                                              8,274
                                                              
                                                              
                                                              8,274
                                                              
                                                              96
                                                              %Kohls
      Corporation
                                                              
                                                              Chicago,
      IL
                                                              
                                                              Retail
                                                              
                                                              133,000
                                                              
                                                              6.69
                                                              %
                                                              5/2030
                                                              
                                                              5/2030
                                                              
                                                              
                                                              48,270
                                                              
                                                              
                                                              45,110
                                                              
                                                              
                                                              45,110
                                                              
                                                              88
                                                              %Koninklijke
      Ahold, N.V.
                                                              
                                                              Bensalem,
      PA
                                                              
                                                              Retail
                                                              
                                                              67,000
                                                              
                                                              7.24
                                                              %
                                                              5/2020
                                                              
                                                              5/2020
                                                              
                                                              
                                                              3,153
                                                              
                                                              
                                                              2,549
                                                              
                                                              
                                                              2,587
                                                              
                                                              73
                                                              %Koninklijke
      Ahold, N.V.
                                                              
                                                              North
      Kingstown, RI
                                                              
                                                              Retail
                                                              
                                                              125,772
                                                              
                                                              7.50
                                                              %
                                                              11/2025
                                                              
                                                              11/2025
                                                              
                                                              
                                                              6,794
                                                              
                                                              
                                                              6,075
                                                              
                                                              
                                                              6,059
                                                              
                                                              67
                                                              %Koninklijke
      Ahold, N.V.
                                                              
                                                              Tewksbury,
      MA
                                                              
                                                              Retail
                                                              
                                                              58,450
                                                              
                                                              7.50
                                                              %
                                                              1/2027
                                                              
                                                              1/2027
                                                              
                                                              
                                                              6,625
                                                              
                                                              
                                                              5,969
                                                              
                                                              
                                                              5,965
                                                              
                                                              68
                                                              %Koninklijke
      Ahold, N.V.
                                                              
                                                              Upper
      Darby Township, PA
                                                              
                                                              Retail
                                                              
                                                              54,800
                                                              
                                                              7.29
                                                              %
                                                              4/2024
                                                              
                                                              4/2024
                                                              
                                                              
                                                              6,867
                                                              
                                                              
                                                              5,763
                                                              
                                                              
                                                              5,554
                                                              
                                                              79
                                                              %Lowes
      Companies, Inc.
                                                              
                                                              Framingham,
      MA
                                                              
                                                              Retail
                                                              
                                                              156,543
                                                              
                                                              0.96
                                                              %
                                                              10/2031
                                                              
                                                              9/2031
                                                              
                                                              
                                                              5,545
                                                              
                                                              
                                                              5,585
                                                              
                                                              
                                                              1,530
                                                              
                                                              82
                                                              %Lowes
      Companies, Inc.
                                                              
                                                              Matamoras,
      PA
                                                              
                                                              Retail
                                                              
                                                              162,070
                                                              
                                                              6.61
                                                              %
                                                              5/2030
                                                              
                                                              5/2030
                                                              
                                                              
                                                              7,208
                                                              
                                                              
                                                              6,923
                                                              
                                                              
                                                              6,923
                                                              
                                                              92
                                                              %National
      City Bank
                                                              
                                                              Chicago,
      IL
                                                              
                                                              Bank
      Branch
                                                              
                                                              5,274
                                                              
                                                              5.89
                                                              %
                                                              12/2024
                                                              
                                                              12/2024
                                                              
                                                              
                                                              3,114
                                                              
                                                              
                                                              2,723
                                                              
                                                              
                                                              2,782
                                                              
                                                              69
                                                              %Neiman
      Marcus Group, Inc.
                                                              
                                                              Las
      Vegas, NV
                                                              
                                                              Retail
                                                              
                                                              167,000
                                                              
                                                              6.06
                                                              %
                                                              11/2022
                                                              
                                                              11/2021
                                                              
                                                              
                                                              8,267
                                                              
                                                              
                                                              5,821
                                                              
                                                              
                                                              6,223
                                                              
                                                              61
                                                              %United
      States Postal Service
                                                              
                                                              Scammon
      Bay, AK
                                                              
                                                              Post
      Office
                                                              
                                                              2,080
                                                              
                                                              7.05
                                                              %
                                                              10/2021
                                                              
                                                              10/2021
                                                              
                                                              
                                                              1,015
                                                              
                                                              
                                                              759
                                                              
                                                              
                                                              771
                                                              
                                                              59
                                                              %University
      of Connecticut Health Center
                                                              
                                                              Farmington,
      CT
                                                              
                                                              Medical
      Office
                                                              
                                                              100,000
                                                              
                                                              6.34
                                                              %
                                                              11/2029
                                                              
                                                              11/2024
                                                              
                                                              
                                                              22,800
                                                              
                                                              
                                                              18,592
                                                              
                                                              
                                                              19,150
                                                              
                                                              75
                                                              %Walgreen
      Co.
                                                              
                                                              Dallas,
      TX
                                                              
                                                              Retail
      Drug
                                                              
                                                              14,550
                                                              
                                                              6.46
                                                              %
                                                              12/2029
                                                              
                                                              12/2029
                                                              
                                                              
                                                              3,534
                                                              
                                                              
                                                              3,126
                                                              
                                                              
                                                              3,126
                                                              
                                                              73
                                                              %Walgreen
      Co.
                                                              
                                                              Montebello,
      CA
                                                              
                                                              Retail
      Drug
                                                              
                                                              14,414
                                                              
                                                              6.10
                                                              %
                                                              3/2030
                                                              
                                                              2/2030
                                                              
                                                              
                                                              4,680
                                                              
                                                              
                                                              4,147
                                                              
                                                              
                                                              4,147
                                                              
                                                              61
                                                              %Walgreen
      Co.
                                                              
                                                              Nacogdoches,
      TX
                                                              
                                                              Retail
      Drug
                                                              
                                                              14,820
                                                              
                                                              6.80
                                                              %
                                                              9/2030
                                                              
                                                              9/2030
                                                              
                                                              
                                                              3,649
                                                              
                                                              
                                                              3,350
                                                              
                                                              
                                                              3,350
                                                              
                                                              66
                                                              %Walgreen
      Co.
                                                              
                                                              Rosemead,
      CA
                                                              
                                                              Retail
      Drug
                                                              
                                                              12,004
                                                              
                                                              6.26
                                                              %
                                                              12/2029
                                                              
                                                              12/2029
                                                              
                                                              
                                                              5,334
                                                              
                                                              
                                                              4,804
                                                              
                                                              
                                                              4,804
                                                              
                                                              67
                                                              %217,586
                                                              
                                                              
                                                              193,421
                                                              
                                                              
                                                              190,837Corporate
      Credit NotesAlbertsons,
      LLC
                                                              
                                                              Los
      Angeles, CA
                                                              
                                                              Retail
      Drug
                                                              
                                                              16,475
                                                              
                                                              6.50
                                                              %
                                                              7/2028
                                                              
                                                              9/2013
                                                              
                                                              
                                                              437
                                                              
                                                              
                                                              154
                                                              
                                                              
                                                              147
                                                              
                                                              73
                                                              %Albertsons,
      LLC
                                                              
                                                              Norwalk,
      CA
                                                              
                                                              Retail
      Drug
                                                              
                                                              14,696
                                                              
                                                              6.33
                                                              %
                                                              11/2028
                                                              
                                                              12/2013
                                                              
                                                              
                                                              470
                                                              
                                                              
                                                              174
                                                              
                                                              
                                                              173
                                                              
                                                              67
                                                              %Best
      Buy Co., Inc.
                                                              
                                                              Olathe,
      KS
                                                              
                                                              Retail
                                                              
                                                              48,744
                                                              
                                                              5.40
                                                              %
                                                              1/2018
                                                              
                                                              6/2013
                                                              
                                                              
                                                              1,779
                                                              
                                                              
                                                              586
                                                              
                                                              
                                                              577
                                                              
                                                              65
                                                              %Best
      Buy Co., Inc.
                                                              
                                                              Wichita
      Falls, TX
                                                              
                                                              Retail
                                                              
                                                              30,038
                                                              
                                                              6.15
                                                              %
                                                              1/2017
                                                              
                                                              11/2012
                                                              
                                                              
                                                              743
                                                              
                                                              
                                                              186
                                                              
                                                              
                                                              183
                                                              
                                                              62
                                                              %CVS
      Corporation
                                                              
                                                              Clemmons,
      NC
                                                              
                                                              Retail
      Drug
                                                              
                                                              10,880
                                                              
                                                              5.54
                                                              %
                                                              1/2022
                                                              
                                                              1/2015
                                                              
                                                              
                                                              285
                                                              
                                                              
                                                              136
                                                              
                                                              
                                                              133
                                                              
                                                              55
                                                              %CVS
      Corporation
                                                              
                                                              Commerce,
      MI
                                                              
                                                              Retail
      Drug
                                                              
                                                              10,880
                                                              
                                                              5.85
                                                              %
                                                              4/2025
                                                              
                                                              5/2013
                                                              
                                                              
                                                              501
                                                              
                                                              
                                                              164
                                                              
                                                              
                                                              162
                                                              
                                                              72
                                                              %CVS
      Corporation
                                                              
                                                              Garwood,
      NJ
                                                              
                                                              Retail
      Drug
                                                              
                                                              11,970
                                                              
                                                              6.12
                                                              %
                                                              6/2025
                                                              
                                                              8/2013
                                                              
                                                              
                                                              879
                                                              
                                                              
                                                              290
                                                              
                                                              
                                                              287
                                                              
                                                              71
                                                              %CVS
      Corporation
                                                              
                                                              Kennett
      Square, PA
                                                              
                                                              Retail
      Drug
                                                              
                                                              12,150
                                                              
                                                              6.40
                                                              %
                                                              1/2025
                                                              
                                                              10/2012
                                                              
                                                              
                                                              857
                                                              
                                                              
                                                              201
                                                              
                                                              
                                                              199
                                                              
                                                              72
                                                              %CVS
      Corporation
                                                              
                                                              Knox,
      IN
                                                              
                                                              Retail
      Drug
                                                              
                                                              10,125
                                                              
                                                              7.60
                                                              %
                                                              1/2024
                                                              
                                                              12/2011
                                                              
                                                              
                                                              322
                                                              
                                                              
                                                              44
                                                              
                                                              
                                                              44
                                                              
                                                              59
                                                              %CVS
      Corporation
                                                              
                                                              Rockingham,
      NC
                                                              
                                                              Retail
      Drug
                                                              
                                                              10,125
                                                              
                                                              6.12
                                                              %
                                                              1/2025
                                                              
                                                              10/2013
                                                              
                                                              
                                                              435
                                                              
                                                              
                                                              152
                                                              
                                                              
                                                              150
                                                              
                                                              65
                                                              %CVS
      Corporation
                                                              
                                                              Rutherford
      College, NC
                                                              
                                                              Retail
      Drug
                                                              
                                                              10,125
                                                              
                                                              6.12
                                                              %
                                                              1/2025
                                                              
                                                              10/2013
                                                              
                                                              
                                                              346
                                                              
                                                              
                                                              136
                                                              
                                                              
                                                              134
                                                              
                                                              66
                                                              %Federal
      Express Corporation
                                                              
                                                              Bellingham,
      WA
                                                              
                                                              Warehouse
                                                              
                                                              30,313
                                                              
                                                              5.78
                                                              %
                                                              10/2018
                                                              
                                                              3/2015
                                                              
                                                              
                                                              362
                                                              
                                                              
                                                              196
                                                              
                                                              
                                                              194
                                                              
                                                              62
                                                              %FedEx
      Ground Package System, Inc.
                                                              
                                                              McCook,
      IL
                                                              
                                                              Warehouse
                                                              
                                                              159,699
                                                              
                                                              5.89
                                                              %
                                                              1/2019
                                                              
                                                              2/2015
                                                              
                                                              
                                                              2,737
                                                              
                                                              
                                                              1,345
                                                              
                                                              
                                                              1,337
                                                              
                                                              73
                                                              %FedEx
      Ground Package System, Inc.
                                                              
                                                              Reno,
      NV
                                                              
                                                              Warehouse
                                                              
                                                              106,396
                                                              
                                                              5.90
                                                              %
                                                              9/2018
                                                              
                                                              10/2014
                                                              
                                                              
                                                              1,374
                                                              
                                                              
                                                              629
                                                              
                                                              
                                                              625
                                                              
                                                              68
                                                              %Hercules
      Incorporated
                                                              
                                                              Wilmington,
      DE
                                                              
                                                              Office
                                                              
                                                              518,409
                                                              
                                                              9.32
                                                              %
                                                              5/2013
                                                              
                                                              5/2013
                                                              
                                                              
                                                              20,000
                                                              
                                                              
                                                              12,664
                                                              
                                                              
                                                              12,664
                                                              
                                                              71
                                                              %Lowes
      Companies, Inc.
                                                              
                                                              N.
      Windham, ME
                                                              
                                                              Retail
                                                              
                                                              138,134
                                                              
                                                              5.28
                                                              %
                                                              1/2026
                                                              
                                                              9/2015
                                                              
                                                              
                                                              1,140
                                                              
                                                              
                                                              642
                                                              
                                                              
                                                              635
                                                              
                                                              77
                                                              %PerkinElmer,
      Inc.
                                                              
                                                              Beltsville,
      MD
                                                              
                                                              Office/Industrial
                                                              
                                                              65,862
                                                              
                                                              7.35
                                                              %
                                                              11/2021
                                                              
                                                              12/2011
                                                              
                                                              
                                                              707
                                                              
                                                              
                                                              97
                                                              
                                                              
                                                              96
                                                              
                                                              64
                                                              %PerkinElmer,
      Inc.
                                                              
                                                              Daytona
      Beach, FL
                                                              
                                                              Office/Industrial
                                                              
                                                              34,196
                                                              
                                                              7.35
                                                              %
                                                              11/2021
                                                              
                                                              12/2011
                                                              
                                                              
                                                              321
                                                              
                                                              
                                                              44
                                                              
                                                              
                                                              44
                                                              
                                                              63
                                                              %PerkinElmer,
      Inc.
                                                              
                                                              Phelps,
      NY
                                                              
                                                              Office/Industrial
                                                              
                                                              32,700
                                                              
                                                              7.35
                                                              %
                                                              11/2021
                                                              
                                                              12/2011
                                                              
                                                              
                                                              299
                                                              
                                                              
                                                              41
                                                              
                                                              
                                                              41
                                                              
                                                              66
                                                              %PerkinElmer,
      Inc.
                                                              
                                                              Warwick,
      RI
                                                              
                                                              Industrial
                                                              
                                                              95,720
                                                              
                                                              7.68
                                                              %
                                                              12/2021
                                                              
                                                              1/2012
                                                              
                                                              
                                                              939
                                                              
                                                              
                                                              140
                                                              
                                                              
                                                              140
                                                              
                                                              65
                                                              %Staples,
      Inc.
                                                              
                                                              Odessa,
      TX
                                                              
                                                              Retail
                                                              
                                                              23,942
                                                              
                                                              6.41
                                                              %
                                                              6/2015
                                                              
                                                              9/2012
                                                              
                                                              
                                                              408
                                                              
                                                              
                                                              106
                                                              
                                                              
                                                              105
                                                              
                                                              60
                                                              %Walgreen
      Co.
                                                              
                                                              Delray
      Beach, FL
                                                              
                                                              Retail
      Drug
                                                              
                                                              15,120
                                                              
                                                              6.20
                                                              %
                                                              1/2021
                                                              
                                                              1/2013
                                                              
                                                              
                                                              595
                                                              
                                                              
                                                              156
                                                              
                                                              
                                                              156
                                                              
                                                              63
                                                              %Walgreen
      Co.
                                                              
                                                              Jefferson
      City, TN
                                                              
                                                              Retail
      Drug
                                                              
                                                              14,266
                                                              
                                                              5.49
                                                              %
                                                              3/2030
                                                              
                                                              5/2015
                                                              
                                                              
                                                              786
                                                              
                                                              
                                                              401
                                                              
                                                              
                                                              401
                                                              
                                                              79
                                                              %Walgreen
      Co.
                                                              
                                                              Riverside,
      CA
                                                              
                                                              Retail
      Drug
                                                              
                                                              12,804
                                                              
                                                              6.10
                                                              %
                                                              10/2028
                                                              
                                                              12/2013
                                                              
                                                              
                                                              571
                                                              
                                                              
                                                              210
                                                              
                                                              
                                                              208
                                                              
                                                              67
                                                              %Walgreen
      Co.
                                                              
                                                              Waterford,
      MI
                                                              
                                                              Retail
      Drug
                                                              
                                                              14,490
                                                              
                                                              5.50
                                                              %
                                                              1/2023
                                                              
                                                              6/2013
                                                              
                                                              
                                                              953
                                                              
                                                              
                                                              290
                                                              
                                                              
                                                              282
                                                              
                                                              68
                                                              %38,246
                                                              
                                                              
                                                              19,184
                                                              
                                                              
                                                              19,117Mezzanine
      and Other InvestmentsWest
      End Mortgage Finance Fund I L.P.
                                                              
                                                              Various
                                                              
                                                              Other
                                                              
                                                              N/A
                                                              
                                                              5.00
                                                              %
                                                              N/A
                                                              
                                                              Delinquent
                                                              
                                                              
                                                              7,154
                                                              
                                                              
                                                              1,444
                                                              
                                                              
                                                              988
                                                              
                                                              N/A7,154
                                                              
                                                              
                                                              1,444
                                                              
                                                              
                                                              988Total
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              $
                                                              262,986
                                                              
                                                              $
                                                              214,049
                                                              
                                                              $
                                                              210,942





(1)
            All
      percentages have been rounded to the nearest whole percentage. Loan to
      realty value is the ratio of the principal balance of the loan as of
      December 31, 2010 to the appraised value of the real estate that
      secures the loan at the time the loan was made. The current value of the
      real estate may be different. The loan to realty value for each corporate
      credit note includes the principal balance of the portion of the loan we
      have sold.


10




Commercial
Mortgage-Backed and Other Real Estate Securities




As of
December 31, 2010, real estate securities aggregated approximately $146.0
million, or approximately 7% of our portfolio. We invest in commercial
mortgage-backed securities, or CMBS, and other real estate securities. Our CMBS
investments include senior, subordinate and interest-only classes of primarily
net lease loan securitizations or pass through trusts. Our other real estate
securities represent our pro rata investments in one or more first mortgage
loans on properties net leased to a single tenant. We believe we are
well-positioned to evaluate net lease CMBS investments and other real estate
securities due to our expertise with net lease loan assets and our experience in
structuring CMBS transactions. We structured four CMBS securitizations
aggregating approximately $1.5 billion prior to our initial public offering. As
a result of our familiarity with the collateral included in these transactions,
many of our CMBS investments to date have been made in classes of our prior
securitizations.




The
weighted average credit rating on our securities portfolio was BB as of December
31, 2010, with 40% of the portfolio rated investment grade or implied investment
grade. These statistics reflect the actual ratings on our CMBS securities and
underlying tenant ratings on our other real estate securities.




Our CMBS
and other real estate securities as of December 31, 2010 are summarized in the
following table:




(in thousands)Security Description
                            
                            CUSIP No.
                            
                            Face Amount (1)
                            
                            
                            Carry Value
                            
                            
                            Amortized
                              Cost
                            
                            
                            Coupon(2)
                            
                            
                            MaturityDateInvestments in
      Commercial Mortgage Loan SecuritizationsBACM
      2006-4, Class H
                            
                            05950WAT5
                            
                            $
                            8,000
                            
                            
                            $
                            400
                            
                            
                            $
                            400
                            
                            
                            
                            6.01
                            %
                            
                            Aug
      2016Banc
      of America 2007-1, Class C
                            
                            059497AB3
                            
                            
                            500
                            
                            
                            
                            173
                            
                            
                            
                            173
                            
                            
                            
                            5.56
                            %
                            
                            Feb
      2017BSCMS
      1999 CLF1, Class E
                            
                            07383FCC0
                            
                            
                            3,326
                            
                            
                            
                            –
                            
                            
                            
                            –
                            
                            
                            
                            7.10
                            %
                            
                            May
      2028BSCMS
      1999 CLF1, Class F
                            
                            07383FCD8
                            
                            
                            251
                            
                            
                            
                            –
                            
                            
                            
                            –
                            
                            
                            
                            6.41
                            %
                            
                            Sep
      2025CALFS
      1997-CTL1, Class D
                            
                            140281AF3
                            
                            
                            6,000
                            
                            
                            
                            5,375
                            
                            
                            
                            5,951
                            
                            
                            
                            6.16
                            %
                            
                            Apr
      2016CMLBC
      2001-CMLB-1, Class E
                            
                            201736AJ4
                            
                            
                            9,526
                            
                            
                            
                            9,658
                            
                            
                            
                            10,033
                            
                            
                            
                            7.88
                            %
                            
                            Jul
      2022CMLBC
      2001-CMLB-1, Class G
                            
                            201736AL9
                            
                            
                            9,526
                            
                            
                            
                            4,945
                            
                            
                            
                            8,953
                            
                            
                            
                            7.88
                            %
                            
                            Feb
      2023CMLBC
      2001-CMLB-1, Class H
                            
                            201736AM7
                            
                            
                            11,907
                            
                            
                            
                            1,109
                            
                            
                            
                            6,978
                            
                            
                            
                            6.25
                            %
                            
                            Mar
      2024CMLBC
      2001-CMLB-1, Class J
                            
                            201736AN5
                            
                            
                            6,383
                            
                            
                            
                            320
                            
                            
                            
                            1,149
                            
                            
                            
                            6.25
                            %
                            
                            Oct
      2025JP
      Morgan 2006-LDP9, Class AJ
                            
                            46629PAF5
                            
                            
                            200
                            
                            
                            
                            99
                            
                            
                            
                            99
                            
                            
                            
                            5.41
                            %
                            
                            Dec
      2016NLFC
      1999-LTL-1, Class E
                            
                            63859CCL5
                            
                            
                            11,081
                            
                            
                            
                            6,483
                            
                            
                            
                            5,926
                            
                            
                            
                            5.00
                            %
                            
                            Mar
      2022NLFC
      1999-LTL-1, Class X (IO)
                            
                            63859CCG6
                            
                            
                            4,392
                            
                            
                            
                            3,917
                            
                            
                            
                            4,392
                            
                            
                            
                            0.53
                            %
                            
                            Jan
      2024Wachovia
      2007-C30, Class AJ
                            
                            92978QAJ6
                            
                            
                            200
                            
                            
                            
                            95
                            
                            
                            
                            95
                            
                            
                            
                            5.41
                            %
                            
                            Feb
      2017Wachovia
      2007-C31, Class AJ
                            
                            92978TAJ0
                            
                            
                            200
                            
                            
                            
                            96
                            
                            
                            
                            96
                            
                            
                            
                            5.66
                            %
                            
                            May
      2017Wachovia
      2007-C33, Class AJ
                            
                            92978NAK0
                            
                            
                            200
                            
                            
                            
                            96
                            
                            
                            
                            96
                            
                            
                            
                            5.90
                            %
                            
                            Jul
      2017WBCMT
      2004-C15, Class 180ML-D
                            
                            929766YG2
                            
                            
                            15,000
                            
                            
                            
                            15,013
                            
                            
                            
                            15,013
                            
                            
                            
                            5.59
                            %
                            
                            Nov
      2012
                            (3)WBCMT
      2004-C15, Class 180ML-E
                            
                            929766YH0
                            
                            
                            8,000
                            
                            
                            
                            7,223
                            
                            
                            
                            8,008
                            
                            
                            
                            5.59
                            %
                            
                            Nov
      2012
                            (3)WBCMT
      2006-C27, Class C
                            
                            92977QAK4
                            
                            
                            11,000
                            
                            
                            
                            10,601
                            
                            
                            
                            11,148
                            
                            
                            
                            5.89
                            %
                            
                            Aug
      2016BACMS
      2002-2, Class V-1 (7-Eleven, Inc.)
                            
                            05947UJE9
                            
                            
                            602
                            
                            
                            
                            493
                            
                            
                            
                            493
                            
                            
                            
                            8.72
                            %
                            
                            Sep
      2019BACMS
      2002-2, Class V-2 (Sterling Jewelers)
                            
                            05947UJF6
                            
                            
                            920
                            
                            
                            
                            734
                            
                            
                            
                            735
                            
                            
                            
                            8.68
                            %
                            
                            Jan
      2021107,214
                            
                            
                            
                            66,830
                            
                            
                            
                            79,738Investments
      in Certificated Loan TransactionsAlcatel-Lucent
      USA Inc. as tenant
                            
                            72817#AA6
                            
                            
                            34,722
                            
                            
                            
                            34,000
                            
                            
                            
                            35,172
                            
                            
                            
                            6.70
                            %
                            
                            Sep
      2020CVS
      Corporation as tenant
                            
                            126650BB5
                            
                            
                            17,480
                            
                            
                            
                            16,702
                            
                            
                            
                            17,480
                            
                            
                            
                            5.88
                            %
                            
                            Jan
      2028Koninklijke
      Ahold, N.V. as tenant
                            
                            008686AA5
                            
                            
                            8,032
                            
                            
                            
                            8,336
                            
                            
                            
                            8,142
                            
                            
                            
                            7.82
                            %
                            
                            Jan
      2019Yahoo!
      Inc. as tenant
                            
                            984332AC0
                            
                            
                            21,739
                            
                            
                            
                            20,096
                            
                            
                            
                            21,497
                            
                            
                            
                            6.65
                            %
                            
                            Aug
      202681,973
                            
                            
                            
                            79,134
                            
                            
                            
                            82,291Total
                            
                            
                            
                            $
                            189,187
                            
                            
                            $
                            145,964
                            
                            
                            $
                            162,029




(1)
            Represents
      face amount or, in the case of the NLFC 1999-LTL-1, Class X (IO) bond, our
      amortized cost.




(2)
            As
      of December 31, 2010, we were not receiving scheduled interest payments on
      the BSCMS bonds (Class E and Class F).  We have adopted the
      cost-recovery method, in which all receipts are applied to reduce our cost
      basis, on a limited number of our securities
  investments.




(3)
            The
      security had an original scheduled maturity in November 2009 and,
      therefore, the Company held the security beyond its original scheduled
      maturity date.




The
weighted average life of our securities portfolio as of December 31, 2010 was
7.2 years.




Portfolio
Financing




Our
strategy is to finance our assets with secured long-term fixed rate non-recourse
first mortgage debt. We seek to finance our assets as soon as practicable after
we invest through “match-funded” or substantially “match-funded” debt, meaning
that we seek to obtain debt whose maturity matches as closely as possible the
lease maturity of the asset financed. By doing so, we seek to lock-in the
positive spread on the assets (representing the difference between our yield and
our cost of financing) for the long-term. Through non-recourse debt, we seek to
limit the overall company exposure in the event we default on the debt to the
amount we have invested in the asset or assets financed. We also seek to employ
amortizing debt on our assets, or debt that will diminish over time as we make
scheduled principal payments.


11




Since our
initial public offering, our long-term fixed rate financings have been in the
form of mortgage debt on most of our owned properties and two term financings,
including one CDO. We have used term financings to finance most of our loan and
CMBS investments and to finance a portion of our owned properties.




We issued
an entirely fixed rate on balance sheet CDO financing in March 2005. We
aggregated approximately $300 million face amount of assets into the pool, and
we issued $285 million face amount of multi-class notes and $15 million of
preferred equity through the CDO trust. The net amount of the debt we initially
issued was $268.1 million, inclusive of a $0.4 million discount to face, as we
retained the three most junior note classes aggregating a face amount of $16.5
million and the full $15 million of preferred equity. The CDO notes have a
stated maturity in January 2040, although the actual life of the notes is
expected to be substantially shorter. Our weighted average effective financing
rate (inclusive of original issue discount and debt issuance and hedge costs) on
our CDO is approximately 5.6%.




We have
completed a $129.5 million original principal balance secured term loan with a
European based institutional lender in December 2007. Upon closing of the
financing, we pledged approximately $163.1 million principal amount of
collateral to secure our obligations under the loan. The interest coupon on the
loan is fixed at 5.81% annually until the loan matures in January 2018. Our
effective financing rate on the loan is 6.0% annually (inclusive of hedge and
closing costs).




We have
financed certain of our portfolio assets pursuant to a credit agreement we
entered into with Wells Fargo Bank in April 2008, and amended and restated in
July 2010. We have $105.3 million outstanding under the agreement as of December
31, 2010. Our borrowings are scheduled to mature in July 2013. The agreement is
a floating rate LIBOR based recourse borrowing facility. We may pursue a variety
of strategies for the assets financed pursuant to the agreement, which may
include obtaining long-term fixed rate financing when market conditions permit,
pursuing selected asset sales, and retiring the debt on selected assets and
holding the assets unlevered. Through a combination of voluntary and scheduled
principal repayments, we reduced the borrowings under the agreement by
$20.9 million during 2010.




As of
December 31, 2010, the following statistics summarize various aspects of our
overall portfolio financing position:




·
            leverage
      of approximately 72%, which includes secured and unsecured
      debt;




·
            $928.4
      million of non-recourse first mortgage debt at a weighted average coupon
      of 5.62% and a weighted average effective financing rate of
      5.6%;




·
            $254.2
      million of non-recourse CDO debt at a weighted average effective financing
      rate of approximately 5.6%;




·
            $101.9
      million of non-recourse other term debt at a coupon of 5.81% and an
      effective financing rate of 6.0%;
and




·
            $105.3
      million of recourse debt to Wells Fargo Bank under the credit agreement
      described above at an effective financing rate of
  3.3%.




We expect
our leverage levels to decrease over time, as a result of one or more of the
following factors: scheduled principal amortization on our debt, voluntary debt
reduction including potentially through selected asset sales, and lower or no
leverage on new asset acquisitions.




Hedging
Strategy




For
assets that have not yet been financed with long-term fixed rate debt, we may
employ a hedging strategy to manage our exposure to interest rate fluctuations
prior to the time we obtain long-term fixed rate financing. We do so by entering
into hedging transactions that we expect to offset the impact to us of changes
in interest rates. As interest rates increase, the hedge transactions are
intended to offset the increased interest cost on the expected future financing
with gains on the hedge positions. Our hedging transactions have historically
consisted primarily of forward starting interest rate swaps. Interest rate swaps
are agreements between two parties to exchange, at particular intervals, payment
streams calculated on a specified notional amount.




We do not
hedge those assets that we have financed with long-term fixed rate debt, as our
yields and spreads on those assets are fixed and, therefore, not impacted by
fluctuations in interest rates.




We will
continue to seek to manage our interest rate exposure taking into account market
conditions, the cost of the hedging transactions and the limitations on hedging
transactions imposed by the REIT tax rules. As of December 31, 2010, we had no
open hedge transactions.


12




Revenue
Concentrations in 2010




Other
than the United States Government and Nestlé Holdings, Inc., which accounted for
approximately 12.4% and 8.8%, respectively, of our total revenue, and
approximately 15.0% and 10.6%, respectively, of our total revenue from our owned
properties segment, we had no greater than 10% revenue concentrations based on
total revenue or on a total revenue by segment basis during 2010. Approximately
11.2% and 10.4%, respectively, of our total revenue from our debt investments
segment during 2010 was obtained from investments where Kohl’s Corporation and
CVS Corporation is the tenant (or lease guarantor), but not our
obligor.




Investment
Network




Our level
of new investment activity is influenced by market conditions. We reinitiated
our portfolio growth activities during 2010, and we expect to continue our
portfolio growth momentum during 2011.




We
maintain a comprehensive marketing, advertising and public relations program
that supports our investment efforts. The objective of the program is to build
our name recognition and reinforce our position as an industry leader in the
single tenant market segment. We believe, based upon our experience and
responses from customers, that we have been successful in achieving our
objectives of market awareness and prominence.




Property
Acquisitions.




Since our
initial public offering, we have leveraged our relationships within our loan
origination business and our knowledge of the single tenant business to develop
relationships with investment sale brokers, through which we identify real
property for purchase. In addition, we source property acquisition opportunities
directly from a growing number of developers and owners or investors in real
estate assets.




During
2010, we launched a development joint venture program designed to source
build-to-suit investments at higher rates of return relative to completed
projects. We believe that by entering into projects with established developer
partners, we can provide the capital needed to get projects built, while at the
same time, securing long-term investment assets for our company at yields
significantly higher than those available for completed properties. The program
is being met with significant interest from developers and tenants, and we
commenced funding our first project (for Michelin North America, Inc.) during
2010 which is scheduled for completion during the beginning of the second
quarter of 2011.




Loan
Origination.




We source
loan business through our national network of independent mortgage brokers. In
addition, we originate loans directly from developers and owners or investors in
net leased properties. A significant portion of our loan business has
historically been with repeat customers.




Underwriting
Process




Once a
prospective investment opportunity is identified, the potential transaction
undergoes a comprehensive underwriting and due diligence process that is
overseen by our investment committee, which consists of our key employees,
including the chief executive officer, president, chief financial officer and
chief investment officer. The focus of our asset underwriting falls into four
primary areas:




·
            credit
      and financial reviews of the tenant as well as an assessment of the
      tenant’s business, the overall industry segment and the tenant’s market
      position within the industry;




·
            lease
      quality, including an analysis of the term, tenant termination and
      abatement rights, landlord obligations and other lease
      provisions;




·
            a
      real estate fundamentals review and analysis;
  and




·
            an
      analysis of the risk adjusted returns on the
  investment.




Prior to
entering into any transaction, our underwriter and analyst, assisted by our
chief investment officer and chief financial officer as necessary, conducts a
review of the tenant’s credit quality. This review may include reviews of
publicly available information, including any public credit ratings, financial
statements, debt and equity analyst reports, and reviews of corporate credit
spreads, stock prices, market capitalization and other financial
metrics.




While we
have no defined minimum credit rating or balance sheet size for tenants, we
anticipate that a majority of the tenants underlying our investments will have
investment grade or implied investment grade credit ratings. For those tenants
that either are below investment grade or are unrated, we may conduct additional
due diligence, including additional financial reviews of the tenant and a more
comprehensive review of the business segment and industry in which the tenant
operates.


13


Assuming
that the credit of the tenant under the lease is satisfactory, a thorough review
is then conducted into the quality of the lease, focusing primarily on the
landlord’s obligations under the lease and those provisions of the lease that
would permit the tenant to terminate or abate rent prior to the conclusion of
the primary lease term. We analyze the lease to ensure that all or substantially
all of the property expenses are borne by the tenant or that any property
expenses not borne by the tenant are sufficiently underwritten to assure that we
can isolate a predictable cash flow from the asset. For our loan investments, we
isolate any lease provisions that provide for tenant abatement or termination
rights or landlord’s obligations, and determine whether to apply appropriate
forms of lease enhancements, including as necessary, specialized insurance,
reserves or debt service coverage covenants. In addition, each lease is reviewed
by outside counsel and a lease summary is provided to our underwriter for use in
underwriting the transaction.




We
conduct a review with respect to the quality of the real estate subject to the
lease. In all cases, the property is reviewed from a traditional real estate
perspective, including quality of construction and maintenance, location and
value of the real estate and technical issues such as title, survey and
environmental. Appraisals and environmental and, as necessary, engineering
reports are obtained from third-parties and reviewed by our underwriter and/or
legal counsel. The level of additional review will then vary depending on the
credit of the tenant (below investment grade tenants generally require a more
stringent review of real estate fundamentals). For our owned properties, we
thoroughly review the property’s real estate fundamentals, including location
and type of the property, vacancy rates and trends in vacancy rates in the
property’s market, rental rates within the property’s market, recent sales
prices and demographics in the property’s market. As described in detail under
“Our Portfolio—Owned Properties” above, we target properties with one or more of
the following: located in a primary metropolitan market, fungible asset type,
barriers to entry in the market, and a core facility of the tenant. In addition,
we may evaluate, or engage a third-party provider to evaluate, alternative uses
for the real estate and the costs associated with converting to such alternative
uses, as well as examine the surrounding real estate market in greater detail.
In the case of a loan to a property owner, our real estate due diligence
includes a review of the background and financial capabilities of the
owner/borrower.




In the
case of CMBS investments, our underwriter, assisted by our chief investment
officer and chief financial officer, thoroughly evaluates the credit, the legal
and financial structures and the collateral quality underlying the
transaction.




In
addition to our review of the quality of any individual transaction, our
investment committee also:




·
            evaluates
      our current portfolio, including consideration of how the subject
      transaction affects asset diversity and credit concentrations in the
      tenant, industry or credit level;




·
            determines
      whether we can implement appropriate legal and financial structures,
      including our ability to control the asset in a variety of circumstances,
      such as an event of default by the tenant or the borrower, as
      applicable;




·
            evaluates
      the leveraged and unleveraged yield on the asset and how that yield
      compares to our target yields for that asset class and our analysis of the
      risk profile of the investment; and




·
            determines
      our plans for financing and hedging the
asset.




We use
integrated systems such as customized software and models to support our
decisions on pricing and structuring investments. Before issuing any form of
commitment to fund an investment transaction, the transaction must be approved
by our investment committee. The committee meets frequently and on an as-needed
basis to evaluate potential investments.




In
addition, we have a three-member investment oversight committee of our board of
directors, which approves all transactions in excess of $50 million. Our chief
executive officer is the only member of this committee who is an employee of our
company.




We
believe that we can continue to grow our business more rapidly than we need to
expand our general and administrative costs and headcount.




Asset
Management




We manage
a diverse portfolio of primarily single tenant commercial real estate assets.
For our owned properties where we are responsible for day-to-day management of
the property, we typically hire third party property managers who are overseen
by employees of our company. Our owned property investments also require that we
perform a variety of asset management functions, such as:




·
            meeting
      periodically with our tenants;




·
            monitoring
      lease expirations and tenant space requirements and renewing leases as
      they mature or re-letting space;




·
            monitoring
      the financial condition and credit ratings of our
  tenants;




14




·
            performing
      physical inspections of our
properties;




·
            making
      periodic improvements to properties where
  required;




·
            monitoring
      portfolio concentrations (e.g., tenant, industry);
  and




·
            monitoring
      real estate market conditions where we own
  properties.




Asset
Surveillance System




We also
have created an on-going asset surveillance system that:




·
            tracks
      the status of our investments and investment
  opportunities;




·
            links
      into a management program that includes the underlying asset origination
      or acquisition documents;




·
            loads
      expected asset cash flows from our underwriting files into the
      system;




·
            imports
      data from the system into our financial accounting
  system;




·
            monitors
      actual cash flows on each asset through servicer
  reports;




·
            immediately
      identifies issues such as non-payment of rent and servicer advances of
      rent or debt service through servicer exception
  reports;




·
            automatically
      generates system e-mail notifications when the credit ratings of
      underlying tenants change; and




·
            computes
      coverage and compliance tests for our CDO
  transactions.




Through
this single system we are able to track and document the entire lifecycle of our
assets.




Closing
Process




From the
time we begin to consider an investment until the investment is closed, the
prospective transaction undergoes a variety of defined steps and procedures. In
connection with the closing process, we will typically need to rely on certain
third parties not under our control, including tenants, borrowers, sellers,
lenders, brokers, outside counsel, insurance companies, title companies,
environmental consultants, appraisers, engineering consultants and other product
or service providers. Our personnel carefully manage the closing process and
have developed a streamlined set of procedures, checklists and relationships
with many of the third-party providers with whom we do business on an on-going
basis.




As set
forth under “Underwriting Process” above, each transaction goes through a
multi-stage underwriting process including review by our investment committee.
Transaction underwriting and the documentary process surrounding it is supported
by the use of standardized transaction documents, including closing checklists
and form acquisition and loan documents, and is further supported by proprietary
underwriting and pricing software. All of our transactions are closed by our
in-house closing staff. That staff seeks to close our property acquisitions four
to eight weeks after a purchase and sale agreement is signed and close loan
transactions four to eight weeks after the application is signed, while at the
same time maintaining our underwriting standards.




Competition




We are
subject to significant competition in each of our business segments. We compete
with specialty finance companies, insurance companies, commercial banks,
investment banks, savings and loan associations, mortgage bankers, mutual funds,
institutional investors, pension funds, hedge funds, other lenders, governmental
bodies and individuals and other entities, including REITs. We may face new
competitors and, due to our focus on single tenant properties located throughout
the United States, and because many of our competitors are locally and/or
regionally focused, we will not encounter the same competitors in each region of
the United States.




Many of
our competitors have greater financial and other resources and may have other
advantages over our company. Our competitors may be willing to accept lower
returns on their investments and may succeed in buying the assets that we have
targeted for acquisition. We may also incur costs on unsuccessful acquisitions
that we will not be able to recover.




15




Environmental
Matters




Under
various federal, state and local environmental laws, a current owner of real
estate may be required to investigate and clean up contaminated property. Under
these laws, courts and government agencies have the authority to impose cleanup
responsibility and liability even if the owner did not know of and was not
responsible for the contamination. For example, liability can be imposed upon us
based on the activities of our tenants or a prior owner. In addition to the cost
of the cleanup, environmental contamination on a property may adversely affect
the value of the property and our ability to sell, rent or finance the property,
and may adversely impact our investment in that property.




Prior to
acquisition of a property, we obtain Phase I environmental reports. These
reports are prepared in accordance with an appropriate level of due diligence
based on our underwriting standards 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
and nearby or adjoining properties. We may also obtain a Phase II investigation
which may include limited subsurface investigations and tests for substances of
concern where the results of the Phase I environmental reports or other
information indicates possible contamination or where our consultants recommend
such procedures.




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




At
December 31, 2010, we were not aware of any environmental concerns that would
have a material adverse effect on our financial position or results of
operations.




Employees




As of
December 31, 2010, we had 19 employees. We have an experienced staff, many of
the members of which have been previously employed by the real estate
departments from major financial institutions, law firms and rating agencies. We
believe that our relations with our employees are good. None of our employees
are unionized.




Available
Information




We are
required to file annual, quarterly and current reports, proxy statements and
other information with the SEC. Investors may read and copy any document that we
file, including this Annual Report on Form 10-K, at the SEC’s Public Reference
Room at 100 F Street, N.E., Washington, D.C. 20549. Investors may obtain
information on the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. In addition, the SEC maintains an Internet site at
http://www.sec.gov that contains reports, proxy and information statements, and
other information regarding issuers that file electronically with the SEC, from
which investors can electronically access our SEC filings.




We also
make available free of charge on or through our Web site (www.caplease.com), 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, as soon as
reasonably practicable after we electronically file such material with, or
furnish it to, the SEC. Investors can access our filings with the SEC by
visiting the investor relations section of our web site at
www.caplease.com.




The
information on our web site is not, and shall not be deemed to be, a part of
this report or incorporated into any other filings we make with the
SEC.




Item
1A.     Risk Factors.




Set
forth below and elsewhere in this annual report on Form 10-K and in other
documents we file or furnish with the SEC are risks and uncertainties that could
adversely affect our business and operations and cause actual results to differ
materially from the results contemplated by any forward-looking statements made
by us or on our behalf.




Risks
Related to Operations




Current
market conditions expose us to a variety of risks.




Current
economic conditions remain weak and while commercial real estate market
conditions have improved, various signs of weakness persist, particularly in
those markets hardest hit by the recent downturn. Current market conditions
could negatively impact us in a number of ways, including by adversely impacting
our ability to add new assets to the portfolio, the economic terms that we can
renew or re-let and sell or refinance our owned properties as well as our
ability to do so at all, and/or causing us to record impairment charges on our
assets. Current economic conditions may also cause one or more of the tenants to
whom we have exposure to fail or default in their payment obligations, which
could cause us to record material losses or result in a material reduction in
our cash flows and hence our liquidity.




16




If
we lower or eliminate our dividend, the market value of our common stock may
decline.




The level
of our common stock dividend is established by our board of directors from time
to time based on a variety of factors, including market conditions, our cash
available for distribution, our funds from operations and our maintenance of
REIT status. Various factors could cause our board of directors to decrease or
eliminate our common stock dividend level, including our desire due to market
conditions or otherwise to maintain higher levels of liquidity, tenant defaults
resulting in a material reduction in our cash flows or a material loss resulting
from an adverse change in one or more of the tenants underlying our investments.
We have not established a minimum dividend payment level and we cannot assure
you that we will be able to pay dividends in the future. If we lower or
eliminate our common stock dividend, the market value of common stock in our
company could be adversely affected.




REIT
distribution requirements could adversely affect our ability to execute our
business plan and may require us to incur debt or sell assets to make such
distributions.




To
maintain our status as a REIT, we must distribute annually at least 90% of our
taxable income. To the extent we satisfy this requirement but distribute less
than 100% of our taxable income, we will be subject to federal corporate income
tax and may be subject to a 4% nondeductible excise tax on our undistributed
taxable income. We generally intend to distribute each year all or substantially
all of our taxable income so as to comply with the REIT requirements and to
avoid federal income tax and nondeductible excise tax.




From time
to time, we may generate less cash flow than taxable income, for example, if we
are required to use cash income we receive from our assets to make principal
payments on our indebtedness or due to timing differences in when we record
income for tax purposes.




As a
result of the foregoing, we may be required to take one or more of the following
steps in order to comply with the REIT distribution requirements and to avoid
corporate income tax and the 4% nondeductible excise tax:




·
            sell
      assets in adverse market
conditions;




·
            borrow
      on unfavorable terms;




·
            distribute
      amounts that would otherwise be invested in future investments, capital
      expenditures or repayment of debt;




·
            distribute
      shares of our common stock rather than cash;
or




·
            utilize
      cash on hand to fund distributions.




Thus,
compliance with the REIT distribution requirements may hinder our ability to
grow, which could adversely affect the value of our common stock.




We
conduct a significant part of our business with Wells Fargo Bank, N.A. and its
affiliates, and their continued business with us is not guaranteed.




We rely
on Wells Fargo Bank, N.A. and its affiliates in various aspects of our business.
For example:




·
            Wells
      Fargo Bank and its affiliates provide us with asset financing through a
      revolving credit agreement.




·
            We
      have obtained mortgage financing on our owned properties from Wells Fargo
      Bank (as successor to Wachovia Bank, N.A.) in the past, and we expect to
      continue to do so in the future.




·
            Affiliates
      of Wells Fargo Bank have performed investment banking services for us,
      including in connection with our initial public offering, our CDO
      transaction and each of our follow-on public equity
    offerings.




These
parties are not obligated to do business with us, and any adverse developments
in their business or in our relationship with them could result in these parties
choosing not to do business with us or a significant reduction in our business
with them. Termination of our business or a significant reduction in our
business with these parties could have a material adverse effect on our
business, operating results, financial condition and liquidity.




The
market price of our stock may be adversely impacted by our pace of investment
activity.




The
markets in which we compete for investments are competitive and our pace of
investment activity continues to be impacted by competitive and market
conditions. If our pace of investment activity does not match market
expectations the market price of our stock could be adversely
affected.




17




Risks
Related to Portfolio Assets




Single
tenant leases involve significant risks of tenant default.




We focus
our investment activities on ownership of real properties and loans on real
properties that are leased to a single tenant. Therefore, the financial failure
of, or other default in payment by, a single tenant under its lease is likely to
cause a complete reduction in the operating cash flows from that investment and
a significant reduction in the value of our investment, and could cause a
significant reduction in our revenues, cash flows and hence our liquidity, and a
significant impairment loss recorded directly to our Statement of Operations.
Current economic conditions may put financial pressure on and increase the
likelihood of the financial failure of, or other default in payment by, one or
more of the tenants to whom we have exposure.




Credit
ratings may prove to be inaccurate.




We
consider credit ratings assigned by S&P and/or Moody’s to our tenants, their
guarantors or parent companies and to our structured CMBS securities when making
investment and leasing decisions. A credit rating is not a guarantee of
continued financial performance and only reflects the rating agency's opinion of
an entity's ability to meet its financial commitments, such as its senior
unsecured obligations, in accordance with their stated terms. A rating may
ultimately prove not to accurately reflect the credit risk associated with a
particular tenant. In addition, ratings may be changed, qualified, suspended,
placed on watch or withdrawn over time. If a tenant’s rating is downgraded,
qualified, suspended, placed on watch or withdrawn, such tenant may be more
likely to default in its obligations to us, and investors may view our cash
flows as less stable.




An
adverse change in the financial condition of one or more tenants underlying our
investments could have a material adverse impact on us.




We rely
on rent payments by the underlying tenant for our cash flows and make portfolio
investments based on the financial strength of such tenant and our expectations
of their continued payment of rent under the lease. Therefore, adverse changes
in the financial condition of the tenants or the certainty of their ability to
pay rents could have a material adverse impact on us. For example:




·
            The
      bankruptcy or insolvency of any of our tenants could result in that tenant
      ceasing to make rental payments, resulting in a reduction of our cash
      flows and losses to our company. In addition to the rent loss, due to our
      focus on net leased properties, our expenses will likely increase as the
      tenant will no longer pay or reimburse us for the operating costs at the
      property.




·
            The
      credit quality of the underlying tenant or tenants is frequently a
      significant factor in determining the value of our investments, and an
      adverse change in the subject tenant’s financial condition or a decline in
      the credit rating of such tenant may result in a decline in the value of
      our investments and a resulting impairment charge directly to our
      Statement of Operations.




·
            An
      adverse change in the financial condition of one or more of the tenants
      underlying our investments or a decline in the credit rating of one or
      more of the tenants underlying our investments could result in a margin
      call if the related asset is being financed on our Wells Fargo Bank credit
      agreement, and could make it more difficult for us to arrange long-term
      financing for that asset, including by increasing our cost of
      financing.




·
            We
      own the subordinate classes in our CDO financings and subordinate equity
      in any other term financings. If the underlying tenant on any asset
      financed in our CDO or other term financing fails to make rental payments,
      our cash flows may be redirected to the senior
  owners.




Our
assets may be subject to impairment charges, which could materially adversely
affect our financial condition and results of operations.




We
periodically evaluate our investments for impairment indicators. If we determine
that an impairment has occurred (and solely in the case of our securities
investments, the impairment is due to credit factors), we would be required to
reduce the carrying value of the investment, and record a loss directly to the
Statement of Operations in the applicable period. The judgment regarding the
existence of impairment indicators is based on a variety of factors such as
market conditions, the status of significant leases, the financial condition of
major tenants, our expectations regarding future cash flows and the estimated
fair value of our investment and/or related collateral. During 2009 and 2010, we
incurred substantial impairment charges, including an $11.9 million impairment
loss in 2009 on our property in Johnston, Rhode, Island and a $7.7 million
other-than-temporary impairment loss in 2010 on one of our securities
investments. We may continue to take similar impairment charges in the future.
These impairments could have a material adverse effect on our financial
condition and results of operations.




18




Bankruptcy
laws will limit our remedies if an underlying tenant becomes bankrupt and
rejects the lease.




We rely
on rent payments from the underlying tenant to service our financing of the
asset and generate the spread we expect to earn. If the tenant becomes insolvent
or bankrupt, they have the right under the United States Bankruptcy Code to
reject the lease and rent payments could cease. In such a case, our remedies
will be limited under the Bankruptcy Code. The premises may not be recoverable
promptly from the tenant and our claim for damages, which will be unsecured and
is limited to rent under the lease for the greater of one year or 15 percent
(but not more than three years) of the remaining term, plus rent already due but
unpaid, may not be sufficient to cover our debt service and any other expenses
with respect to the property.




We
are subject to tenant credit concentrations that make us more susceptible to
adverse events with respect to certain tenants.




We are
subject to tenant credit concentrations, the most significant of which are the
following as of December 31, 2010:




·
            approximately
      $198.2 million, or 9.9%, of our assets represent investments in three
      properties leased to, or leases guaranteed by, Nestlé Holdings, Inc.;
      and




·
            approximately
      $194.4 million, or 9.7%, of our assets represent investments in seven
      properties leased to the United States
  Government.




Any
bankruptcy, insolvency or failure to make rental payments by, or any adverse
change in the financial condition of, one or more of these tenants, or any other
tenant to whom we may have a significant credit concentration now or in the
future, could result in a material reduction of our cash flows and hence our
liquidity or material losses to our company.




We
are subject to tenant industry concentrations that make us more susceptible to
adverse events with respect to certain industries.




We are
subject to industry concentrations, the most significant of which are the
following as of December 31, 2010:




·
            approximately
      $298.9 million, or 14.9%, of our assets represent investments in
      properties leased to, or leases guaranteed by, companies in the insurance
      industry (e.g., Aon Corporation, Allstate Insurance Company, Farmers New
      World Life Insurance Company, Aetna Life Insurance Company and Travelers
      Corporation);




·
            approximately
      $258.7 million, or 12.9%, of our assets represent investments in
      properties leased to, or leases guaranteed by, companies in the food and
      beverage industry (e.g., Nestlé Holdings, Inc. and Cadbury Schweppes
      Holdings (US));




·
            approximately
      $211.3 million, or 10.5%, of our assets represent investments in
      properties leased to, or leases guaranteed by, federal or state
      governmental entities or branches or units thereof (e.g., United States
      Government and County of Yolo,
California);




·
            approximately
      $145.8 million, or 7.3%, of our assets represent investments in properties
      leased to, or leases guaranteed by, companies in the financial industry
      (e.g., Capital One Financial Corporation, General Motors Financial
      Company, Inc. and AMVESCAP PLC);




·
            approximately
      $138.1 million, or 6.9%, of our assets represent investments in properties
      leased to, or leases guaranteed by, companies in the retail department
      stores industry (e.g., TJX Companies, Inc. and Kohl’s Corporation);
      and




·
            approximately
      $137.5 million, or 6.9%, of our assets represent investments in properties
      leased to, or leases guaranteed by, companies in the retail grocery
      industry (e.g., The Kroger Co. and Koninklijke Ahold,
    N.V.).




Any
downturn in one or more of these industries, or in any other industry in which
we may have a significant credit concentration now or in the future, could
result in a material reduction of our cash flows and hence our liquidity or
material losses to our company.




We
are subject to geographic concentrations that make us more susceptible to
adverse events in these areas.




We are
subject to geographic concentrations, the most significant of which are the
following as of December 31, 2010:




·
            approximately
      $225.6 million, or 11.3%, of our assets represent investments in
      properties located in the Philadelphia, Pennsylvania metropolitan
      area;




·
            approximately
      $189.0 million, or 9.5%, of our assets represent investments in properties
      located in the Washington, D.C. metropolitan
  area;




·
            approximately
      $182.6 million, or 9.1%, of our assets represent investments in properties
      located in the Chicago, Illinois metropolitan
  area;




19




·
            approximately
      $150.4 million, or 7.5%, of our assets represent investments in properties
      located in the New York City and Northern New Jersey
  area;




·
            approximately
      $106.3 million, or 5.3%, of our assets represent investments in properties
      located in the Dallas/Fort Worth, Texas metropolitan area;
    and




·
            approximately
      $104.2 million, or 5.2%, of our assets represent investments in properties
      located in the Southern California
area.




An
economic downturn or other adverse events or conditions such as terrorist
attacks or natural disasters in one or more of these areas, or any other area
where we may have a significant credit concentration now or in the future, could
result in a material reduction of our cash flows and hence our liquidity or
material losses to our company.




Our
investments in assets backed by below investment grade credits have a greater
risk of default.




We invest
in assets where the underlying tenant’s credit rating is below investment grade
(approximately $180.9 million, or 9.5%, of our portfolio as of December 31,
2010). These investments will have a greater risk of default and bankruptcy than
investments in properties leased exclusively to investment grade
tenants.




Our
investments in assets where the underlying tenant does not have a publicly
available credit rating expose us to certain risks.




We have
historically been successful at obtaining attractively priced term financing for
our assets due in part to the high credit quality of the underlying tenant. When
we invest in a property or loan where the underlying tenant does not have a
publicly available credit rating, we rely on our own estimates of the tenant’s
credit rating and usually subsequently obtain a private rating from S&P or
Moody’s to allow us to finance the asset as we had planned. If our lender,
S&P or Moody’s disagrees with our ratings estimates, we may not be able to
obtain our desired level of leverage and/or our financing costs may exceed those
that we projected. This outcome could have an adverse impact on our returns on
that asset and hence our operating results.




Risks
Related to Ownership of Real Estate




It
may be difficult for us to buy and sell real estate quickly and the value of
these investments may decline.




Real
estate investments are relatively illiquid. Our ability to vary our portfolio by
selling and buying properties in response to changes in economic and other
conditions is limited. We may encounter difficulty in disposing of properties
when tenants vacate either at the expiration of the applicable lease or
otherwise. If we decide to sell any of our properties, our ability to sell these
properties and the prices we receive on their sale may be affected by many
factors, including any limits of our form of ownership such as an estate for
years or ground lease, the number of potential buyers, the number of competing
properties on the market and other market conditions, as well as whether the
property is leased and if it is leased, the terms of the lease. In addition, the
mortgage debt we put on the property and REIT tax requirements limits our
ability to quickly re-sell properties we have purchased. As a result, we may be
unable to sell our properties for an extended period of time without incurring a
loss, which would adversely affect our results of operations, liquidity and
financial condition.




We
may not be able to renew our leases or re-lease our properties.




Upon the
maturity of leases at our properties, we may not be able to renew the leases or
re-let all or a portion of that property, or the terms of renewal or re-letting
(including the cost of concessions to tenants) may be less favorable to us than
the current lease terms. If we are unable to renew existing leases or re-let
promptly all or a substantial portion of the space located in our properties, or
if the rental rates upon renewal or re-letting are significantly lower than the
current rates, our funds from operations and cash available for distribution to
stockholders will be adversely affected due to the resulting reduction in rental
receipts and increase in property operating costs.




Current
economic weakness could adversely impact our ability or the terms under which we
are able to renew leases as they mature or re-let vacant space.




Operating
expenses of our properties could reduce our cash flow and funds available for
future dividends.




For
certain of our owned properties, we are responsible for operating costs of the
property. In these instances, our lease requires the tenant to reimburse us for
all or a portion of these costs, either in the form of an expense reimbursement
or increased rent. Our reimbursement may be limited to a fixed amount or a
specified percentage annually. To the extent operating costs exceed our
reimbursement, our returns and net cash flows from the property and hence our
overall operating results and cash flows could be materially adversely
affected.




20




We
have greater exposure to operating costs when we invest in owned properties
leased to the United States Government.




Our
leases with the United States Government are typical Government Services
Administration, or GSA, type leases. These leases do not provide that the United
States Government is wholly responsible for operating costs of the property, but
include an operating cost component within the rent we receive that increases
annually by an agreed upon percentage based upon the Consumer Price Index, or
CPI. Thus, we have greater exposure to operating costs on our properties leased
to the United States Government because if the operating costs of the property
increase faster than the CPI, we will bear those excess costs.




We
are subject to risks associated with the development of properties.




We have
begun and expect to continue to make new investments through our construction to
acquisition program, where we fund all or substantially all of the construction
costs for a build-to-suit project through a joint venture with the developer
during the construction period, and then acquire the developer’s interest in the
joint venture upon completion of the project. We entered into our first joint
venture under this program during the third quarter 2010 which contemplates the
construction of a warehouse/distribution building in Louisville, Kentucky with a
construction budget of $8.4 million. We are subject to certain risks associated
with the development of this or any other property we intend to develop,
including the following:




·
            Completion
      of the project in a timely and workmanlike manner will be dependent upon
      the efforts of various parties outside of our control, such as our
      developer partner and the general contractor and any subcontractors.
      Construction could be delayed if these parties fail to perform their
      obligations or for a variety of other reasons outside of our control,
      which could subject us to losses for failure to timely deliver the
      completed project to the tenant or result in a termination of the
      underlying lease.




·
            Unanticipated
      environmental conditions at the property could also delay completion of
      the project or force us to abandon the project if we determine that
      remediation of the conditions would be too
  expensive.




·
            Construction
      costs may exceed original estimates, which could adversely impact our
      expected return from the
investment.




Our
investments in properties subject to an estate for years or ground lease are
subject to various unique risks.




Our
ownership interest in certain of our owned properties includes an estate for
years in or a ground lease of the land, along with fee title to the improvements
on the land. An estate for years and a ground lease are more limited forms of
ownership than a fee interest, as they generally mean that another unrelated
party has a present or future interest in the land. Our estate for years and
ground lease investments are subject to a variety of risks which could
materially adversely impact the value of our investment, such as:




·
            the
      existence of the estate for years or ground lease and the interest of a
      third party in the property could reduce the value of our investment or
      make it more difficult or more expensive to sell or obtain financing for
      our investment; and




·
            unless
      we have purchased the land, we will lose any remaining investment in these
      properties when the estate for years and/or ground lease
      expires.




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




Our
comprehensive loss insurance policies may include substantial deductibles and
certain exclusions. For example, our earthquake insurance coverage for
properties we own in California will typically include a customary deductible of
five percent of our insurable value. If we are subject to an uninsured loss or a
loss that is subject to a substantial deductible, we could lose part of our
capital invested in, and anticipated revenue from, the property, which could
harm our operating results and financial condition and our ability to pay
dividends.




Noncompliance
with environmental laws could adversely affect our financial condition and
operating results.




The real
properties we own are subject to various federal, state and local environmental
laws. Under these laws, courts and government agencies have the authority to
require the current owner of a contaminated property to clean up the property,
even if the owner did not know of and was not responsible for the contamination.
For example, liability can be imposed upon us based on activities of one of our
tenants or a prior owner.




21


Prior to
acquisition of a property, we obtain Phase I environmental reports and, in some
cases, a Phase II environmental report. However, these reports may not reveal
all environmental conditions at a property and we may incur material
environmental liabilities of which we are unaware. The costs incurred to clean
up a contaminated property, to defend against a claim, or to comply with
environmental laws could be material and could adversely affect our financial
condition, liquidity and operating results.




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




As an
owner of real property (including any real property we may acquire upon a loan
foreclosure), we are subject to various additional risks not otherwise discussed
in these risk factors and generally incident to the ownership of the real
estate. These risks may include those listed below:




·
            civil
      unrest, acts of God, including earthquakes, floods and other natural
      disasters, which may result in uninsured losses, and acts of war or
      terrorism, including the consequences of the terrorist attacks, such as
      those that occurred on September 11,
2001;




·
            adverse
      changes in national and local economic and market
    conditions;




·
            the
      costs of complying or fines or damages as a result of non-compliance with
      the Americans with Disabilities
Act;




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




·
            other
      circumstances beyond our control.




Should
any of these events occur, our financial condition, liquidity and operating
results could be adversely affected.




New
rules relating to the accounting for leases could adversely affect our
business.




The
Financial Accounting Standards Board and International Accounting Standards
Board have proposed accounting rules that may take effect in 2012 or 2013 and
would require companies to capitalize all leases on their balance sheets by
recognizing the tenant’s rights and obligations. If the proposal is adopted in
its current form, our financial statements could be materially impacted. We
would be required to account for leases with tenants “on balance sheet,” with
offsetting asset and liability accounts for the expected future cash flows from
the leases. The timing of recognition of income (but not the amount) from the
lease would also change, with generally greater income expected in the earlier
years and lower amounts in the later years of the lease. Further, because this
accounting change would remove many of the differences in the way companies
account for owned property versus leased property, it could cause companies to
favor owning as opposed to leasing properties. If the proposal is adopted in its
current form, it could also cause companies that lease properties to prefer
shorter lease terms, in an effort to reduce the lease liability required to be
recorded on the balance sheet. The proposal could also make lease renewal
options less attractive, as, under certain circumstances, the rules would
require a tenant to assume that a renewal right would be exercised and accrue a
liability relating to the longer lease term.




Risks
Related to Debt Assets




We
invest in CMBS securities, including subordinate securities, which entail
significant risks.




We invest
in commercial mortgage-backed securities, or CMBS. CMBS securities entitle the
holder to receive payments that depend primarily on the cash flow from a
specified pool of commercial mortgage loans. Our CMBS investments include
classes of securities backed by pools of first mortgage loans on net lease
properties (with most of the underlying loan collateral originated by us in the
mid to late 1990s), as well as investments in generic CMBS pools, or securities
backed by loans on a variety of multifamily and commercial properties, such as
regional malls, other retail space, office buildings, industrial or warehouse
properties, hotels, apartment buildings, mobile home parks, nursing homes and
senior living centers. Generally, we have invested in subordinate classes of the
securitization pool, or securities that are in a near “first loss” position in
the event of losses on the assets within the pool. Consequently, in the event of
a loss on one or more commercial real estate loans contained in a
securitization, we could lose all or a substantial portion of our investment in
the related security.




As a
result of the general weakening of economic conditions and related deterioration
of commercial real estate fundamentals, we have seen an increase in defaults and
delinquencies in the underlying commercial real estate loans in the CMBS pools
in which we have invested, particularly on our investments in generic CMBS
pools. While we believe we have been reasonable in estimating the impact of
these events on our portfolio, the actual impact on our investments remains
highly uncertain. Further, continued weakness in general economic and commercial
real estate conditions could further adversely impact the loans in the pools in
which we have invested and hence our investment in the transactions. Our cash
flows from the CMBS securities could decline or temporarily or permanently
cease, and we could lose all or a substantial portion of our investment in our
CMBS securities.




22




Worsening
economic conditions could cause the recovery value of the collateral underlying
our securities investments to decline, which could cause a material reduction of
our cash flows or material losses to our company.




Our
securities investments are collateralized by mortgage loan assets secured by
properties located throughout the United States. If one or more of the
underlying loans in the securitization default, receipt of the scheduled
payments on our securities may become dependent upon the recovery value of the
related collateral. In such an event, any economic downturn such as current
economic conditions or other adverse events or conditions in any location where
we have a significant credit concentration could cause the recovery value of the
related collateral to decline, and, therefore, could result in a material
reduction of our cash flows or material losses to our company.





The
following table summarizes the geographic concentrations of five percent or more
within our securities portfolio as of December 31, 2010.




State
                    
                    Allocated
                      Cost Basis
                      (in thousands)
                    
                    
                    PercentageColorado
                    
                    $
                    36,316
                    
                    
                    
                    22.4
                    %New
      York
                    
                    
                    28,664
                    
                    
                    
                    17.7
                    %California
                    
                    
                    25,650
                    
                    
                    
                    15.8
                    %




We
have limited recourse in the event of a default on any of our mortgage
loans.




Our
mortgage loan investments are non-recourse obligations of the property owner,
and, in the event of default, we are generally dependent entirely on the loan
collateral to recover our investment. Our loan collateral consists primarily of
a mortgage on the underlying property and an assignment of the tenant’s lease.
In the event of a default, we may not be able to recover the premises promptly
and the proceeds we receive upon sale of the property may be adversely affected
by risks generally incident to interests in real property, including changes in
general or local economic conditions and/or specific industry segments, declines
in real estate values, increases in interest rates, real estate tax rates and
other operating expenses including energy costs, changes in governmental rules,
regulations and fiscal policies, including environmental legislation, acts of
God, and other factors which are beyond our or our borrower’s control. Current
economic conditions may reduce the proceeds we are able to receive or our
ability to renew existing leases or re-let the property in the event we
foreclose on the collateral. As discussed above, bankruptcy laws will limit our
remedies with respect to the tenant’s lease. There can be no assurance that our
remedies with respect to the loan collateral will provide us with a recovery
adequate to recover our investment.




We
may experience losses on our mortgage loans.




Our
portfolio includes mortgage loans on properties subject to a net lease. The
typical net lease requires the borrower or tenant to maintain casualty insurance
on the underlying property. These insurance policies may include substantial
deductibles and certain exclusions. If the underlying property is subject to a
casualty loss that is uninsured or subject to a substantial deductible, rent
payments on the related lease may cease, our loan may default and we could lose
some or all of our investment.




Our
collateral rights under our corporate credit notes are limited.




Our
collateral rights on our corporate credit notes are more limited than the
collateral rights we have under our long-term mortgage loans. Our corporate
credit notes represent one of two notes comprising a single first mortgage loan
on a net lease property. Both notes are secured by the same first mortgage and
assignment of the tenant’s lease and rents, and the note holders have agreed
amongst themselves that the corporate credit note holder will have a junior
claim on the real estate mortgage and a senior claim on the rents in the event
of a tenant bankruptcy and lease rejection. So our collateral rights with
respect to the real estate mortgage will be junior to the holder of the related
real estate note. Further, while we will have a senior claim on the lease
assignment in a tenant bankruptcy, as discussed above, our claim for damages
will be unsecured and limited to an amount defined under the Bankruptcy Code
(the greater of one year’s rent or 15% (but not more than three years) of rent
over the remaining lease term, plus rent already due but unpaid). Therefore,
there can be no assurance that our remedies with respect to the loan collateral
will provide us with a recovery adequate to recover our investment.




We
may make mezzanine investments and they will likely have a greater risk of loss
than mortgage loans.




We have
made and may continue to make in the future mezzanine and other generally
subordinate investments. These investments generally involve a higher degree of
risk than our first mortgage loans. While we expect most of these investments
will be secured, we expect our right to payment and security interest will be
subordinated to one or more senior lenders. Therefore, we may be limited in our
rights to collect scheduled payments on these investments and to recover any of
our investment through a foreclosure of collateral.




23




Our
mezzanine investments may also include an interest only payment schedule, with
the principal amount remaining outstanding and at risk until the maturity of the
obligation. In this case, a borrower’s ability to repay its obligation may be
dependent upon a liquidity event, such as a sale of the related property or
other collateral or refinancing of the debt.




We
may be subject to losses from the investments we make in franchise
loans.




As of
December 31, 2010, our sole mezzanine investment was $1.4 million of
remaining principal under a loan to a third party borrower to support the
borrower’s capital contributions to a joint venture that makes franchise loans
to franchisees of YUM! Brands, Inc. restaurant concepts such as Taco Bell,
Kentucky Fried Chicken and Pizza Hut. Our interest in the cash flows from the
related franchise loans is subordinate to the interest of a senior lender and
that lender has the right to redirect a portion of the borrower’s cash flows to
reduce its debt. We cannot provide any assurance that the borrower will have
sufficient cash flows to pay our debt service or that our collateral will be
adequate to allow us to recover our investment. As a result, we could lose some
or all of our investment in this loan.




We
may be required to repurchase assets that we have sold or to indemnify holders
of the notes issued in our term financings.




If any of
the assets we originate or acquire and sell or pledge to obtain long-term
financing do not comply with representations and warranties that we make about
certain characteristics of the assets, the borrowers and the underlying
properties, we may be required to repurchase those assets, repay the related
borrowings or replace the assets with substitute assets. In addition, in the
case of assets that we have sold, we may be required to indemnify persons for
losses or expenses incurred as a result of a breach of a representation or
warranty. Repurchased assets may require a significant allocation of working
capital to carry on our books, and our ability to borrow against such assets may
be limited. Any significant repurchases, repayments or indemnification payments
could materially and adversely affect our financial condition, liquidity and
operating results.




Maintenance
of our Investment Company Act of 1940 exemption imposes limits on our
operations.




We intend
to continue to conduct our business in a manner that allows us to avoid
registration as an investment company under the Investment Company Act of 1940
(the “1940 Act”). Under Section 3(c)(5)(C) of the 1940 Act, entities that are
primarily engaged in the business of purchasing or otherwise acquiring
“mortgages and other liens on and interests in real estate” are not treated as
investment companies. The position of the SEC staff generally requires us to
maintain at least 55% of our assets directly in qualifying real estate interests
in order for us to rely on this exemption (the “55% Requirement”). To constitute
a qualifying real estate interest under this 55% Requirement, a real estate
interest must meet various criteria. Mortgage securities that do not represent
all of the certificates issued with respect to an underlying pool of mortgages
may be treated as securities separate from the underlying mortgage loans and,
thus, may not qualify for purposes of the 55% Requirement. Our ownership of
these mortgage securities, therefore, is limited by the provisions of the 1940
Act and SEC staff interpretations. We cannot assure you that efforts to pursue
our investment strategy will not be adversely affected by operation of the 1940
Act.




Risks
Related to Borrowings




Our
use of debt financing could have a material adverse effect on our financial
condition.




We are
subject to the risks normally associated with debt financing, including the risk
that our cash flows will be insufficient to meet required principal and interest
payments on the debt, and the risk that we will be unable to refinance our
existing indebtedness, or that the terms of such refinancing will not be as
favorable as the terms of our existing indebtedness. As of December 31, 2010,
the scheduled principal payments on our long-term debt over the next five years
and thereafter were as follows:




Expected Maturity Dates2011
                        
                        
                        2012
                        
                        
                        2013
                        
                        
                        2014
                        
                        
                        2015
                        
                        
                        Thereafter(in thousands, notional amounts where appropriate,
                          otherwise carrying amounts)Mortgages
      on real estate investments
                        
                        $
                        35,929
                        
                        
                        $
                        131,486
                        
                        
                        $
                        69,445
                        
                        
                        $
                        67,678
                        
                        
                        $
                        266,235
                        
                        
                        $
                        357,656Collateralized
      debt obligations
                        
                        
                        10,266
                        
                        
                        
                        10,949
                        
                        
                        
                        26,065
                        
                        
                        
                        19,221
                        
                        
                        
                        187,709
                        
                        
                        
                        –Credit
      agreement
                        
                        
                        8,743
                        
                        
                        
                        7,976
                        
                        
                        
                        88,626
                        
                        
                        
                        –
                        
                        
                        
                        –
                        
                        
                        
                        –Secured
      term loan
                        
                        
                        13,737
                        
                        
                        
                        15,380
                        
                        
                        
                        13,602
                        
                        
                        
                        12,349
                        
                        
                        
                        13,405
                        
                        
                        
                        33,407Convertible
      senior notes
                        
                        
                        (596
                        )
                        
                        
                        34,522
                        
                        
                        
                        –
                        
                        
                        
                        –
                        
                        
                        
                        –
                        
                        
                        
                        –Other
      long-term debt
                        
                        
                        –
                        
                        
                        
                        –
                        
                        
                        
                        –
                        
                        
                        
                        –
                        
                        
                        
                        –
                        
                        
                        
                        30,930




24


Included
in the above amounts are balloon payments on our debt instruments. Most of our
debt provides for balloon payments that are payable at maturity. Our ability to
make these balloon payments will depend upon our ability to refinance the
related debt, raise additional equity capital and/or sell assets or any related
collateral. Our ability to accomplish these goals will be affected by various
factors existing at the relevant time, such as capital and credit market
conditions, the state of the national and regional economies, local real estate
conditions, available interest rate levels, the lease terms for and equity in
and value of any related collateral, our financial condition and the operating
history of the collateral, if any. We cannot provide any assurance that we will
be able to repay our debt or refinance it on terms as favorable as the existing
indebtedness or at all. If we are unable to obtain sufficient financing to fund
the scheduled balloon payments or to sell the related collateral at a price that
generates sufficient proceeds to make the scheduled balloon payments, we could
lose all or a substantial portion of our investment in the asset
financed.




Our
convertible senior notes and other long-term debt are unsecured and, therefore,
it may be more difficult to generate sufficient proceeds to repay these
obligations in the future. These obligations are also recourse, meaning that our
lender will have general recourse against our assets if we fail to make required
payments on the debt.




If our
debt cannot be repaid, refinanced or extended, we may not be able to make
distributions to stockholders at expected levels or at all. Further, if
prevailing interest rates or other factors at the time of a refinancing result
in higher interest rates or other restrictive financial covenants upon the
refinancing, then such refinancing would adversely affect our cash flows and
funds available for operation and distribution.




Our
credit agreement with Wells Fargo Bank is a secured, recourse obligation and
exposes us to interest rate and margin call risks.




We have
financed certain of our investments pursuant to a credit agreement we have
entered into with Wells Fargo Bank. This borrowing agreement exposes us to a
variety of risks, including the following:




·
            It
      is priced at floating rates based on one-month LIBOR, or the London
      Interbank Offered Rate. Therefore, increases in the one-month LIBOR rate
      will cause our borrowing costs to increase and our net income to
      decrease.




·
            The
      agreement is recourse to all of our other assets. In the event we are
      unable to satisfy our payment obligations under the agreement from the
      assets securing our borrowings, we will remain obligated to satisfy these
      obligations out of other assets of our
company.




·
            We
      are subject to margin call risk under the credit agreement documents.
      Wells Fargo has the right in its sole discretion to revalue our
      collateral, provided that Wells Fargo may not reduce the value of any of
      our collateral other than CMBS securities due to general credit spread or
      interest rate fluctuations. In the event Wells Fargo determines that the
      value of our collateral has decreased, it has the right to make a margin
      call. A margin call would require us to make up any collateral shortfall
      with cash or additional portfolio assets. We may not have sufficient cash
      or portfolio assets to do so. A failure to meet a margin call could cause
      us to default under the agreement and otherwise have a material adverse
      effect on our financial condition and operating
  results.




·
            We
      have borrowed the full amount permitted under the loan documents based on
      the lender’s current valuation of our collateral. In order to borrow any
      additional amounts under the credit agreement, we will be required to post
      additional collateral. Further, Wells Fargo has the right to reject any
      asset that we seek to finance pursuant to the credit
      agreement.




Leveraging
our portfolio is an important component of our strategy and subjects us to
increased risk of loss.




A key
component of our strategy is to borrow against, or leverage, our assets to allow
us to invest in a greater number of assets and enhance our asset returns.
However, leverage also subjects us to increased risk of loss. We are highly
leveraged compared to certain of our competitors. The use of leverage may result
in increased losses to us in the following ways:




·
            We
      rely on the cash flows from the assets financed to fund our debt service
      requirements. Therefore, in the event of a tenant default on its rent
      payments, our losses are expected to increase as we will need to fund our
      debt service requirements from other
sources.




·
            To
      the extent we have financed our assets under our variable rate credit
      agreement with Wells Fargo Bank, our debt service requirements will
      increase as short-term interest rates rise. In addition, if short-term
      interest rates rise in excess of the yields on our assets financed, we
      will be subject to losses.




·
            Our
      lenders will have a first priority claim on the collateral we pledge and
      the right to foreclose on the collateral. Therefore, if we default on our
      debt service obligations, we would be at risk of losing the related
      collateral.




·
            Our
      credit agreement with Wells Fargo Bank is a fully recourse lending
      arrangement. Therefore, if we default on this agreement, our lenders will
      have general recourse to our company’s assets, rather than limited
      recourse to just the assets
financed.




25




We
may not be able to implement our long-term financing strategy.




Part of
our business strategy is to secure long-term financing of our assets to enable
us to invest in a greater number of assets and enhance our asset returns. Our
ability to implement our long-term financing strategy is subject to the
following risks:




·
            We
      may not be able to achieve our desired leverage level due to decreases in
      the market value of our assets, increases in interest rates and other
      factors.




·
            We
      are subject to conditions in the mortgage, CDO and other long-term
      financing markets which are beyond our control, including the liquidity of
      these markets and maintenance of attractive credit
  spreads.




·
            In
      the event of an adverse change in the financial condition of our
      underlying tenant, it may not be possible or it may be uneconomical for us
      to obtain long-term financing for the subject
  asset.




Our
inability to implement our long-term financing strategy may cause us to
experience lower leveraged returns on our assets than would otherwise be the
case, and could have a material adverse effect on our operating
results.




Certain
of our assets are cross-collateralized, and certain of our indebtedness is
cross-defaulted.




As of
December 31, 2010, our three Nestlé properties all serve as collateral for a
single mortgage note on the three properties. In addition, (1) our CDO is
secured by interests in 67 of our investments, (2) our secured term loan is
secured by interests in 28 of our investments and (3) our credit agreement with
Wells Fargo is secured by interests in 23 of our investments. To the extent that
any of our investments are cross-collateralized, the lender will have recourse
to any and all of the assets that secure the debt in the event that we default
under the loan documents. Therefore, cross-collateralizing our investments
generally exposes us to increased risk of loss under the related financing
arrangement.




In
addition, our credit agreement with Wells Fargo Bank and our convertible senior
notes contain cross-default provisions, meaning that a default under one
obligation could result in the other lender accelerating the maturity of our
obligations to them.




We
may not be able to finance our investments on a long-term basis on attractive
terms, which may require us to seek more costly financing for our investments or
to liquidate assets.




As part
of our investment strategy, we may acquire new assets and finance them on a
floating rate, recourse borrowing agreement with the expectation that we will
obtain long-term, fixed rate, non-recourse financing in the future. During the
period we finance these assets on a recourse facility, we bear the risk of being
unable to finance the assets on a non-recourse basis at attractive prices or in
a timely matter, or at all. If it is not possible or economical for us to
finance such assets on a non-recourse basis, we may be unable to pay down our
recourse borrowings, or be required to liquidate the assets at a loss in order
to do so. If we sell an asset at less than what the lender has advanced to us
against that asset, we will remain liable to the lender for the shortfall
because of the recourse nature of the facility.




The
use of CDO financings with coverage tests may have a negative impact on our
operating results and cash flows.




We have
used CDO financings in the past and may continue to do so in the future. We
retain the subordinate classes of bonds in our CDO financings. The terms of the
CDO securities issued by us include cash flow coverage tests that are used
primarily to determine whether and to what extent principal and interest
proceeds on the underlying assets may be used to pay principal of and interest
on the subordinate classes of bonds in the CDO. These cash flow coverage tests
consist of an overcollateralization test and an interest coverage test. The
overcollateralization test ensures that a minimum amount of collateral principal
amount secures the related notes. The interest coverage test ensures that cash
coupon payments generated from the CDO collateral will be adequate to pay fees
and interest due on the related notes.




In the
event the cash flow coverage tests are not satisfied, interest and principal
that would otherwise be payable on the subordinate classes may be re-directed to
pay principal on the senior bond classes. Therefore, failure to satisfy these
coverage tests could adversely affect our operating results and cash flows and
hence our liquidity.




Hedging
transactions may not effectively protect us against anticipated risks and may
subject us to certain other risks and costs.




We may
enter into hedging transactions to manage our exposure to interest rate
fluctuations prior to the time we obtain long-term fixed rate financing for our
assets. Our hedging strategy exposes us to certain risks, among them the
following:




·
            No
      hedging activity can completely insulate us from the risks associated with
      changes in interest rates and, therefore, our hedging strategy may not
      have the desired beneficial impact on our results of operations or
      financial condition.




26




·
            There
      will be various market risks which we do not intend or expect to hedge
      against, including changes in credit
spreads.




·
            Hedging
      transactions are entered into at the discretion of our management team and
      they may conclude that it is not in our company’s best interest to hedge
      the interest rate risks with respect to certain expected long-term
      financings, particularly during periods of market dislocation. We are not
      currently carrying an open interest rate hedge to manage our exposure to
      interest rate fluctuations for assets for which we may obtain long-term
      financing for in the future. Our decision to do so leaves us exposed to
      increases in long-term interest rates for those assets and, therefore, may
      make it more difficult or more costly to obtain long-term
      financing.




·
            Our
      hedging strategy may serve to reduce the returns which we could possibly
      achieve if we did not utilize the
hedge.




·
            Because
      we intend to structure our hedging transactions in a manner that does not
      jeopardize our status as a REIT, we are limited in the type of hedging
      transactions that we may use.




·
            Hedging
      costs increase as the period covered by the hedge 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.




·
            Our
      hedging transactions may not perform as expected, including during periods
      of market dislocation.




·
            If
      we do not obtain long-term financing in the time frame we designate at the
      time of the hedge transaction, our hedging strategy may not have the
      desired beneficial impact on our results of operations or financial
      condition.




We
may fail to qualify for hedge accounting treatment.




We record
derivative and hedge transactions in accordance with United States generally
accepted accounting principles. Under these standards, we may fail to qualify
for hedge accounting treatment for a number of reasons, including if we use
instruments that do not meet the applicable accounting definition of a
derivative (such as short sales), we fail to satisfy applicable accounting hedge
documentation requirements or we fail initial or subsequent quarterly hedge
effectiveness assessment requirements. If we fail to qualify for hedge
accounting treatment, our operating results may suffer because any losses on the
derivatives we enter into would be charged to our Statement of Operations
without any offset from the change in fair value of the related hedged
transaction.




Risks
Related to Lease Enhancements




Our
lease enhancement mechanisms may fail.




We have
developed certain lease enhancement mechanisms designed to reduce the risks
inherent in our net lease investments. These lease enhancement mechanisms
include:




·
            casualty
      and condemnation insurance policies that protect us from any losses due to
      any rights the tenant may have to terminate the underlying net lease or
      abate rent as a result of a casualty or condemnation event;
      and




·
            borrower
      reserve funds that protect us from any losses due to any rights the tenant
      may have to terminate the underlying net lease or abate rent as a result
      of the failure of the property owner to maintain and repair the property
      or related common areas.




These
lease enhancement mechanisms may not protect us against all losses. For example,
our casualty and condemnation policies typically contain exclusions relating to
war, insurrection, rebellion, revolution or civil riot and radioactive matter,
earthquakes (in earthquake zones) and takings (other than by condemnation) by
reason of danger to public health, public safety or the environment. In
addition, amounts in the borrower reserve fund may be insufficient to cover the
cost of maintenance or repairs, and the borrower may fail to perform such
maintenance or repairs at its own expense. The failure of our lease enhancement
mechanisms may result in the loss of all or part of our capital invested in, and
profits anticipated from, our investment, and could adversely affect our
financial condition, liquidity and operating results.




We
depend on our insurance carriers to provide and honor lease
enhancements.




There are
a limited number of insurance carriers from whom we can obtain specialized lease
enhancement insurance policies, and, therefore, our ability to replace one or
more of our current carriers is restricted. Any of the following developments
with respect to our carriers may have a material adverse effect on our financial
condition, liquidity and operating results:




·
            a
      deterioration in our relationship with one or more of the
      carriers;




27




·
            a
      bankruptcy or other material adverse financial development with respect to
      one or more of the carriers; and




·
            a
      dispute as to policy coverage with one or more of the
      carriers.




We
may determine not to apply lease enhancement mechanisms that would otherwise
protect us.




In
determining whether a lease enhancement mechanism is appropriate, we examine the
costs and benefits of the lease enhancement mechanism in light of our analysis
of the risks associated with the underlying net lease. As a result of this
analysis, we may decline to apply a lease enhancement mechanism that would
otherwise protect us. Actual losses may exceed our estimates and, therefore, our
decision not to apply appropriate lease enhancement mechanisms may result in the
loss of all or part of our capital invested in, and profits anticipated from,
our investment, and could adversely affect our financial condition, liquidity
and operating results.




Risks
Related to Business Strategy and Policies




We
face significant competition that could harm our business.




We are
subject to significant competition in each of our business segments. We compete
with specialty finance companies, insurance companies, investment banks, savings
and loan associations, banks, mortgage bankers, mutual funds, institutional
investors, pension funds, hedge funds, other lenders, governmental bodies and
individuals and other entities, including REITs. We may face new competitors
and, due to our focus on single tenant properties located throughout the United
States, and because many of our competitors are locally and/or regionally
focused, we may not encounter the same competitors in each region of the United
States. Many of our competitors have greater financial and other resources and
may have other advantages over our company. Our competitors may be willing to
accept lower returns on their investments, may have access to lower cost capital
and may succeed in buying the assets that we target for acquisition. We may
incur costs on unsuccessful acquisitions that we will not be able to recover.
Our failure to compete successfully could have a material adverse effect on our
financial condition, liquidity and operating results.




Our
network of investment sale brokers and independent mortgage brokers may sell
investment opportunities to our competitors.




An
important source of our investments is our network of investment sale brokers
and independent mortgage brokers. These brokers are not contractually obligated
to do business with us. Further, our competitors also have relationships with
many of these brokers and actively compete with us in our efforts to obtain
investments from these brokers. As a result, we may lose potential transactions
to our competitors, causing our investment pace to fail to meet market
expectations, which could have a material adverse effect on the market price of
our stock.




Joint
venture investments will expose us to certain risks.




We may
from time to time enter into joint venture transactions for portions of our
exiting or future portfolio assets, which may include certain of our real
properties and/or some or all of our loan and securities investments. Investing
in this manner subjects us to certain risks, among them the
following:




·
            We
      will not exercise sole decision-making authority regarding the joint
      venture’s business and assets and, thus, we may not be able to take
      actions that we believe are in our company’s best
    interests.




·
            We
      may be required to accept liability for obligations of the joint venture
      (such as recourse carve-outs on mortgage loans) beyond our economic
      interest.




·
            Our
      returns on joint venture assets may be adversely affected if the assets
      are not held for the long-term, or a period of about ten
      years.




Our
ability to grow our business will be limited by our ability to attract debt or
equity financing, and we may have difficulty accessing capital on attractive
terms.




We expect
to fund future investments primarily from debt or equity capital. Therefore, our
ability to grow is dependent upon the availability of debt or equity capital
from public or institutional investors. Further, additional debt and/or equity
capital may not be available to us at an acceptable cost. The capital markets
also have been, and in the future may be, adversely affected by various other
events or conditions beyond our control, such as the United States’ military
involvement in the Middle East and elsewhere, the terrorist attacks on September
11, 2001, the ongoing War on Terrorism by the United States and the bankruptcy
of major companies, such as Lehman Brother Holdings Inc. and Enron Corp. Events
such as an escalation in the War on Terrorism, new terrorist attacks, or
additional bankruptcies in the future, as well as other events beyond our
control, could adversely affect the availability and cost of capital for our
business. As a REIT, we will also be dependent upon the availability and cost of
capital in the REIT markets specifically, which can be impacted by various
factors such as interest rate levels, the strength of real estate markets and
investors’ appetite for REIT investments. We cannot assure you that we will be
successful in attracting sufficient debt or equity financing to fund future
investments, or at an acceptable cost.




28


Future
offerings of debt and equity may not be available to us or may adversely affect
the market price of our common stock.
  We expect
to continue to increase our capital resources by making additional offerings of
equity and debt securities in the future, which would include classes of
preferred stock, common stock and senior or subordinated notes. All debt
securities and other borrowings, as well as all classes of preferred stock, will
be senior to our common stock in a liquidation of our company. Additional equity
offerings could dilute our stockholders’ equity, reduce the market price of
shares of our common stock, or be of preferred stock having a distribution
preference that may limit our ability to make distributions on our common stock.
Market conditions could cause us to seek sources of potentially less attractive
capital. Our ability to estimate the amount, timing or nature of additional
offerings is limited as these factors will depend upon market conditions and
other factors.
  We
may fail to manage our anticipated growth.
  As of
December 31, 2010, our company had 19 employees. As our asset base and/or
portfolio management duties continue to grow, we may experience a significant
strain on our management, operational, financial and other resources. Our
ability to manage growth effectively will require us to continue to improve our
operational and financial systems, potentially expand our employee base and
train and manage our employees and develop additional management expertise.
Failure to manage growth effectively could have a material adverse effect on our
financial condition, liquidity and operating results.
  The
concentration of our company’s common stock could have an adverse impact on the
value of your investment.
  As of
December 31, 2010, approximately 41.4% of our common stock was owned by seven
different institutional investors (based on SEC filings made by these
investors). This concentration of ownership could have an adverse impact on the
value of your investment, including as a result of the following:
  ·
              Trading
      volume in our stock may be limited, which will reduce the liquidity of
      your investment.
  ·
              The
      sale of a significant number of our shares in the open market by a
      significant stockholder or otherwise could cause our stock price to
      decline.
  ·
              Although
      none of these investors on its own controls a majority of our common
      stock, these owners could determine to act together and given their
      significant concentration may be able to take actions that are not in your
      best interest.
  Our
board of directors may change our investment and operational policies without
stockholder consent.
  Our board
of directors determines our investment and operational policies and may amend or
revise these policies at any time, including our policies with respect to our
REIT status, investment objectives, acquisitions, growth, operations,
indebtedness, capitalization and distributions, or approve transactions that
deviate from these policies without a vote of or notice to our stockholders.
Investment and operational policy changes could adversely affect the market
price of stock in our company and our ability to make distributions to our
stockholders.
  The
federal income tax laws governing REITs are complex, and our failure to qualify
as a REIT under the federal tax laws will result in adverse tax
consequences.
  We intend
to continue to operate in a manner that will allow us to qualify as a REIT under
the federal income tax laws. The REIT qualification requirements are extremely
complex, however, and interpretations of the federal income tax laws governing
qualification as a REIT are limited. Accordingly, we cannot be certain that we
will be successful in qualifying as a REIT. At any time, new laws,
interpretations, or court decisions may change the federal tax laws or the
federal income tax consequences of our qualification as a REIT.
  If we
fail to qualify as a REIT in any taxable year, we will be subject to federal
income tax on our taxable income. Our taxable income would be determined without
deducting any distributions to our stockholders. We might need to borrow money
or sell assets in order to pay any such tax. If we cease to qualify as a REIT,
we no longer would be required to distribute most of our taxable income to our
stockholders. Unless the federal income tax laws excused our failure to qualify
as a REIT, we could not re-elect REIT status until the fifth calendar year after
the year in which we failed to qualify as a REIT.
  Our
ownership limitations may restrict or prevent you from engaging in certain
transfers of our stock.
  In order
to maintain our REIT qualification, no more than 50% in value of our outstanding
stock may be owned, directly or indirectly, by five or fewer individuals (as
defined in the federal income tax laws to include various kinds of entities)
during the last half of any taxable year. “Individuals” for this purpose include
natural persons, private foundations, some employee benefit plans and trusts,
and some charitable trusts. In order to preserve our REIT qualification, our
charter generally prohibits any person from directly or indirectly owning more
than 9.9% in value or in number of shares, whichever is more restrictive, of any
class or series of the outstanding shares of our capital stock.
  29
  If anyone
transfers shares in a way that would violate our ownership limits, or prevent us
from continuing to qualify as a REIT under the federal income tax laws, we will
consider the transfer to be null and void from the outset and the intended
transferee of those shares will be deemed never to have owned the shares or
those shares instead will be transferred to a trust for the benefit of a
charitable beneficiary and will be either redeemed by us or sold to a person
whose ownership of the shares will not violate our ownership limits. Anyone who
acquires shares in violation of our ownership limits or the other restrictions
on transfer in our charter bears the risk of suffering a financial loss when the
shares are redeemed or sold if the market price of our stock falls between the
date of purchase and the date of redemption or sale.
  Provisions
of our charter and Maryland law may limit the ability of a third-party to
acquire control of our company.
  Our
charter contains restrictions on stock ownership and transfer.
  As
described above, our charter contains stock ownership limits. These limits may
delay, defer or prevent a transaction or a change of control of our company that
might involve a premium price for stock of our company or otherwise be in the
best interest of our stockholders.
  Our
board of directors may issue additional stock without stockholder
approval.
  Our
charter authorizes our board of directors to amend the charter to increase or
decrease the aggregate number of shares of stock we have authority to issue,
without any action by the stockholders. Issuances of additional shares of stock
may delay, defer or prevent a transaction or a change of control of our company
that might involve a premium price for stock of our company or otherwise be in
the best interest of our stockholders.
  Other
provisions of our charter and bylaws may delay or prevent a transaction or
change of control.
  Our
charter and bylaws also contain other provisions that may delay, defer or
prevent a transaction or a change of control of our company that might involve a
premium price for our common stock or otherwise be in the best interest of our
stockholders. For example, our charter and bylaws provide that:  a
two-thirds vote of stockholders is required to remove a director, vacancies on
our board may only be filled by the remaining directors (or, if no directors
remain, by the stockholders), the number of directors may be fixed only by the
directors, our bylaws may only be amended by our directors and a majority of
shares is required to call a special stockholders meeting.
  Increased
market interest rates may reduce the value of our stock.
  We
believe that investors consider the dividend distribution rate on shares of REIT
stock, expressed as a percentage of the market price of the shares, relative to
market interest rates as an important factor in deciding whether to buy or sell
shares of REIT stock. If market interest rates go up, prospective purchasers of
REIT stock may expect a higher dividend distribution rate. Higher interest rates
would also likely increase our borrowing costs and might decrease cash available
for distribution. Thus, higher market interest rates could cause the market
price of stock in our company to decline.
  The
market price of our stock may vary substantially.
  Various
factors can affect the market price of our stock including the
following:
  ·
              actual
      or anticipated variations in our quarterly results of
      operations;
  ·
              the
      extent of investor interest in our company, real estate generally or
      commercial real estate
specifically;
  ·
              the
      reputation of REITs generally and the attractiveness of their equity
      securities in comparison to other equity securities, including securities
      issued by other real estate companies, and fixed income
      securities;
  ·
              changes
      in expectations of future financial performance or changes in estimates of
      securities analysts;
  ·
              fluctuations
      in stock market prices and volumes;
and
  ·
              announcements
      by us or our competitors of acquisitions, investments or strategic
      alliances.
  We
depend on our key personnel.
  We depend
on the efforts and expertise of our senior management team. There is no
guarantee that any member of our senior management team will remain employed
with our company. If any member of our senior management team were to die,
become disabled or otherwise leave our employ, we may not be able to replace him
with a person of equal skill, ability and industry expertise.
  30
  Item
      1B.
              Unresolved
      Staff Comments.
  None.
  Item
      2.
              Properties.
  Our
corporate offices are located at 1065 Avenue of the Americas, New York, New York
10018. Our lease at this property expires in September 2013.
  Our owned
real properties are described above under “Business—Our Portfolio—Owned
Properties.”
  Item
      3.
              Legal
      Proceedings.
  From time
to time, we are involved in legal proceedings in the ordinary course of
business. We do not believe that any matter we are currently involved in will
have a material adverse effect on our business, results of operations or
financial condition. However, periodic settlements and/or professional or other
fees and expenses related to any matter could have an adverse impact on our
results of operations in the quarterly or annual period in which they are
recognized.
  Item
      4.
              [Removed
      and Reserved.]
  31
  PART
II.
  Item
      5.
              Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities.
  Information
and Holders of Record
  Our
common stock has been listed for trading on the New York Stock Exchange (“NYSE”)
under the symbol “LSE” since our initial public offering on March 19, 2004. On
February 15, 2011, the reported closing sale price per share of common
stock on the NYSE was $5.69 and there were 769 holders of record of our common
stock. The table below sets forth the quarterly high and low sales prices of our
common stock on the NYSE for the periods indicated.
  Fiscal Year
                  
                  Low
                  
                  
                  High2009First
      Quarter
                  
                  $
                  1.46
                  
                  
                  $
                  2.43Second
      Quarter
                  
                  
                  1.92
                  
                  
                  
                  3.51Third
      Quarter
                  
                  
                  2.63
                  
                  
                  
                  4.45Fourth
      Quarter
                  
                  
                  3.08
                  
                  
                  
                  5.072010First
      Quarter
                  
                  $
                  3.99
                  
                  
                  $
                  5.72Second
      Quarter
                  
                  
                  4.44
                  
                  
                  
                  6.30Third
      Quarter
                  
                  
                  4.42
                  
                  
                  
                  5.81Fourth
      Quarter
                  
                  
                  5.45
                  
                  
                  
                  6.32
 
 Dividends
  The table
below sets forth the cash dividends paid on our common stock for the periods
indicated:
  Quarter Ended
                  
                  Dividend Payment Date
                  
                  Dividend per Share2009March
      31, 2009
                  
                  April
      15, 2009
                  
                  $
                  0.05June
      30, 2009
                  
                  July
      15, 2009
                  
                  
                  0.05September
      30, 2009
                  
                  October
      15, 2009
                  
                  
                  0.05December
      31, 2009
                  
                  January
      15, 2010
                  
                  
                  0.062010March
      31, 2010
                  
                  April
      15, 2010
                  
                  $
                  0.06June
      30, 2010
                  
                  July
      15, 2010
                  
                  
                  0.06September
      30, 2010
                  
                  October
      15, 2010
                  
                  
                  0.06December
      31, 2010
                  
                  January
      18, 2011
                  
                  
                  0.065
 
 We
generally intend to distribute each year all or substantially all of our REIT
taxable income (which does not necessarily equal net income as calculated in
accordance with generally accepted accounting principles) to our stockholders so
as to comply with the REIT provisions of the Internal Revenue Code and to avoid
federal income tax and the nondeductible excise tax. Our dividend policy is
determined from time to time by our board of directors in their sole discretion,
and will depend on factors such as our cash available for distribution, our
funds from operations, our maintenance of REIT status, market conditions and
such other factors as our board of directors deems relevant.
  Tax
Characteristics of 2010 Dividends
  The
following table summarizes the taxable nature of our common dividends during
2010:
  Total common dividend per share (tax
      basis)
                      
                      $
                      0.245Capital
      gain
                      
                      
                      0.00
                      %Ordinary
      income
                      
                      
                      0.00
                      %Return
      of capital
                      
                      
                      100.00
                      %100.00
                      %
  32
  Stock
Price Performance Graph
  The graph
below compares the cumulative total stockholder return of our common stock with
that of the Standard & Poor’s 500 Composite Stock Price Index and the
Standard & Poor’s 500 REIT Index from December 31, 2005 through December 31,
2010. The graph assumes that you invested $100 at the close of market on
December 31, 2005 in our common stock and each of the indexes, with dividends
reinvested. The comparisons in this graph are provided in accordance with
Securities and Exchange Commission disclosure requirements and are not intended
to forecast or be indicative of the future performance of our common
stock.
 
 BasePeriodCompany / Index
                  
                  12/31/05
                  
                  
                  12/31/06
                  
                  
                  12/31/07
                  
                  
                  12/31/08
                  
                  
                  12/31/09
                  
                  
                  12/31/10CapLease,
      Inc.
                  
                  
                  100
                  
                  
                  
                  118.17
                  
                  
                  
                  92.90
                  
                  
                  
                  20.61
                  
                  
                  
                  55.90
                  
                  
                  
                  77.73S&P
      500 Index
                  
                  
                  100
                  
                  
                  
                  115.79
                  
                  
                  
                  122.16
                  
                  
                  
                  76.96
                  
                  
                  
                  97.33
                  
                  
                  
                  111.99S&P
      500 REIT Index
                  
                  
                  100
                  
                  
                  
                  141.75
                  
                  
                  
                  117.51
                  
                  
                  
                  69.11
                  
                  
                  
                  86.40
                  
                  
                  
                  113.81
 
 
  33
  Item
      6.
              Selected
      Financial Data.
  The
following selected historical financial information for the five years ended
December 31, 2010 is derived from our audited consolidated financial statements.
The data should be read in conjunction with the consolidated financial
statements, related notes, and other financial information included in this Form
10-K.
  Year
      ended December 31,2010
                  
                  
                  2009
                  
                  
                  2008
                  
                  
                  2007
                  
                  
                  2006(in
      thousands, except per share amounts)Statement
      of Operations dataRevenues:Rental
      revenue
                  
                  $
                  125,662
                  
                  
                  $
                  134,496
                  
                  
                  $
                  135,026
                  
                  
                  $
                  122,064
                  
                  
                  $
                  76,127Interest
      income from loans and securities
                  
                  
                  27,620
                  
                  
                  
                  30,667
                  
                  
                  
                  35,040
                  
                  
                  
                  35,368
                  
                  
                  
                  32,446Property
      expense recoveries
                  
                  
                  12,159
                  
                  
                  
                  11,473
                  
                  
                  
                  11,457
                  
                  
                  
                  11,215
                  
                  
                  
                  8,828Gains
      on sale of mortgage loans and securities
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  2,923Other
      revenue
                  
                  
                  974
                  
                  
                  
                  1,532
                  
                  
                  
                  764
                  
                  
                  
                  583
                  
                  
                  
                  1,903Total
      revenues
                  
                  
                  166,415
                  
                  
                  
                  178,168
                  
                  
                  
                  182,287
                  
                  
                  
                  169,770
                  
                  
                  
                  122,227Expenses:Interest
      expense
                  
                  
                  84,850
                  
                  
                  
                  90,270
                  
                  
                  
                  98,217
                  
                  
                  
                  96,419
                  
                  
                  
                  62,350Property
      expenses
                  
                  
                  24,715
                  
                  
                  
                  20,442
                  
                  
                  
                  19,526
                  
                  
                  
                  18,556
                  
                  
                  
                  15,511Loss
      (gain) on derivatives
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  19,496
                  
                  
                  
                  (203
                  )
                  
                  
                  (413
                  )Loss
      on investments
                  
                  
                  7,949
                  
                  
                  
                  26,885
                  
                  
                  
                  3,663
                  
                  
                  
                  427
                  
                  
                  
                  907General
      and administrative expenses
                  
                  
                  10,659
                  
                  
                  
                  10,894
                  
                  
                  
                  11,669
                  
                  
                  
                  10,660
                  
                  
                  
                  9,769General
      and administrative expenses - stock based compensation
                  
                  
                  2,541
                  
                  
                  
                  2,118
                  
                  
                  
                  1,978
                  
                  
                  
                  1,621
                  
                  
                  
                  2,621Depreciation
      and amortization expense on realproperty
                  
                  
                  48,409
                  
                  
                  
                  51,410
                  
                  
                  
                  53,132
                  
                  
                  
                  46,866
                  
                  
                  
                  24,782Loan
      processing expenses
                  
                  
                  268
                  
                  
                  
                  309
                  
                  
                  
                  314
                  
                  
                  
                  306
                  
                  
                  
                  268Total
      expenses
                  
                  
                  179,391
                  
                  
                  
                  202,328
                  
                  
                  
                  207,995
                  
                  
                  
                  174,652
                  
                  
                  
                  115,795(Loss)
      gain on extinguishment of debt
                  
                  
                  (293
                  )
                  
                  
                  9,829
                  
                  
                  
                  1,713
                  
                  
                  
                  1,363
                  
                  
                  
                  —Provision
      for income taxes
                  
                  
                  —
                  
                  
                  
                  (201
                  )
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —(Loss)
      income from continuing operations
                  
                  
                  (13,269
                  )
                  
                  
                  (14,532
                  )
                  
                  
                  (23,995
                  )
                  
                  
                  (3,519
                  )
                  
                  
                  6,432Income
      from discontinued operations
                  
                  
                  77
                  
                  
                  
                  514
                  
                  
                  
                  707
                  
                  
                  
                  981
                  
                  
                  
                  834Net
      (loss) income before non-controlling interest in consolidated
      subsidiaries
                  
                  
                  (13,192
                  )
                  
                  
                  (14,018
                  )
                  
                  
                  (23,288
                  )
                  
                  
                  (2,538
                  )
                  
                  
                  7,266Non-controlling
      interest in consolidated subsidiaries
                  
                  
                  52
                  
                  
                  
                  51
                  
                  
                  
                  124
                  
                  
                  
                  33
                  
                  
                  
                  (17
                  )Net
      (loss) income
                  
                  
                  (13,140
                  )
                  
                  
                  (13,967
                  )
                  
                  
                  (23,164
                  )
                  
                  
                  (2,505
                  )
                  
                  
                  7,249Dividends
      allocable to preferred shares
                  
                  
                  (5,618
                  )
                  
                  
                  (2,844
                  )
                  
                  
                  (2,844
                  )
                  
                  
                  (2,844
                  )
                  
                  
                  (2,844
                  )Net
      (loss) income allocable to common stockholders
                  
                  $
                  (18,758
                  )
                  
                  $
                  (16,811
                  )
                  
                  $
                  (26,008
                  )
                  
                  $
                  (5,349
                  )
                  
                  $
                  4,405Earnings
      per share:Net
      (loss) income per common share, basic and diluted
                  
                  $
                  (0.33
                  )
                  
                  $
                  (0.34
                  )
                  
                  $
                  (0.57
                  )
                  
                  $
                  (0.13
                  )
                  
                  $
                  0.14Weighted
      average number of common shares outstanding, basic
                  
                  
                  56,189
                  
                  
                  
                  49,297
                  
                  
                  
                  45,526
                  
                  
                  
                  40,739
                  
                  
                  
                  31,939Weighted
      average number of common shares outstanding, diluted
                  
                  
                  56,189
                  
                  
                  
                  49,297
                  
                  
                  
                  45,526
                  
                  
                  
                  40,739
                  
                  
                  
                  31,941Dividends
      declared per common share
                  
                  $
                  0.25
                  
                  
                  $
                  0.21
                  
                  
                  $
                  0.60
                  
                  
                  $
                  0.80
                  
                  
                  $
                  0.80Dividends
      declared per preferred share
                  
                  $
                  2.03
                  
                  
                  $
                  2.03
                  
                  
                  $
                  2.03
                  
                  
                  $
                  2.03
                  
                  
                  $
                  2.03Other
      dataCash
      flows from operating activities
                  
                  $
                  47,689
                  
                  
                  $
                  56,614
                  
                  
                  $
                  64,359
                  
                  
                  $
                  30,945
                  
                  
                  $
                  27,443Cash
      flows from investing activities
                  
                  
                  (25,051
                  )
                  
                  
                  70,342
                  
                  
                  
                  9,547
                  
                  
                  
                  (309,062
                  )
                  
                  
                  (361,854
                  )Cash
      flows from financing activities
                  
                  
                  (28,442
                  )
                  
                  
                  (96,849
                  )
                  
                  
                  (99,514
                  )
                  
                  
                  307,739
                  
                  
                  
                  319,520
  34
 
 As
      of December 31,2010
                  
                  
                  2009
                  
                  
                  2008
                  
                  
                  2007
                  
                  
                  2006(in
      thousands)Balance
      sheet dataReal
      estate investments, net
                  
                  $
                  1,398,399
                  
                  
                  $
                  1,408,819
                  
                  
                  $
                  1,510,413
                  
                  
                  $
                  1,563,570
                  
                  
                  $
                  1,115,001Loans
      held for investment
                  
                  
                  210,040
                  
                  
                  
                  221,211
                  
                  
                  
                  285,779
                  
                  
                  
                  269,293
                  
                  
                  
                  273,170Commercial
      mortgage-backed securities
                  
                  
                  145,965
                  
                  
                  
                  153,056
                  
                  
                  
                  161,842
                  
                  
                  
                  198,187
                  
                  
                  
                  183,066Cash
      and cash equivalents
                  
                  
                  32,742
                  
                  
                  
                  38,546
                  
                  
                  
                  8,439
                  
                  
                  
                  34,047
                  
                  
                  
                  4,425Structuring
      fees receivable
                  
                  
                  326
                  
                  
                  
                  3,410
                  
                  
                  
                  1,863
                  
                  
                  
                  2,576
                  
                  
                  
                  3,253Total
      assets
                  
                  
                  1,870,271
                  
                  
                  
                  1,904,415
                  
                  
                  
                  2,045,525
                  
                  
                  
                  2,158,067
                  
                  
                  
                  1,644,300Mortgages
      on real estate investments
                  
                  
                  928,429
                  
                  
                  
                  943,811
                  
                  
                  
                  972,324
                  
                  
                  
                  983,770
                  
                  
                  
                  794,773Collateralized
      debt obligations
                  
                  
                  254,210
                  
                  
                  
                  263,310
                  
                  
                  
                  268,265
                  
                  
                  
                  268,227
                  
                  
                  
                  268,190Repurchase
      agreement obligations
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  232,869
                  
                  
                  
                  195,485Credit
      agreement
                  
                  
                  105,345
                  
                  
                  
                  126,262
                  
                  
                  
                  189,262
                  
                  
                  
                  —
                  
                  
                  
                  —Secured
      term loan
                  
                  
                  101,880
                  
                  
                  
                  114,070
                  
                  
                  
                  123,719
                  
                  
                  
                  129,521
                  
                  
                  
                  —Convertible
      senior notes
                  
                  
                  33,926
                  
                  
                  
                  49,452
                  
                  
                  
                  66,239
                  
                  
                  
                  68,017
                  
                  
                  
                  —Other
      long-term debt
                  
                  
                  30,930
                  
                  
                  
                  30,930
                  
                  
                  
                  30,930
                  
                  
                  
                  30,930
                  
                  
                  
                  30,930Total
      stockholders’ equity
                  
                  
                  350,472
                  
                  
                  
                  313,210
                  
                  
                  
                  323,578
                  
                  
                  
                  356,440
                  
                  
                  
                  307,656
  35
  Item
      7.
              Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations.
  The
following discussion should be read in conjunction with the consolidated
financial statements and the notes to those financial statements, included
elsewhere in this filing. Except where otherwise indicated or where the context
is clear, the portfolio statistics in Item 7 of this Form 10-K represent or are
calculated from our carry value for financial reporting purposes before
depreciation and amortization. With respect to our loan portfolio, we have
adjusted our carry value to exclude a $0.5 million general loss
reserve.
  Overview
  We are a
REIT that invests primarily in single tenant commercial real estate assets
subject to long-term leases to high credit quality tenants. We focus on
properties that are subject to a net lease, or a lease that requires the tenant
to pay all or substantially all property operating expenses, such as utilities,
real estate taxes, insurance and routine maintenance.  We also
continue to be opportunistic and have made and expect to continue to make
investments in single tenant properties where the owner has exposure to property
operating expenses when we determine we can sufficiently underwrite that
exposure and isolate a predictable cash flow.
  Our
primary business line is and we expect will continue to be the ownership of
single tenant properties. We also have a portfolio of first mortgage loans and
other debt investments on single tenant properties and may continue to make such
debt investments from time to time on an opportunistic basis in the
future.
  As a
result of lease non-renewals or lease terminations, we have classified three
properties as “multi-tenant properties,” as each is no longer leased primarily
by a single tenant. As of December 31, 2010, we had an approximately $2.0
billion investment portfolio, including $1.6 billion of owned properties and
$0.4 billion of loans and other debt investments.
  Our
primary business objective is to generate stable, long-term and attractive
returns based on the spread between the yields generated by our assets and the
cost of financing our portfolio. We believe that our focus on assets leased to
high credit quality tenants subject to long-term leases will provide us with a
stable and predictable stream of cash flows that will support our business and
the payment of dividends to our stockholders for the foreseeable
future.
  The
principal sources of our revenues are rental income on our owned real properties
and interest income from our debt investments (loans and securities). In order
to grow our revenues, we will be primarily dependent on our ability to add new
assets to our portfolio. We are also intensely focused on growing revenues by
re-letting vacant space within our portfolio. As of December 31, 2010, the
occupancy rate in our owned property portfolio was 95.9% with virtually all of
the vacant space being in our office property in Johnston, Rhode Island and our
two office buildings in Omaha, Nebraska. We cannot provide any assurance as to
when and on what terms we will be able to re-let properties that are or may
become vacant in our portfolio.
  The
principal sources of our expenses are interest expense on our assets financed,
depreciation expense on our real properties, general and administrative expenses
and property expenses (net of expense recoveries). With the exception of our
credit agreement with Wells Fargo Bank, all of our debt is currently fixed rate
and, therefore, the interest expense we pay is not subject to fluctuation based
on changes in market interest rates. Our credit agreement with Wells Fargo Bank
is floating rate debt and, therefore, the interest expense we pay is expected to
increase if interest rates, in particular the one-month LIBOR rate,
increases.
  The
average remaining lease term on our owned properties is approximately 7 years,
although we have some leases that are scheduled to mature over the next few
years. We are subject to the risk that our tenants do not renew their leases at
maturity and that we are unable to promptly re-let the property, or the terms of
renewal or re-letting may be less favorable to us than the current lease terms,
any of which could result in a reduction in our revenues and an increase in our
property operating costs.
  We rely
on leverage to allow us to invest in a greater number of assets and enhance our
asset returns. Our overall portfolio leverage, expressed as a percentage of our
total debt to our total assets before depreciation and amortization on owned
properties and with other minor adjustments, was approximately 72% as of
December 31, 2010. Our leverage ratios by segment as of December 31, 2010 were
approximately 66% for the owned properties segment and 85% for the debt
investments segment. See “Liquidity and Capital Resources—Leverage” below for
information about our use of leverage ratios and how we compute
them.
  We expect
our leverage level to continue to decrease over time, as a result of one or more
of the following factors: scheduled principal amortization on our debt,
voluntary debt reduction including potentially through selected asset sales, and
lower or no leverage on new asset acquisitions. During 2010, the focus of our
portfolio activity was on strengthening our balance sheet through debt repayment
and/or repurchase and on resuming portfolio growth as market conditions
permitted during the second half of the year.
  36
  Our
portfolio financing strategy is to finance our assets with long-term fixed rate
debt as soon as practicable after we invest, generally on a secured,
non-recourse basis. Through non-recourse debt, we seek to limit the overall
company exposure in the event we default on the debt to the amount we have
invested in the asset or assets financed. We also had $170.2 million of recourse
debt obligations outstanding as of December 31, 2010, including $105.3 million
outstanding under our credit agreement with Wells Fargo Bank which is scheduled
to mature in July 2013.
  We will
be required to repay or refinance our debt obligations at maturity, which we
expect, although cannot provide any assurance, that we will be able to
do.  To the extent we are unable to refinance debt obligations, we may
rely on a combination of cash on hand, cash from asset sales, and cash from
future debt or equity capital raises to fund the liquidity needed to repay the
obligations. Our ability to refinance debt, sell assets and/or raise capital on
favorable terms will be highly dependent upon prevailing market
conditions.
  Business
Environment
  The
performance of our existing portfolio and our ability to add new assets will
continue to be impacted by market conditions.  Commercial real estate
market conditions are improving, although various signs of weakness still
persist.  For example, delinquency rates on commercial real estate
loans remains at historic highs, which has impacted the amount and terms of
credit available for new transactions.  Further, overall transaction
volumes remain lower and interest rates remain at historic lows, which has
driven significant competition for new investment opportunities.  We
cannot provide any assurance as to when and at what yields and other terms we
will be able to add new assets to our portfolio.
  In
addition, while rents and property values have been recovering in some markets,
weakness and uncertainty persists, particularly in those markets hardest hit by
the recent downturn.  We have a series of leases maturing over the
next several years and commercial real estate conditions in the relevant markets
at lease maturity will have a significant impact on our ability to retain
tenants or re-let vacant properties promptly and on favorable terms as leases
mature.
  We also
have a series of non-recourse mortgages on our owned properties maturing over
the next several years and lending for commercial real estate transactions,
while improving, remains uneven and muted, which could impact our ability to
sell properties and refinance maturing debt on favorable terms or at
all.
  We cannot
make any assurance that capital markets will be favorable to us at any time,
which could impact our ability to raise capital to support our business,
including to add new assets to our portfolio and support additional investments
in our existing assets.
  Application
of Critical Accounting Policies
  Our
discussion and analysis of financial condition and results of operations is
based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States,
or GAAP. The preparation of financial statements in conformity with GAAP
requires the use of judgments, estimates and assumptions that could affect the
reported amounts of assets and liabilities, the disclosure of contingent assets
and liabilities and the reported amounts of revenues and expenses. Actual
results could differ from these estimates. The following is a summary of our
accounting policies that are most affected by judgments, estimates and
assumptions. The summary should be read in conjunction with the more complete
discussion of our accounting policies included in Note 2 to the consolidated
financial statements in this Annual Report on Form 10-K.
  Impairment
on Owned Real Properties.
  We are
required under GAAP to review our owned properties for impairment whenever
events or changes in circumstances indicate that the carrying value of an asset
may not be recoverable. The evaluation includes estimating and reviewing
anticipated future undiscounted cash flows to be derived from the asset. If such
cash flows are less than the asset’s carrying value, an impairment charge is
recognized to earnings to the extent by which the asset’s carrying value exceeds
the estimated fair value. Estimating future cash flows is highly subjective and
includes an evaluation of factors such as the anticipated cash flows from the
property, which may include rent from current leases in place and projected
future leases, estimated capital expenditures, and an estimate of proceeds to be
realized upon sale of the property. Our estimates could differ materially from
actual results.  We did not record any impairment losses on our owned
properties during 2010.  We recorded impairment losses on our owned
properties of $16.0 million in 2009 (including $11.9 million on the write-down
to estimated fair value of a property in Johnston, Rhode Island that is now
vacant and $4.1 million on the sale of one property during 2009 and a second
property sold during 2010), and $0.4 million in 2008.
  37
  Impairment
of Loan Investments.
  We are
required under GAAP to periodically evaluate each of our loan investments for
possible impairment. In accordance with applicable accounting guidance, our
impairment analysis includes both a general reserve component (on performing
loans) and an asset-specific component (on loans where we have deemed it
probable that we will not be able to collect all amounts due according to the
contractual terms). Significant judgment is required in the analysis of each
component, including (under the general reserve component) making estimates of
the likelihood of default and lease rejection given the credit characteristics
of the tenant, and estimates of stressed collateral values and potential
bankruptcy claim recoveries, and (under the asset-specific component) evaluating
factors such as the status of the loans (i.e., current or expected payment or
other defaults), the credit quality of the underlying tenants, the present value
of expected future cash flows on the loans, the fair market value of our
collateral, and the amount and status of any senior debt. These estimates are
highly subjective and could differ materially from actual results. As of
December 31, 2010, we had a general loan loss reserve of $0.5 million
(established in 2008) and an asset-specific loan loss reserve related to a
mezzanine loan investment of $0.4 million (established in 2009).
  Purchase
Accounting for Acquisition of Real Estate.
  We
allocate the purchase price of rental real estate acquired to the following
based on fair values:
  ·
              acquired
      tangible assets, consisting of land, building and improvements;
      and
  ·
              identified
      intangible assets and liabilities, consisting of above-market and
      below-market leases, in-place leases and tenant
    relationships.
  In
estimating the fair value of the tangible and intangible assets acquired, we
consider information obtained about each property as a result of our due
diligence activities and other market data, and utilize various valuation
methods, such as estimated cash flow projections utilizing appropriate discount
and capitalization rates, estimates of replacement costs, and available market
information. The fair value of the tangible assets of an acquired property
considers the value of the property as if it were vacant (the “dark
value”).
  Above-market
and below-market lease values for acquired properties are recorded based on the
present value of the differences between (i) the contractual amounts to be paid
pursuant to each in-place lease and (ii) management’s estimate of fair market
lease rates for each corresponding in-place lease. Fair market lease rates are
measured over a period equal to the remaining term of the lease for above-market
leases and the initial term plus the term of any below-market rate renewal
options for below-market leases. In computing present value, we consider the
costs which would need to be invested to achieve the fair market lease rates. We
use a discount rate which reflects the risks associated with the leases
acquired. The capitalized above-market lease values are amortized as a reduction
of base rental revenue over the remaining term of the respective leases, and the
capitalized below-market lease values are amortized as an increase to base
rental revenue over the remaining initial terms plus the terms of any
below-market renewal options of the respective leases.
  Other
intangible assets acquired include in-place leases and tenant relationships
which are valued based on management’s evaluation of the specific
characteristics of each tenant’s lease and our overall relationship with the
respective tenant. Factors considered by management in its analysis of in-place
lease values include an estimate of the dark value of the property, carrying
costs during the hypothetical expected time it would take management to find a
tenant to lease the space for the existing lease term (a “lease-up period”)
considering current market conditions, and costs to execute similar leases.
Management estimates carrying costs, including such factors as real estate
taxes, insurance and other operating expenses during the expected lease-up
period, considering current market conditions and costs to execute similar
leases. In estimating costs to execute similar leases, management considers
leasing commissions and other related expenses. Characteristics considered by
management in valuing tenant relationships include the nature and extent of our
existing business relationships with the tenant, growth prospects for developing
new business with the tenant, the tenant’s credit quality and expectations of
lease renewals. The value of in-place leases is amortized to expense over the
remaining initial terms of the respective leases. The value of tenant
relationship intangibles is amortized to expense over the anticipated life of
the relationships. Through December 31, 2010, we have assigned no value to
tenant relationships on any of our acquisitions.
  Commercial
Mortgage-Backed Securities.
  Under
applicable accounting guidance, we estimate the fair value on our investments in
securities quarterly. Management evaluates a variety of inputs and then
estimates fair value based on those inputs. The primary inputs evaluated by
management are broker quotations, index pricing, market yields and credit
spreads on securities with similar credit ratings and duration, collateral
values, and liquidity of the security. Our estimates of fair value are subject
to significant variability based on market conditions, including interest rates
and credit spreads. We are then required under GAAP to assess whether any
unrealized losses on securities below our carry value reflect a decline in value
which is other-than-temporary. If an other-than-temporarily impaired security is
intended to be sold or required to be sold prior to the recovery of its carrying
amount, the full amount of the impairment loss is charged to earnings.
Otherwise, losses on the security must be separated into two categories, the
portion which is considered credit loss, which is charged to earnings, and the
portion due to other factors, which is charged to other comprehensive income
(loss), a component of balance sheet equity. Significant judgment is required in
this analysis. Current credit market conditions have made these judgments even
more challenging. In determining whether a decline in value is
other-than-temporary, we consider whether the decline is due to factors such as
changes in interest rates or credit spreads (indicator of temporary decline) or
credit rating downgrades on the securities or credit defaults on the underlying
collateral assets (indicator of an other-than-temporary decline). In estimating
other-than-temporary impairment losses, management considers a variety of
factors including (1) the financial condition and near-term prospects of the
credit, including credit rating of the security and the underlying tenant and an
estimate of the likelihood and expected timing of any default, (2) whether we
expect to hold the investment for a period of time sufficient to allow for
anticipated recovery in fair value, (3) the length of time and the extent to
which the fair value has been below cost, (4) current market conditions, (5)
expected cash flows from the underlying collateral and an estimate of underlying
collateral values, and (6) subordination levels within the securitization pool.
These estimates are highly subjective and could differ materially from actual
results. We recorded other-than-temporary impairment losses on our CMBS
securities of $7.9 million in 2010, $0.1 million in 2009, $1.0 million in
2008.
  38
  Stock
Based Compensation.
  Pursuant
to our 2004 stock incentive plan, we have made and expect to continue to make
awards of common stock to our employees with vesting subject to attainment of
performance criteria. Under applicable accounting guidance, we are required to
estimate the probability of vesting of these shares quarterly and recognize
expense (generally equal to the fair market value of the shares awarded on the
grant date) for any shares deemed probable to vest over the period the employee
is required to perform services to receive the shares. We base our estimates of
probability on an assessment of our actual results against the relevant
performance criteria. These estimates may change over time as our actual results
against the criteria are re-assessed. Changes in these estimates could have a
material impact on the expense we recognize.
  Property
Acquisitions
  During
the quarter ended December 31, 2010, we completed the following real estate
acquisition.
  Month
                        Acquired
                      
                      Tenant
                      
                      Location
                      
                      Purchase Price
                      
                      Lease Expires
                      
                      Net Rentable
                        Square FeetDecember
                      
                      Cooper
      Tire &
                        Rubber
      Company
                      
                      500
      Bartram
                        Parkway,
                        Franklin,
      IN
                      
                      $32.5 million
                      
                      May
      2021
                      
                      807,042
  Business
Segments
  We
conduct our business through two operating segments:
  ·
              operating
      real estate (including our investments in owned real properties);
      and
  ·
              debt
      investments (including our loan investments as well as our investments in
      securities).
  Segment
data for the year ended December 31, 2010 are as follows (amounts in
thousands):
  Corporate /
                      Unallocated
                    
                    
                    Operating
                      Real Estate
                    
                    
                    Debt
                      Investments
                    
                    
                    TotalTotal
      revenues
                    
                    $
                    856
                    
                    
                    $
                    138,438
                    
                    
                    $
                    27,121
                    
                    
                    $
                    166,415Total
      expenses
                    
                    
                    19,799
                    
                    
                    
                    133,647
                    
                    
                    
                    25,945
                    
                    
                    
                    179,391Loss
      on extinguishment of debt
                    
                    
                    (293
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (293
                    )Income
      (Loss) from continuing operations
                    
                    
                    (19,237
                    )
                    
                    
                    4,791
                    
                    
                    
                    1,177
                    
                    
                    
                    (13,269
                    )Total
      assets
                    
                    
                    48,213
                    
                    
                    
                    1,463,362
                    
                    
                    
                    358,696
                    
                    
                    
                    1,870,271
 
  Segment
data for the year ended December 31, 2009 are as follows (amounts in
thousands):
  Corporate /
                      Unallocated
                    
                    
                    Operating
                      Real Estate
                    
                    
                    Debt
                      Investments
                    
                    
                    TotalTotal
      revenues
                    
                    $
                    492
                    
                    
                    $
                    147,408
                    
                    
                    $
                    30,268
                    
                    
                    $
                    178,168Total
      expenses
                    
                    
                    21,210
                    
                    
                    
                    150,516
                    
                    
                    
                    30,602
                    
                    
                    
                    202,328Gain
      on extinguishment of debt
                    
                    
                    9,829
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    9,829Provision
      for income tax
                    
                    
                    201
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    201Loss
      from continuing operations
                    
                    
                    (11,090
                    )
                    
                    
                    (3,109
                    )
                    
                    
                    (333
                    )
                    
                    
                    (14,532
                    )Total
      assets
                    
                    
                    54,618
                    
                    
                    
                    1,471,987
                    
                    
                    
                    377,810
                    
                    
                    
                    1,904,415
  39
  Segment
data for the year ended December 31, 2008 are as follows (amounts in
thousands):
  Corporate /
                      Unallocated
                    
                    
                    Operating
                      Real Estate
                    
                    
                    Debt
                      Investments
                    
                    
                    TotalTotal
      revenues
                    
                    $
                    777
                    
                    
                    $
                    147,172
                    
                    
                    $
                    34,338
                    
                    
                    $
                    182,287Total
      expenses
                    
                    
                    23,457
                    
                    
                    
                    144,776
                    
                    
                    
                    39,762
                    
                    
                    
                    207,995Gain
      on extinguishment of debt
                    
                    
                    1,713
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    1,713Income
      (loss) from continuing operations
                    
                    
                    (20,967
                    )
                    
                    
                    2,396
                    
                    
                    
                    (5,424
                    )
                    
                    
                    (23,995
                    )Total
      assets
                    
                    
                    26,620
                    
                    
                    
                    1,566,405
                    
                    
                    
                    452,500
                    
                    
                    
                    2,045,525
  Comparison
of Year Ended December 31, 2010 to the Year Ended December 31, 2009
  The
following discussion compares our operating results for the year ended December
31, 2010 to the comparable period in 2009.
  Revenue.
  Total
revenue decreased $11.8 million, or 7%, to $166.4 million. The decrease was
primarily attributable to decreases in rental revenue and interest
income.
  Rental
revenue and property expense recoveries, in the aggregate, decreased $8.1
million, or 6%, to $137.8 million, primarily reflecting the vacancy of our
property in Johnston, Rhode Island during the fourth quarter of
2009.
  Interest
income decreased $3.0 million, or 10%, to $27.6 million during 2010, primarily
as a result of lower loan balances and lower interest rates on cash
balances.
  Other
revenue decreased $0.6 million, or 36%, to $1.0 million, from $1.5 million,
primarily reflecting the lease termination payment we received on the Omaha,
Nebraska properties during 2009.
  Expenses.
  Total
expenses decreased $22.9 million, or 11%, to $179.4 million. The decrease in
expenses was primarily attributable to higher investment losses in the 2009
period, and lower interest expense and depreciation expense in the 2010 period,
offset in part by higher property expenses in the 2010 period.
  Interest
expense decreased $5.4 million, or 6%, to $84.8 million, from $90.3 million. The
decrease in the 2010 period resulted primarily from $2.1 million of lower
interest expense on floating rate borrowings (resulting from lower borrowings in
the 2010 period), $1.5 million of lower interest expense on convertible debt due
to repurchases of the convertible debt, $0.8 million of lower interest expense
on property mortgages, $0.7 million of lower interest expense on the secured
term loan and $0.4 million of lower interest expense on collateralized debt
obligations due to repurchases in 2009. The Company’s average balance
outstanding and effective financing rate under its floating rate borrowings was
approximately $107 million at 3.66% during the 2010 period (average one-month
LIBOR of 0.27%), compared with approximately $157 million at 3.71% during the
2009 period (average one-month LIBOR of 0.35%). Market interest rates remained
low during 2010 but we cannot predict the level of market interest rates in the
future.
  Property
expense increased $4.3 million, or 21%, to $24.7 million, primarily reflecting
carrying costs associated with the Johnston, Rhode Island property of
approximately $1.7 million and expenses on the Omaha, Nebraska properties where
the leases are now gross and were previously net during 2009 when the property
was leased to a single tenant.  The net amount of property expenses we
incurred in 2010 (net of expense recoveries from our tenants) was $12.6 million,
compared to $9.0 million in 2009.
  We had
losses on investments of $7.9 million during 2010, compared to losses on
investments of $26.9 million in 2009. The 2010 losses reflect
other-than-temporary impairment losses primarily on one security investments
(see Note 5).  The 2009 losses reflect a $11.9 million impairment loss
on the Johnston, Rhode Island property that is now vacant (see Note 3), an
aggregate of $14.4 million of impairment losses on four assets that were sold
during 2009 (two loans, one property and one security) and one asset that was
sold during 2010 (Cott property) (see Note 6), $444 of impairment losses on a
mezzanine loan investment (see Note 4), and $133 of impairment losses on a
security investment (see Note 5).
  General
and administrative expense in 2010 was largely unchanged from 2009, as it
decreased $0.2 million, or 2%, to $10.7 million, from $10.9
million.
  40
  General
and administrative expense-stock based compensation increased $0.4 million, or
20%, to $2.5 million.  The increase was primarily a result of higher
share prices year over year, which primarily impacted the value of prior year
performance share grants that do not price until the eligible vesting
year.  As of December 31, 2010, $3.2 million of unvested shares (fair
value at the grant dates) is expected to be charged to our Consolidated
Statement of Operations ratably over the remaining vesting period (through March
2014). As of December 31, 2010, the grant date fair value for awards of 31,350
restricted shares made in 2007, 78,690 restricted shares made in 2008, 314,145
restricted shares made in 2009 and 192,900 restricted shares made in 2010, has
not yet been determined because the grant date (as defined under relevant
accounting guidance) had not yet occurred.
  Depreciation
and amortization expense on real property decreased $3.0 million, or 6%, to
$48.4 million, primarily due to the value of our in place lease on the property
in Johnston, Rhode Island being fully amortized at the scheduled lease maturity
in July 2009.
  Gain/loss
on extinguishment of debt.
  We had
$9.8 million of non-cash gains on extinguishment of debt in 2009, compared to a
loss of $0.3 in the 2010 period.  These amounts related primarily to
repurchases of our convertible senior notes (see Note 9).
  Net
(loss).
  Net
(loss) decreased $0.8 million, to $(13.1) million in
2010, from $(14.0) million in 2009, as lower loss on investments, interest
expense and depreciation and amortization expense on real property during 2010
was substantially offset by lower revenues and gain on debt extinguishment and
higher property expenses during 2010. Net (loss) allocable to common
stockholders was $(18.8) million in
2010, reflecting dividends to preferred stockholders of $5.6
million.
  Comparison
of Year Ended December 31, 2009 to the Year Ended December 31, 2008
  The
following discussion compares our operating results for the year ended December
31, 2009 to the comparable period in 2008.
  Revenue.
  Total
revenue decreased $4.1 million, or 2%, to $178.2 million. The decrease was
primarily attributable to a decrease in interest income.
  Rental
revenue and property expense recoveries, in the aggregate, was basically
unchanged, as it decreased $0.5 million, or less than one percent, to $146.0
million. While we had one tenant vacancy during 2009 (Johnston, Rhode Island
property), the impact on revenue during 2009 was modest as the tenant held over
for three months beyond the scheduled lease maturity in July and paid higher
rent during the holdover period.
  Interest
income decreased $4.4 million, or 12%, to $30.7 million during 2009, primarily
as a result of lower loan balances and lower interest rates on cash
balances.
  Other
revenue increased $0.8 million, or 100%, to $1.5 million, primarily reflecting
the lease termination payment we received on the Omaha, Nebraska properties
during 2009.
  Expenses.
  Total
expenses decreased $5.7 million, or 3%, to $202.3 million. The decrease in
expenses was primarily attributable to lower interest expense and various other
expenses in the 2009 period, offset in part by higher investment losses in the
2009 period.
  Interest
expense decreased $7.9 million, or 8%, to $90.3 million, from $98.2 million. The
decrease in the 2009 period resulted primarily from $5.0 million of lower
interest expense on floating rate borrowings (resulting from lower borrowings
and interest rates in the 2009 period), $1.6 million of lower interest expense
on convertible debt due to repurchases of the convertible debt, $0.8 million of
lower interest expense on property mortgages and $0.5 million of lower interest
expense on the secured term loan. The Company’s average balance outstanding and
effective financing rate under its floating rate borrowings was approximately
$157 million at 3.71% during the 2009 period (average one-month LIBOR of 0.35%),
compared with approximately $202 million at 5.44% during the 2008 period
(average one-month LIBOR of 2.91%). Market interest rates were low during 2009
but we cannot predict the level of market interest rates in the
future.
  Depreciation
and amortization expense on real property decreased $1.7 million, or 3%, to
$51.4 million, primarily due to the value of our in place lease on the property
in Johnston, Rhode Island being fully amortized at the scheduled lease maturity
in July 2009.
  41
  Property
expense increased $0.9 million, or 5%, to $20.4 million, reflecting increased
expenses including costs paid to one of our tenants and real estate taxes. The
net amount of property expenses we incurred in 2009 (net of expense recoveries)
was $9.0 million, compared to $8.1 million in 2008.
  We had no
loss on derivatives in 2009, compared to a $19.5 million loss on derivatives in
the 2008 period. The loss in the 2008 period relates primarily to $18.1 million
of losses we realized in November 2008 when we closed our only open hedge
position. As of December 31, 2007 and during most of 2008, we had a single open
interest rate swap, intended to manage our exposure to interest rate movements
for a planned long-term financing of assets financed on our credit agreement
with Wachovia Bank. During November 2008, we closed the swap as a result of
unprecedented credit market dislocations and associated declines in the 10-Year
Treasury and other benchmark market interest rates. The full amount of the
realized loss on closing the swap of $15.2 million, along with $2.9 million of
related losses previously deferred in Other Comprehensive Income/Loss on our
Consolidated Balance Sheet, were charged directly to our Consolidated Statement
of Operations, as the swap position no longer represented an effective cash flow
hedge under applicable accounting guidance. We currently have no open hedge
positions and did not have any open hedge positions during 2009 or
2010.
  Loss on
investments was $26.9 million in 2009, compared to $3.7 million in 2008. The
2009 losses reflect a $11.9 million impairment loss on the Johnston, Rhode
Island property that is now vacant (see Note 3), an aggregate of $14.4 million
of impairment losses on four assets that were sold during 2009 (two loans, one
property and one security) and one asset that was sold during 2010 (Cott
property) (see Note 6), $444 of impairment losses on a mezzanine loan investment
(see Note 4), and $133 of impairment losses on a security investment (see Note
5). Losses in 2008 reflect a $1.1 million write-off of the investment in
Matapeake in the fourth quarter, a $1.0 million impairment loss on securities
investments in the fourth quarter (see Note 5), a $0.7 million write-off of a
development loan in the third quarter, a $0.5 million general reserve for loan
losses in the fourth quarter (see Note 4), and a $0.4 million impairment loss on
the Cott property in the third quarter (see Note 6).
  General
and administrative expense decreased $0.8 million, or 7%, from $11.7 million to
$10.9 million, primarily reflecting higher legal expenses in the 2008 period
related to our legal actions involving the real property we own in Johnston,
Rhode Island.
  General
and administrative expense-stock based compensation increased $0.1 million. The
increase was primarily a result of an additional year of stock awards and an
increase in estimated vesting percentage in the 2009 period, offset in part by
reduced amortization expense related to the vesting of prior year awards. As of
December 31, 2009, $3.3 million of unvested shares (fair value at the grant
dates) is expected to be charged to our Consolidated Statement of Operations
ratably over the remaining vesting period (through March 2014). As of December
31, 2009, the grant date fair value for awards of 23,557 restricted shares made
in 2006, 62,700 restricted shares made in 2007, 118,035 restricted shares made
in 2008 and 418,859 restricted shares made in 2009, had not yet been determined
because the grant date (as defined under relevant accounting guidance) had not
yet occurred.
  Gain
on extinguishment of debt.
  We had
$9.8 million of non-cash gains on extinguishment of debt in 2009, compared to
$1.7 million in the 2008 period. Gains in the 2009 period related to the
repurchase of our convertible senior notes and CDO debt (see Note 9). Gains in
the 2008 period related to the repurchase of our convertible senior notes in
December 2008 (see Note 9).
  Net
(loss).
  Net
(loss) decreased to $(14.0) million in
2009, from $(23.2) million in 2008, primarily as a result of lower interest
expense in the 2009 period. Net (loss) allocable to common stockholders was
$(16.8) million in 2009, reflecting dividends to preferred stockholders of $2.8
million.
  Funds
from Operations
  Funds
from operations, or FFO, is a non-GAAP financial measure. We believe FFO is a
useful additional measure of our performance because it facilitates an
understanding of our operating performance after adjustment for real estate
depreciation, a non-cash expense which assumes that the value of real estate
assets diminishes predictably over time. In addition, we believe that FFO
provides useful information to the investment community about our financial
performance as compared to other REITs, since FFO is generally recognized as an
industry standard for measuring the operating performance of an equity REIT. FFO
does not represent cash generated from operating activities in accordance with
GAAP and is not indicative of cash available to fund cash needs. FFO should not
be considered as an alternative to net income or earnings per share determined
in accordance with GAAP as an indicator of our operating performance or as an
alternative to cash flow as a measure of liquidity. Since all companies and
analysts do not calculate FFO in a similar fashion, our calculation of FFO may
not be comparable to similarly titled measures reported by other
companies.
  We
calculate FFO in accordance with standards established by the National
Association of Real Estate Investment Trusts (“NAREIT”) which defines FFO as net
income (loss) (computed in accordance with GAAP) excluding gains (or losses)
from sales of property, plus depreciation and amortization, and after
adjustments for unconsolidated partnerships and joint ventures.
  42
  The
following table reconciles our net income (loss) allocable to common
stockholders to FFO for the years ended December 31, 2010, December 31, 2009 and
December 31, 2008.
  Year ended December 31,(in thousands, except per share amounts)
                    
                    2010
                    
                    
                    2009
                    
                    
                    2008Net
      loss allocable to common stockholders
                    
                    $
                    (18,758
                    )
                    
                    $
                    (16,811
                    )
                    
                    $
                    (26,008
                    )Add
      (deduct)Non-controlling
      interest in consolidated subsidiaries
                    
                    
                    (52
                    )
                    
                    
                    (51
                    )
                    
                    
                    (124
                    )Depreciation
      and amortization expense on real property
                    
                    
                    48,409
                    
                    
                    
                    51,410
                    
                    
                    
                    53,132Depreciation
      and amortization expense on discontinued operations
                    
                    
                    –
                    
                    
                    
                    282
                    
                    
                    
                    889Funds from operations
                    
                    $
                    29,599
                    
                    
                    $
                    34,830
                    
                    
                    $
                    27,889Weighted
      average number of common shares outstanding, diluted
                    
                    
                    56,189
                    
                    
                    
                    49,297
                    
                    
                    
                    45,526Weighted
      average number of OP units outstanding
                    
                    
                    156
                    
                    
                    
                    156
                    
                    
                    
                    230Weighted
      average number of common shares and OP units outstanding,
      diluted
                    
                    
                    56,345
                    
                    
                    
                    49,453
                    
                    
                    
                    45,756Net
      loss per common share, basic and diluted
                    
                    $
                    (0.33
                    )
                    
                    $
                    (0.34
                    )
                    
                    $
                    (0.57
                    )Funds from operations per share
                    
                    $
                    0.53
                    
                    
                    $
                    0.70
                    
                    
                    $
                    0.61
  Liquidity
and Capital Resources
  Short-Term
Liquidity.
  We define
our short-term liquidity as our ability to generate adequate amounts of cash to
meet day-to-day operating expenses and material cash commitments over the next
twelve months. Our primary sources of short-term liquidity are available cash
and cash equivalents, cash provided by operations, and a portion of the cash
proceeds from issuances of debt and equity capital. We may also use revolving
loan borrowings under our credit agreement with Wells Fargo Bank to finance,
likely on a short-term basis, a portion of our new investment
activity.  As of December 31, 2010, we had $32.7 million in available
cash and cash equivalents. As of February 17, 2011, we had $40.4 million in
available cash and cash equivalents. We believe that our sources of short-term
liquidity will be sufficient to enable us to satisfy our short-term liquidity
requirements, including the payment of our dividend.
  As a
REIT, we are required to distribute at least 90% of our taxable income to our
stockholders on an annual basis, and we intend to distribute all or
substantially all of our REIT taxable income in order to comply with the
distribution requirements of the Code and to avoid federal income tax and the
nondeductible excise tax. We declared total cash dividends of $0.245 per share
of common stock during the year ended December 31, 2010, including $0.06 per
share in each of the first, second and third quarters, and $0.065 per share in
the fourth quarter. We declared a cash dividend of $0.5078125 per share of
8.125% Series A cumulative redeemable preferred stock in each of the first,
second, third and fourth quarters of 2010. Our dividend policy is subject to
revision at the discretion of our board of directors. All distributions will be
made at the discretion of our board of directors and will depend on our cash
available for distribution, our funds from operations, our maintenance of REIT
status, market conditions and such other factors as our board of directors deems
relevant.
  While we
believe we will be able to satisfy our short-term liquidity requirements, the
following are the primary factors that we believe could have a material adverse
effect on our plans:
  ·
              payment
      defaults on our assets which we expect could be triggered primarily in the
      event of the bankruptcy of the underlying tenant or
    tenants;
  ·
              unexpected
      capital expenditures on our owned
properties;
  ·
              margin
      calls on our Wells Fargo Bank credit agreement;
  or
  ·
              margin
      calls on any future risk management
  transactions.
  Long-Term
Liquidity.
  We define
our long-term liquidity as our ability to generate adequate amounts of cash to
meet cash demands and commitments beyond the next 12 months, including balloon
payments on our debt obligations and capital expenditures on our owned
properties. Our primary sources of long-term liquidity are our cash and cash
equivalents, cash provided by operations, cash from long-term financings on our
asset investments and issuances of debt and equity capital. We may continue to
selectively sell assets to allow us to generate additional long-term liquidity.
We believe that our various sources of long-term liquidity will be sufficient to
enable us to satisfy our long-term liquidity requirements.
  43




Our
primary long-term liquidity requirement is repayment of our debt obligations. We
intend generally to manage our debt maturities by refinancing or repaying the
related debt at maturity. We expect to utilize a combination of (i) cash on
hand, (ii) cash from sales of assets which may include the collateral for the
debt, and (iii) cash from future debt or equity capital raises to fund any
liquidity needed to satisfy these obligations. These actions, however, may not
enable us to generate sufficient liquidity to satisfy our borrowings and,
therefore, we cannot provide any assurance we will be able to refinance or repay
our debt obligations as they come due. Our ability to refinance debt, sell
assets and/or raise capital on favorable terms will be highly dependent upon
prevailing market conditions. See “Item 1A—Risk Factors—Our use of debt
financing could have a material adverse effect on our financial condition.” in
this Annual Report on Form 10-K.




We have
two recourse debt obligations that are scheduled to mature over the next few
years. Our convertible senior notes can be put to us at the option of the note
holders for a repurchase price of 100% of the principal amount of the notes in
October 2012 and our credit agreement with Wells Fargo Bank is scheduled to
mature in July 2013. The convertible senior notes are unsecured obligations and
the credit agreement with Wells Fargo Bank is a secured borrowing agreement.
With respect to the convertible notes, we have through various repurchase
transactions reduced the principal amount of notes outstanding to $35.0 million
as of December 31, 2010 (from $75 million at original issuance in October 2007).
We may continue to seek to opportunistically repurchase this debt over time and
then intend to repay or refinance any remaining obligation at or prior to
maturity. With respect to the Wells Fargo Bank agreement, we entered into an
amendment and restatement of the agreement in July 2010, which, among other
things, extended the maturity date until July 2013.




While we
believe we will be successful in either refinancing or repaying these
obligations at or prior to maturity, we cannot provide any assurance we will be
able to do so. If we are unsuccessful in refinancing these obligations, we may
not have sufficient liquidity to repay the debt in full at maturity. Our failure
to do so is a default under the debt and could materially adversely affect our
financial condition and operating results in a variety of ways. For example, if
we default under the Wells Fargo Bank agreement, the bank could foreclose on the
related collateral causing us to lose some of our assets. Wells Fargo Bank and
the convertible note holders also would have general recourse against our
company if we default in our obligations to them. In addition, each of these
obligations is cross-defaulted with the other, meaning that a default under one
obligation could result in the other lender accelerating the maturity of our
obligations to them.




We have
various non-recourse mortgage debt obligations that are scheduled to mature in
the future beginning in September 2011. See the schedule of mortgage note
maturities included at Note 9 in our consolidated financial statements included
in this Form 10-K. In connection with the maturity of our mortgage debt
obligations, we intend to evaluate a variety of alternatives with respect to our
investment in the subject property, including refinancing the debt, utilizing
cash on hand and other sources of liquidity to repay the mortgage debt, and
selling the property. If we are unsuccessful with one or more of these
alternatives, we could convey the property to the lender to satisfy in full our
obligations under the non-recourse debt.




We hold
two mortgage note obligations on the Travelers Corporation property in Hartford,
Connecticut, one scheduled to mature in September 2011 and the second in October
2011, and our lease with Travelers Corporation is scheduled to mature in October
2011. The remaining rent payments from Travelers will be fully utilized to
amortize in full the principal on the note that matures in September 2011, while
the note that matures in October 2011 does not require current debt service and
is scheduled to accrete in value to $18.9 million due at maturity. We do not
expect Travelers to renew its lease at this property.  Our willingness
to re-lease the property will be dependent to a large degree on our ability to
either restructure the existing mortgage debt or secure new debt.  If we
are unsuccessful in our efforts to restructure the existing debt or secure new
debt, we could convey the property to the lender to satisfy in full our
obligations under the non-recourse mortgage debt, which would trigger an
impairment charge on the property with a fully offsetting gain on extinguishment
of debt.  The above impairment charge and gain on debt extinguishment, if
any, may not be recorded in the same financial reporting period.




Our
mortgage debt obligations are non-recourse and not cross-defaulted with our
other debt obligations, and therefore, default of any of our mortgage debt
obligations will not threaten the viability of our company, although it could
result in us losing all or some of our remaining investment in the
property.




As an
owner of commercial real estate, we will be required to make capital
expenditures to maintain and upgrade our properties. We expect the vast majority
of these expenditures will be made as the leases mature and we renew existing
leases or find new tenants to occupy the property. Any estimates we make of
expected capital expenditures are highly subjective and actual amounts we spend
may differ materially and will be impacted by a variety of factors, including
market conditions which are beyond our control. We may be required to incur
additional debt, sell assets and/or raise capital to generate the liquidity
needed to pay for capital expenditures on our properties, and our ability to do
so on favorable terms will be highly dependent upon prevailing market
conditions. Our ability to satisfy our long-term liquidity requirements could be
materially adversely affected by capital expenditures we make on our owned
properties.




Sources
of Equity Capital.




We have
implemented a dividend reinvestment and direct stock purchase plan and an “at
the market offering” program (as defined in Rule 415 of the Securities Act of
1933, as amended), each of which may be utilized by us from time to time to sell
shares of our common stock and increase liquidity. During March 2010, we
expanded our “at the market offering” program to enable us to sell shares of our
Series A preferred stock and increase liquidity. During December 2010, we
expanded our common stock “at the market offering” program to include a new
sales agent, Merrill Lynch, Pierce Fenner & Smith Incorporated. We completed
a refresh of our shelf registration statement in February 2011, and now have an
effective shelf registration statement under which we can offer an aggregate of
$500 million of common stock, preferred stock and/or senior or subordinated
debt securities from time to time.




44


In March
2007, we implemented a dividend reinvestment and direct stock purchase plan. The
plan allows interested stockholders to reinvest all or a portion of their cash
dividends in shares of our common stock and to make monthly purchases of our
common stock generally up to a maximum of $10,000 (unless a higher amount is
approved by us in our sole discretion). Shares purchased through the plan may be
either (i) newly issued by us (which may be sold at a discount of up to 5% off
of the average of the high and low sales prices on the applicable investment
date) or (ii) purchased by the plan administrator in the open market, at our
discretion. During the year ended December 31, 2010, we issued 103 shares of
common stock through the plan at a price of $5.85 per share. During the year
ended December 31, 2009, we issued 807,661 shares of common stock through the
plan at an average price of $3.60 per share. As of December 31, 2010, we have
reserved an aggregate of 6,857,740 shares of common stock for future issuance
pursuant to the dividend reinvestment and direct stock purchase plan. We issued
a small number of new shares through the plan during December 2010 and January
2011, at a two percent discount off of the market price of the common stock (as
determined under the plan). We are not currently issuing new shares through the
plan, although we reserve the right to elect to do so in our sole discretion at
any time in the future.




We have
entered into a sales agreement with Brinson Patrick Securities Corporation that
permits us to issue and sell through Brinson Patrick, from time to time, shares
of our common stock and Series A preferred stock, and Brinson Patrick agrees to
use its best efforts to sell such shares during the term of the agreement and on
the terms set forth therein. Our Board of Directors initially authorized the
sale of up to 5,000,000 shares of common stock and 1,000,000 shares of Series A
preferred stock through the program from time to time, of which 2,306,100 shares
of common stock and 4,900 shares of Series A preferred stock have been sold. We
are not obligated to sell any shares pursuant to the agreement and we may start
and stop selling shares pursuant to the program at any time in our sole
discretion. We must pay Brinson Patrick a commission of 1.5% of the gross sales
price per share sold.




We have
entered into a separate sales agreement with Merrill Lynch, Pierce Fenner &
Smith Incorporated pursuant to which we may sell, from time to time, up to
9,000,000 shares of common stock through or to Merrill Lynch, and Merrill Lynch
agrees to use its commercially reasonable efforts to sell such shares during the
term of the agreement and on the terms set forth therein. We may sell our common
stock to Merrill Lynch as principal for its own account at prices agreed upon at
the time of sale. We are not obligated to sell any shares pursuant to the
agreement and we may start and stop selling shares pursuant to the program at
any time in our sole discretion. We must pay Merrill Lynch a commission of 2.0%
of the gross sales price per share sold.




The
following table summarizes our shares of common stock and Series A preferred
stock through the Brinson Patrick and Merrill Lynch “at the market offering”
programs during the quarter and year ended December 31, 2010.




During the three months ended December 31, 2010
                
                
                During the year ended December 31, 2010Number
                    of Shares
                
                
                Average
                    Price
                
                
                Compensation
                    to Agent
                
                
                Net
                    Proceeds (1)
                
                
                Number of
                    Shares
                
                
                Average
                    Price
                
                
                Compensation
                    to Agent
                
                
                Net
                    Proceeds (1)Brinson
      Patrick – common stock
                
                
                283,100
                
                
                $
                6.11
                
                
                $
                25,953
                
                
                $
                1,704,253
                
                
                
                2,134,400
                
                
                $
                4.86
                
                
                $
                176,745
                
                
                $
                10,202,192Brinson
      Patrick – Series A preferred stock
                
                
                4,300
                
                
                $
                24.95
                
                
                $
                1,609
                
                
                $
                105,671
                
                
                
                4,900
                
                
                $
                24.96
                
                
                $
                1,835
                
                
                $
                120,473Merrill
      Lynch – common stock
                
                
                3,100
                
                
                $
                6.01
                
                
                $
                373
                
                
                $
                18,256
                
                
                
                3,100
                
                
                $
                6.01
                
                
                $
                373
                
                
                $
                18,256


(1)
            Net
      proceeds above does not include incidental third-party expenses associated
      with the at-the-market programs.




We
completed a refresh of our shelf registration statement in February 2011, and
now have an effective shelf registration statement under which we can offer an
aggregate of $500 million of common stock, preferred stock and/or senior or
subordinated debt securities from time to time, including an aggregate of
2,693,900 shares of common stock and 995,100 shares of Series A preferred stock
reserved for sale under the Brinson Patrick sales agreement, and an aggregate of
8,996,900 shares of common stock reserved for sale under the Merrill Lynch sales
agreement. We intend to continue to raise additional capital from time to time
to enable us to continue to implement our strategy. Our ability to raise capital
is influenced by market conditions, and we cannot assure you that conditions for
raising capital will be favorable for us at any time. In addition to the stock
issuances through our “at the market offering” program discussed above, we
executed the following transactions off of our shelf registration statement
during the year ended December 31, 2010.




On March
30, 2010, we issued 3,144,654 shares of our common stock to an institutional
investor for a price of $4.77 per share, or net proceeds of approximately $15
million.




On March
31, 2010, we issued 1,800,000 shares of 8.125% Series A cumulative redeemable
preferred stock in a public offering at a price of $23.06 per share, resulting
in an effective annual yield of 9.00%. We received net proceeds in the
transaction (after deducting underwriting discounts and commissions and
estimated offering expenses) of approximately $40.1 million, including $0.9
million of accrued dividends.




45


We have
now fully deployed the approximately $65.3 million of net proceeds from the
share issuances we completed in 2010, with $49.4 million used to reduce recourse
indebtedness and the remaining $15.9 million utilized to fund a portion of the
purchase price of the real property we purchased in December 2010.




Leverage.




We rely
on leverage to allow us to invest in a greater number of assets and enhance our
asset returns. Leverage also exposes us to a variety of risks which are
discussed in more detail in our most recent Annual Report on Form 10-K under the
heading “Risk Factors.”  In reviewing and analyzing our debt, we look
at a variety of financial metrics such as our leverage ratios, weighted average
and individual interest rates on the debt, weighted average and individual
maturity dates and scheduled principal amortization and balloon balances due at
maturity. We also evaluate a variety of subjective factors such as present and
expected future market conditions.




Leverage
ratios are a widely used financial measure by the real estate investment
community, especially for REITs. We measure our leverage ratios by dividing
total debt by total assets, as adjusted. We measure total assets, as adjusted,
at historical cost before depreciation and amortization on owned properties.
Therefore, our leverage ratios do not account for any fluctuations in value, up
or down, that may have occurred since we acquired our owned properties. Other
companies including other REITs may compute leverage ratios in a different
manner and, therefore, our leverage ratios may not be comparable to similarly
titled measures reported by other companies.




The
following table sets forth the computation of our overall portfolio leverage
ratio as of December 31, 2010, and December 31, 2009 (dollars in
thousands).





Dec 31, 2010
                      
                      
                      Dec 31, 2009DebtMortgages
      on real estate investments
                      
                      $
                      928,429
                      
                      
                      $
                      943,811Collateralized
      debt obligations
                      
                      
                      254,210
                      
                      
                      
                      263,310Credit
      agreement
                      
                      
                      105,345
                      
                      
                      
                      126,262Secured
      term loan
                      
                      
                      101,880
                      
                      
                      
                      114,070Convertible
      senior notes
                      
                      
                      33,926
                      
                      
                      
                      49,452Other
      long-term debt
                      
                      
                      30,930
                      
                      
                      
                      30,930Total
      Debt
                      
                      $
                      1,454,720
                      
                      
                      $
                      1,527,835AssetsTotal
      assets
                      
                      $
                      1,870,271
                      
                      
                      $
                      1,904,415Accumulated
      depreciation and amortization on owned properties
                      
                      
                      239,990
                      
                      
                      
                      190,166Intangible
      liabilities on real estate investments
                      
                      
                      (37,405
                      )
                      
                      
                      (39,591
                      )Prepaid
      expenses and deposits
                      
                      
                      (2,197
                      )
                      
                      
                      (1,267
                      )Accrued
      rental income
                      
                      
                      (39,506
                      )
                      
                      
                      (35,317
                      )Debt
      issuance costs, net
                      
                      
                      (5,999
                      )
                      
                      
                      (7,653
                      )Other
                      
                      
                      (720
                      )
                      
                      
                      (988
                      )Total
      Assets, as adjusted
                      
                      $
                      2,024,434
                      
                      
                      $
                      2,009,765Leverage
      (Total Debt/Total Assets, as adjusted)
                      
                      
                      72
                      %
                      
                      
                      76
                      %





The
following table sets forth the computation of our leverage ratios by segment as
of December 31, 2010 (dollars in thousands).




(in
      thousands)
                  
                  Mortgage
                    Debt
                  
                  
                  CDO
      Debt
                  
                  
                  Secured
      Term
                    Loan
      Debt
                  
                  
                  Credit Agreement
                    Debt
                  
                  
                  Total
      Debt
                  
                  
                  Investment (1)
                  
                  
                  LeverageOwned
      Properties
                  
                  $
                  928,429
                  
                  
                  $
                  30,521
                  
                  
                  $
                  30,498
                  
                  
                  $
                  95,610
                  
                  
                  $
                  1,085,058
                  
                  
                  $
                  1,648,892
                  
                  
                  
                  66
                  %Debt
      Investments
                  
                  
                  –
                  
                  
                  
                  223,688
                  
                  
                  
                  71,382
                  
                  
                  
                  9,735
                  
                  
                  
                  304,805
                  
                  
                  
                  356,906
                  
                  
                  
                  85
                  %





(1)
            Represents
      our carry value for financial reporting purposes before depreciation and
      amortization on owned properties. The carry value of our debt investments
      has been adjusted to exclude a $500 general loss
  reserve.




46


We expect
our leverage level to continue to decrease over time, as a result of one or more
of the following factors: scheduled principal amortization on our debt,
voluntary debt reduction including potentially through selected asset sales, and
lower or no leverage on new asset acquisitions.




Our
portfolio financing strategy is to finance our assets with long-term fixed rate
debt as soon as practicable after we invest, generally on a secured,
non-recourse basis. Through non-recourse debt, we seek to limit the overall
company exposure in the event we default on the debt to the amount we have
invested in the asset or assets financed. We seek to finance our assets with
“match-funded” or substantially “match-funded” debt, meaning that we seek to
obtain debt whose maturity matches as closely as possible the maturity of the
asset financed. Through December 31, 2010, our long-term fixed rate asset
financings have been in the form of traditional third party non-recourse first
mortgage financings (on most of our owned real properties) and two non-recourse
term financings, including a secured term loan (completed in December 2007) and
one CDO (completed in March 2005). As of December 31, 2010, we have financed on
a long-term basis an aggregate of approximately $1.77 billion of portfolio
assets with third party first mortgage debt of $928.4 million and term
financings of $356.1 million.




Long-Term
Mortgage Financings.




We have
financed most of our owned properties through traditional first mortgage
financings provided through the commercial mortgage-backed securitization
market. We also have utilized the term financings described below to add
incremental leverage on many of our owned properties.




During
the quarter ended December 31, 2010, we did not obtain any new mortgage
financings. As of December 31, 2010, we had $928.4 million of non-recourse first
mortgage debt at a weighted average coupon of 5.62% and a weighted average
effective financing rate of 5.6%.




Our
mortgage financings are all fixed rate financings. The notes typically mature
over a long-term period of approximately ten years, and debt service is payable
monthly. The notes are non-recourse to us subject to limited recourse exceptions
and are secured by a mortgage on the property and an assignment of the
underlying lease and rents on the property. The notes are often interest only
for all or a portion of the note term, and thus require a balloon payment at
maturity. As described above, we cannot provide any assurance we will be able to
refinance or repay these obligations at maturity and our ability to do so on
favorable terms will be highly dependent upon prevailing market conditions. See
“Business Environment” above and “Item 1A—Risk Factors” in this Annual Report on
Form 10-K.




Term
Financings.




We have
financed most of our loan and securities investments as well as a select number
of our owned properties through the term financings described below. As noted
above, we have also utilized term financings to add incremental leverage on our
owned properties financed with mortgage debt.




In
December 2007, we completed a $129.5 million original principal balance secured
term loan. Upon closing of the financing, we pledged approximately $163.1
million principal amount of collateral to secure our obligations under the loan.
As of December 31, 2010, we had $101.9 million outstanding under the secured
term loan. The interest coupon on the loan is fixed at 5.81% annually until the
loan matures in January 2018. Our effective financing rate on the loan is 6.0%
annually (inclusive of hedge and closing costs). The loan is non-recourse to us,
subject to limited non-recourse exceptions.




We also
completed an entirely fixed rate CDO financing in March 2005. We aggregated
approximately $300 million face amount of assets and then transferred these
assets into a wholly-owned securitization vehicle, and issued $285 million face
amount of multi-class notes and $15 million face amount of preferred equity
through the securitization vehicle. The assets serve as collateral for our
obligations under the notes. The securitization vehicle is a special purpose
entity, or SPE, with its business limited to the issuance of the notes and the
preferred equity, the acquisition of the collateral and certain other matters
related thereto. The net amount of the debt we initially issued was $268.1
million, inclusive of a $0.4 million discount to face, as we retained the three
most junior note classes aggregating a face amount of $16.5 million and the full
$15 million face amount of preferred equity. As of December 31, 2010, we had
$254.2 million outstanding under the CDO.




The CDO
notes have a stated maturity in January 2040, although the actual life of the
notes is expected to be substantially shorter. Our weighted average effective
financing rate (inclusive of original issue discount and debt issuance and hedge
costs) on our CDO is approximately 5.6%. Our CDO debt is non-recourse to us but
is secured by the collateral assets. We reduced the debt outstanding under our
CDO by repurchasing $5 million of our Class A CDO notes during the year ended
December 31, 2009.




We have
financed certain of our portfolio assets pursuant to a credit agreement we
entered into with Wells Fargo Bank in April 2008. We entered into an amendment
and restatement of the credit agreement with Wells Fargo in July 2010, which,
among other things:




·
            established
      a maximum revolving credit commitment of $140
  million;




47


·
            extended
      the maturity date of the credit agreement to July 16, 2013, from April 28,
      2011; and




·
            set
      the interest rate on our borrowings at one-month LIBOR plus 275 basis
      points (an increase from one-month LIBOR plus 250 basis points at June 30,
      2010).




Also in
connection with the July 2010 amendment and restatement, we made a $13.4 million
principal payment to the lender and agreed to repay another $10 million of
principal in four equal quarterly installments beginning on October 1, 2010, the
first two installments of which have been paid. Our outstanding borrowings under
the agreement were $105.3 million as of December 31, 2010.




The
agreement is a floating rate LIBOR based facility. Our borrowings under the
agreement are secured by a combination of first mortgage loan investments,
intercompany mortgage loans on our owned property investments, commercial
mortgage-backed securities and a first lien on our ownership interest in the
real property located in Johnston, Rhode Island. Our obligations under the
credit agreement are also fully recourse to all of our other assets and,
pursuant to the margin call provisions in the agreement, we may be obligated to
prepay a portion of the debt if Wells Fargo determines the value of our
collateral has declined, including as a result of an underlying tenant credit
rating downgrade or other adverse tenant-credit event, Wells Fargo may require
us to prepay a portion of our borrowings, provided that Wells Fargo may not
reduce the value of any of our collateral other than CMBS securities due to
general credit spread or interest rate fluctuations. As of December 31, 2010, we
had $3.3 million borrowed against collateral classified as CMBS securities by
Wells Fargo.




We may
utilize the undrawn amount of the lender’s revolving credit commitment to
finance assets approved by the lender in its sole discretion at an advance rate
of 60% of the asset’s value (as determined by the lender). We drew $15.6 million
under the credit agreement during December 2010 to fund a portion of the
purchase price for the Cooper Tire and Rubber Company asset discussed under
“Property Acquisitions” above.




We are
required to comply with the following financial covenants under the credit
agreement: minimum liquidity (basically cash and cash equivalents) of at least
$12 million, minimum consolidated tangible net worth (basically stockholders’
equity before accumulated depreciation and amortization) of at least $360
million plus 75% of the aggregate net proceeds from equity offerings or capital
contributions after July 16, 2010, maximum corporate leverage (basically total
liabilities divided by total assets before accumulated depreciation and
amortization) of 80% and minimum interest coverage (basically EBITDA, or net
income before income taxes, interest expense, depreciation and amortization,
divided by interest expense) of 105%.  As of December 31, 2010, we
were in compliance with the above financial covenants, and we do not currently
anticipate any difficulty in maintaining compliance with these covenants in
future periods.




We had
$105.3 million outstanding as of December 31, 2010 under our Wells Fargo credit
agreement, which borrowings were secured by loan investments with an aggregate
carry value of $11.2 million, intercompany mortgage loans and investments in our
CDO with an aggregate carry value of $130.2 million, CMBS investments with a
carry value of $11.1 million and a single owned property with a carry value of
$26.8 million.




We may
pursue a variety of strategies for the assets financed on the credit agreement,
which may include obtaining long-term fixed rate financing when market
conditions permit, pursuing selected asset sales, and retiring the debt on
selected assets and holding the assets unlevered. We expect credit market
conditions to impact our ability to achieve these objectives and, therefore, we
cannot provide any assurance as to the timing or our ability to do
so.




Statement
of Cash Flows




Operating
activities provided $47.7 million of cash during the year ended December 31,
2010, primarily driven by net (loss) as adjusted by various non-cash gains,
losses, income and charges of $45.7 million. Operating activities provided $56.6
million of cash during the year ended December 31, 2009, primarily driven by net
(loss) as adjusted by various non-cash gains, losses, income and charges of
$60.2 million, partially offset by increases in other assets of $4.2 million.
Operating activities provided $64.4 million of cash during the year ended
December 31, 2008, primarily driven by net (loss) before the loss on derivatives
and as adjusted by various non-cash gains, income and charges of $52.5 million
and decreases in other assets of $11.9 million.




We
recognize rental income on our owned properties on a straight line basis in
accordance with generally accepted accounting principles. As of December 31,
2010, this has resulted in us accruing $39.5 million of rental income in excess
of actual rents due under the various leases. During the year ended December 31,
2010, rents on a straight-line basis exceeded actual rents due under the leases
by $4.2 million. We expect the impact of straight-lining of rents to fluctuate
over time as contractual rents step up and actual rents due increase under the
various leases and we purchase additional properties. Certain of our owned
properties are also subject to rents which pay semi-annually, rather than
monthly, and this also impacts the quarter-to-quarter changes due to
straight-lining of rents.




48


Investing
activities used $25.1 million of cash during the year ended December 31, 2010,
which primarily resulted from purchases of real estate of $33.5 million, real
estate improvements and construction in progress of $8.1 million and leasing
commission costs of $1.2 million, partially offset by net proceeds from the sale
of owned properties of $3.4 million and principal received on loans of $11.2
million and securities of $3.3 million. Investing activities provided $70.3
million of cash during the year ended December 31, 2009, which primarily
resulted from net proceeds from the sale of loans and securities of $48.7
million, net proceeds from the sale of owned properties of $6.5 million and net
principal received on loans of $15.5 million and securities of $3.1 million.
Investing activities provided $9.5 million of cash during the year ended
December 31, 2008, which primarily resulted from principal received on loans of
$6.9 million and securities of $2.5 million.




Cash used
in financing activities during the year ended December 31, 2010 was $28.4
million, which primarily resulted from net repayments of principal on debt of
$56.6 million ($20.9 million, net on the Wells Fargo credit facility, $14.4
million, net, on property mortgages, $12.2 million on the secured term loan with
KBC Bank, and $9.1 million on the collateralized debt obligations), $17.3
million used to repurchase our convertible senior notes, and dividends and
distributions paid of $19.0 million, partially offset by net proceeds from
preferred stock issuances of $40.2 million and net proceeds from common stock
issuances of $25.1 million. Cash used in financing activities during the year
ended December 31, 2009 was $96.8 million, which primarily resulted from net
repayments of principal on debt of $84.7 million ($63.0 million on the Wells
Fargo credit agreement, $12.1 million, net, on property mortgages, and $9.6
million on the secured term loan with KBC Bank), $12.5 million used to
repurchase our convertible senior notes and collateralized debt obligations, and
dividends and distributions paid of $10.3 million, partially offset by net
proceeds from common stock issuances of $11.0 million. Cash used in financing
activities during the year ended December 31, 2008 was $99.5 million, which
primarily resulted from net repayments of principal on debt of $59.6 million
(net of $43.6 million on the Wells Fargo repurchase agreement and credit
agreement, net of $10.1 million on property mortgages and $5.8 million on the
secured term loan with KBC Bank), dividends and distributions paid of $39.3
million, and cash paid in hedging activities of $17.9 million, partially offset
by net proceeds from common stock issuances of $19.6 million.




See our
consolidated statements of cash flows in the historical consolidated financial
statements included elsewhere in this filing for a reconciliation of our cash
position for the periods described above.




Contractual
Obligations




The
following table outlines the timing of payment requirements related to our
contractual obligations as of December 31, 2010 (in thousands):




Total
                    
                    
                    Less than 1
                      year
                    
                    
                    2-3 years
                    
                    
                    4-5 years
                    
                    
                    After 5 yearsMortgages
      on real estate investments
                    
                    $
                    928,429
                    
                    
                    $
                    35,929
                    
                    
                    $
                    200,931
                    
                    
                    $
                    333,914
                    
                    
                    $
                    357,655Collateralized
      debt obligations
                    
                    
                    254,209
                    
                    
                    
                    10,266
                    
                    
                    
                    37,014
                    
                    
                    
                    206,929Credit
      agreement
                    
                    
                    105,345
                    
                    
                    
                    8,743
                    
                    
                    
                    96,602Secured
      term loan
                    
                    
                    101,880
                    
                    
                    
                    13,737
                    
                    
                    
                    28,981
                    
                    
                    
                    25,754
                    
                    
                    
                    33,408Convertible
      senior notes
                    
                    
                    33,926
                    
                    
                    
                    (596
                    )
                    
                    
                    34,522Other
      long-term debt
                    
                    
                    30,930
                    
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    30,930Operating
      leases
                    
                    
                    2,132
                    
                    
                    
                    768
                    
                    
                    
                    1,344
                    
                    
                    
                    20
                    
                    
                    
                    –Total
                    
                    $
                    1,456,851
                    
                    
                    $
                    68,847
                    
                    
                    $
                    399,394
                    
                    
                    $
                    566,617
                    
                    
                    $
                    421,993




Item
7A.        Quantitative and Qualitative
Disclosures about Market Risk.




Market
risk refers to the risk of loss from adverse changes in the level of one or more
market prices, rate indices or other market factors. We are exposed to market
risk primarily from changes in interest rates, credit spreads, tenant credit
ratings and equity prices. We may attempt to mitigate certain of these risks by
entering into hedge and other risk management transactions during the short-term
and fixed-rate financings for the long-term. We seek to obtain long-term fixed
rate financing as soon as practicable after we make an asset investment. There
can be no assurance, however, that such mitigation strategies will be completely
or even partially successful. The level of our exposure to market risk is
subject to factors beyond our control, including political risk (including
terrorism), monetary and tax policy, general economic conditions and a variety
of other associated risks.




Interest
Rate Exposure




We are
exposed to interest rate risk in various aspects of our business. The most
significant ways we can be impacted by interest rates are as follows: increases
in the level of interest rates may impact our ability to add new assets, as
spreads on assets we are targeting may compress (unless there is a corresponding
increase in asset returns). Declines in interest rates could result in increased
competition for our asset class.




49


Also, to
the extent we finance assets in our portfolio on our floating rate borrowing
facilities, our net income from these fixed rate assets will decrease as
interest rates rise (particularly LIBOR rates) and our borrowing cost increases.
Our Wells Fargo credit agreement is currently our only floating rate borrowing
facility. Low market interest rates kept our borrowing cost on the Wells Fargo
credit agreement low during 2009 and 2010 although we cannot predict the level
of market interest rates in the future. In addition, as interest rates rise, our
anticipated cost to finance these assets on a long-term fixed rate basis may
rise, causing our expected spread on these assets to be reduced. We may attempt
to mitigate these risks by entering into risk management transactions that react
in a manner that offsets our increased interest costs and by locking our
long-term financing cost as soon as practicable after we commit to an asset. As
a result of market conditions, we are not currently carrying an open interest
rate hedge to manage our exposure to interest rate fluctuations for assets for
which we may obtain long-term financing for in the future. Our decision to do so
leaves us exposed to increases in long-term interest rates for those assets and,
therefore, may make it more difficult or more costly to obtain long-term
financing. As noted above, there can be no assurance that our mitigation
strategies will be successful.




Furthermore,
shifts in the U.S. Treasury yield curve, which represents the market’s
expectations of future interest rates, would also affect the yield required on
our loans and real estate securities. Changes in the required yield would result
in a higher or lower value for these assets. If the required market yields
increase as a result of these interest rate changes, the value of our loans and
real estate securities would decline relative to U.S. Treasuries. Conversely, if
the required market yields decrease as a result of interest rate changes, the
value of our loans and real estate securities would increase relative to U.S.
Treasuries. These changes in the market value may affect the equity on our
balance sheet or, if the value is less than our cost basis and we determine the
losses to be other-than-temporary, our Statement of Operations through
impairment losses on our loans or securities. These value changes may also
affect our ability to borrow and access capital.




Credit
Spread Curve Exposure




We are
subject to credit spread risk in various aspects of our business. Credit spreads
represent the portion of the required yield on an income investment attributable
to credit quality. Credit spreads fluctuate over time as investor appetite for
credit risk changes.




Changes
in credit spreads can have many of the same impacts on us as a change in
interest rates, or principally:




·
            increases
      in credit spreads can result in spread compression on investments we
      target and, thus, a slowing of our new investment
  pace;




·
            increases
      in credit spreads can increase our anticipated cost to finance assets not
      yet financed with long-term fixed rate debt, causing our expected spread
      on these assets to be reduced; and




·
            increases
      in credit spreads can lower the value of our loans and securities as
      required yields on these assets
increase.




Tenant
Credit Rating Exposure




Substantially
all of our portfolio assets are subject to risks due to credit rating changes of
the underlying tenant or tenants. Deterioration in the underlying tenant’s
credit rating can result in a lower value for the related asset, which could
result in a reduction in the equity on our balance sheet or, if the value is
less than our cost basis and we determine the loss to be other-than-temporary,
an impairment loss on our Statement of Operations. In addition, declines in the
credit rating of a particular tenant prior to our obtaining long-term fixed rate
financing could result in a margin call by the related lender, and precipitous
declines may significantly impede or eliminate our ability to finance the asset.
We manage these risks by maintaining diversity among our credits and assessing
our aggregate exposure to ratings classes, in particular lower rated classes. We
also seek to lock or procure long-term financing on our assets as promptly as
practicable after we commit to invest.




Equity
Price Risk Exposure




We may
seek to raise capital by sale of our common stock. Our ability to do so is
dependent upon the market price of our common stock and general market
conditions. Any sales we make may be dilutive to existing
stockholders.




Fair
Value




For
certain of our financial instruments, fair values are not readily available
since there are no active trading markets as characterized by current exchanges
between willing parties. Accordingly, we derive or estimate fair values using
various valuation techniques, such as computing the present value of estimated
future cash flows using discount rates commensurate with the risks involved.
However, the determination of estimated cash flows may be subjective and
imprecise. Changes in assumptions or estimation methodologies can have a
material affect on these estimated fair values. The fair values indicated below
are indicative of the interest rate and credit spread environment as of December
31, 2010, and December 31, 2009, as the case may be, and may not take into
consideration the effects of subsequent interest rate or credit spread
fluctuations, or changes in the ratings of the underlying tenants.




50


The
following summarizes certain data regarding our interest rate sensitive
instruments as of December 31, 2010, and December 31, 2009 (dollars in
thousands):





Carrying
      Amount
                    
                    
                    Notional
      Amount
                    
                    
                    Weighted
                      Average Effective
                      Interest
      /
                      Financing
      Rate
                    
                    
                    Maturity Date
                    
                    
                    Fair
      Value12/31/2010
                    
                    
                    12/31/2009
                    
                    
                    12/31/2010
                    
                    
                    12/31/2009
                    
                    
                    12/31/2010
                    
                    
                    12/31/2010
                    
                    
                    12/31/2010
                    
                    
                    12/31/2009Assets:Loans
      held for investment (1)
                    
                    $
                    210,441
                    
                    
                    $
                    221,656
                    
                    
                    $
                    214,049
                    
                    
                    $
                    225,242
                    
                    
                    
                    6.7
                    %
                    
                    Various
                    
                    
                    $
                    223,099
                    
                    
                    $
                    219,185Commercial
      mortgage-backed securities (2)
                    
                    
                    145,965
                    
                    
                    
                    153,056
                    
                    
                    
                    189,187
                    
                    
                    
                    191,876
                    
                    
                    
                    8.0
                    %
                    
                    
                    2012-2028
                    
                    
                    
                    127,164
                    
                    
                    
                    113,306Structuring
      fees receivable (2)
                    
                    
                    326
                    
                    
                    
                    1,094
                    
                    
                    
                    N/A
                    
                    
                    
                    N/A
                    
                    
                    
                    8.9
                    %
                    
                    
                    2010-2020
                    
                    
                    
                    326
                    
                    
                    
                    1,094LiabilitiesMortgages
      on real estate investments (4)
                    
                    $
                    928,429
                    
                    
                    $
                    943,811
                    
                    
                    $
                    925,264
                    
                    
                    $
                    939,616
                    
                    
                    
                    5.6
                    %
                    
                    
                    2011-2022
                    
                    
                    $
                    979,570
                    
                    
                    $
                    902,408Collateralized
      debt obligations (4)
                    
                    
                    254,210
                    
                    
                    
                    263,310
                    
                    
                    
                    254,361
                    
                    
                    
                    263,500
                    
                    
                    
                    5.6
                    %
                    
                    2015
                    
                    
                    
                    220,907
                    
                    
                    
                    150,114Credit
      agreement (3)
                    
                    
                    105,345
                    
                    
                    
                    126,262
                    
                    
                    
                    105,345
                    
                    
                    
                    126,262
                    
                    
                    
                    3.3
                    %
                    
                    2013
                    
                    
                    
                    105,345
                    
                    
                    
                    126,262Secured
      term loan (4)
                    
                    
                    101,880
                    
                    
                    
                    114,070
                    
                    
                    
                    101,880
                    
                    
                    
                    114,070
                    
                    
                    
                    6.0
                    %
                    
                    2018
                    
                    
                    
                    95,145
                    
                    
                    
                    98,641Convertible
      senior notes (5)
                    
                    
                    33,926
                    
                    
                    
                    49,452
                    
                    
                    
                    35,009
                    
                    
                    
                    52,444
                    
                    
                    
                    10.1
                    %
                    
                    2012
                    
                    
                    
                    35,004
                    
                    
                    
                    46,956Other
      long-term debt (6)
                    
                    
                    30,930
                    
                    
                    
                    30,930
                    
                    
                    
                    30,930
                    
                    
                    
                    30,930
                    
                    
                    
                    8.3
                    %
                    
                    2016
                    
                    
                    
                    28,095
                    
                    
                    
                    21,925







(1)
            This
      portfolio of loans bears interest at fixed rates. We have estimated the
      fair value of this portfolio of loans with a discounted cash flow
      analysis, utilizing scheduled cash flows and discount rates estimated by
      management to approximate those that a willing buyer and seller might use.
      The maturity dates for the loans range from 2011 through
    2033.




(2)
            Commercial
      mortgage-backed securities represent subordinate interests in
      securitizations, as well as pass-through certificates representing our pro
      rata investments in a pool of mortgage loans (collectively, CMBS).
      Structuring fees receivable represent cash flows receivable by us from the
      sale of loans to third-party purchasers. The notional values for the CMBS
      are shown at their respective face amounts. The fair values of CMBS
      reflect management’s best estimate and require a considerable amount of
      judgment and assumptions. Management evaluates a variety of inputs and
      then estimates fair value based on those inputs. The primary inputs
      evaluated by management are broker quotations, collateral values,
      subordination levels, and liquidity of the security. Fair value for the
      structuring fees receivable is shown at our amortized cost for these
      items. For the CMBS, we expect to receive monthly interest coupon
      payments, and contractual principal payments as
  scheduled.




(3)
            Our
      credit agreement bears interest at floating rates, and we believe that for
      similar financial instruments with comparable credit risks, the effective
      rates approximate market value. Accordingly, the carrying amounts
      outstanding are believed to approximate fair
  value.




(4)
            We
      estimate the fair value of mortgage notes on real estate investments,
      collateralized debt obligations and the secured term loan using a
      discounted cash flow analysis, based on our estimates of market interest
      rates. For mortgages where we have an early payment right, we also
      consider the prepayment amount to evaluate the fair value. The maturity
      date of the collateralized debt obligations of January 2015 reflects the
      first date the auction call mechanism in the notes is triggered and is
      used to compute the related fair value and weighted average effective
      interest rate.




(5)
            The
      carry value and effective financing rate on the convertible senior notes
      reflect the impact of the accounting guidance applicable to the notes as
      of January 1, 2009. See Note 9 in our consolidated financial statements
      included in this Form 10-K. We estimate the fair value of our convertible
      senior notes using a discounted cash flow analysis, based upon
      management’s estimates of market interest rates, and indications of market
      yields, where available. The maturity date of our convertible senior notes
      reflects our expected maturity date in October 2012 when the note
      investors have the right to require us to repurchase their notes for cash
      and is used to compute the related fair value and weighted average
      effective interest rate.




(6)
            We
      estimate the fair value of our other long-term debt using a discounted
      cash flow analysis, based upon management’s estimates of market interest
      rates. The maturity date of our other long-term debt reflects our expected
      maturity date in January 2016 and is used to compute the related fair
      value and weighted average effective interest
  rate.




51


Scheduled
maturities of interest rate sensitive instruments as of December 31, 2010 are as
follows:





Expected
      Maturity Dates2011
                  
                  
                  2012
                  
                  
                  2013
                  
                  
                  2014
                  
                  
                  2015
                  
                  
                  Thereafter(in
      thousands, notional amounts where appropriate,
                    otherwise
      carrying amounts)Loans held for
      investment
                  
                  $
                  13,721
                  
                  
                  $
                  12,884
                  
                  
                  $
                  10,034
                  
                  
                  $
                  7,520
                  
                  
                  $
                  7,645
                  
                  
                  $
                  162,245Commercial
      mortgage-backed securities
                  
                  
                  3,231
                  
                  
                  
                  26,703
                  
                  
                  
                  4,381
                  
                  
                  
                  7,114
                  
                  
                  
                  7,756
                  
                  
                  
                  140,002Structuring
      fees receivable
                  
                  
                  72
                  
                  
                  
                  79
                  
                  
                  
                  86
                  
                  
                  
                  49
                  
                  
                  
                  7
                  
                  
                  
                  33Mortgages
      on real estate investments
                  
                  
                  35,929
                  
                  
                  
                  131,486
                  
                  
                  
                  69,445
                  
                  
                  
                  67,678
                  
                  
                  
                  266,235
                  
                  
                  
                  357,656Collateralized
      debt obligations
                  
                  
                  10,266
                  
                  
                  
                  10,949
                  
                  
                  
                  26,065
                  
                  
                  
                  19,221
                  
                  
                  
                  187,709Credit
      agreement
                  
                  
                  8,743
                  
                  
                  
                  7,976
                  
                  
                  
                  88,626Secured
      term loan
                  
                  
                  13,737
                  
                  
                  
                  15,380
                  
                  
                  
                  13,602
                  
                  
                  
                  12,349
                  
                  
                  
                  13,405
                  
                  
                  
                  33,407Convertible
      senior notes
                  
                  
                  (596
                  )
                  
                  
                  34,522Other
      long-term debt
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  30,930




The above
table includes regularly scheduled principal amortization and balloon payments
due to maturity on our debt obligations. See Note 9 in our consolidated
financial statements included in this Form 10-K. Negative amounts with respect
to our convertible senior notes represent amortization of the debt discount
related to the liability component of the instrument as measured in accordance
with the accounting guidance applicable to the notes. See Note 9 in our
consolidated financial statements included in this Form 10-K.




The
expected maturity dates shown for loan investments, commercial mortgage-backed
securities and structuring fees receivable are based on the contractual terms of
the underlying assets. These assets, based on our current operating strategy,
are held for investment. The material assumptions used to determine fair value
are included in footnotes 1 through 6 in the immediately preceding
table.




52


MANAGEMENT’S
ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING




Management
of CapLease, Inc. (the “Company”) is responsible for establishing and
maintaining adequate internal control over financial reporting. Internal control
over financial reporting is defined in Rule 13a-15(f) and 15d-15(f) under the
Securities Exchange Act of 1934, as amended, as a process designed by, or under
the supervision of, the Company’s principal executive and principal financial
officers, and effected by the Company’s board of directors, management and other
personnel, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with accounting principles generally accepted in the
United States and includes those policies and procedures that:




·
            pertain
      to the maintenance of records that in reasonable detail accurately and
      fairly reflect the transactions and dispositions of assets of the
      Company;




·
            provide
      reasonable assurance that transactions are recorded as necessary to permit
      preparation of financial statements in accordance with accounting
      principles generally accepted in the United States, and that receipts and
      expenditures of the Company are being made only in accordance with
      authorizations of management and directors of the Company;
    and




·
            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 risks that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.




Management
assessed the effectiveness of the Company’s internal control over financial
reporting as of December 31, 2010. In making the assessment, management used the
criteria set forth by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) in Internal Control—Integrated Framework.




Based on
this assessment, management concluded that, as of December 31, 2010, the
Company’s internal control over financial reporting is designed and operating
effectively.




53




Item
8.      Financial Statements and Supplementary
Data.


Index to
Financial Statements
 and
Financial Statement Schedules
 
 PageReferenceReport
      of Independent Registered Public Accounting Firm
                      55Consolidated
      Balance Sheets as of December 31, 2010 and 2009
                      56Consolidated
      Statements of Operations for the years ended December 31, 2010, 2009 and
      2008
                      57Consolidated
      Statements of Changes in Equity for the yearsended
      December 31, 2010, 2009 and 2008
                      58Consolidated
      Statements of Cash Flows for the years ended December 31, 2010, 2009 and
      2008
                      59Notes
      to Consolidated Financial Statements
                      61Schedule
      III – Schedule of Real Estate and Accumulated Depreciation at December 31,
      2010
                      92Schedule
      IV – Schedule of Loans Held for Investment at December 31,
      2010
                      95
  54
  REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 To the
Board of Directors and Stockholders
 CapLease,
Inc.
 
 We have
audited the accompanying consolidated balance sheets of CapLease, Inc. and
subsidiaries as of December 31, 2010 and 2009, and the related consolidated
statements of operations, changes in equity, and cash flows for each of the
three years in the period ended December 31, 2010. Our audits also included the
financial statement schedules of CapLease, Inc. listed in Item 15(a). We also
have audited CapLease, Inc.’s internal control over financial reporting as of
December 31, 2010, based on criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. CapLease, Inc.'s management is responsible for these financial
statements and financial statement schedules, 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 these financial statements and an
opinion on the Company's internal control over financial reporting 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 audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement and whether effective
internal control over financial reporting was maintained in all material
respects. Our audits of the financial statements included examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
Our audit of internal control over financial reporting included obtaining an
understanding of internal control over financial reporting, assessing the risk
that a material weakness exists, and testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk. Our
audits also included performing such other procedures as we considered necessary
in the circumstances. We believe that our audits provide a reasonable basis
for our opinions.
 
 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 (a) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (b)
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 (c) 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, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of CapLease, Inc. and
subsidiaries as of December 31, 2010 and 2009, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2010, in conformity with accounting principles generally accepted
in the United States of America. Also, in our opinion, the related financial
statement schedules, when considered in relation to the basic consolidated
financial statements taken as a whole, present fairly the information set forth
therein. Also in our opinion, CapLease, Inc. maintained, in all material
respects, effective internal control over financial reporting as of December 31,
2010, based on criteria established in Internal Control—Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway
Commission.
 
 /s/
McGladrey & Pullen, LLP
 New York,
New York
 February
18, 2011
  55
  CapLease,
Inc. and Subsidiaries
 Consolidated Balance Sheets
  December 31,(Amounts in thousands, except share and per share amounts)
                            
                            2010
                            
                            
                            2009AssetsReal
      estate investments, net
                            
                            $
                            1,398,399
                            
                            
                            $
                            1,408,819Loans
      held for investment, net
                            
                            
                            210,040
                            
                            
                            
                            221,211Commercial
      mortgage-backed securities
                            
                            
                            145,965
                            
                            
                            
                            153,056Cash
      and cash equivalents
                            
                            
                            32,742
                            
                            
                            
                            38,546Asset
      held for sale
                            
                            
                            –
                            
                            
                            
                            3,410Structuring
      fees receivable
                            
                            
                            326
                            
                            
                            
                            1,094Other
      assets
                            
                            
                            82,799
                            
                            
                            
                            78,279Total
      Assets
                            
                            $
                            1,870,271
                            
                            
                            $
                            1,904,415Liabilities
      and Stockholders' EquityMortgages
      on real estate investments
                            
                            $
                            928,429
                            
                            
                            $
                            943,811Collateralized
      debt obligations
                            
                            
                            254,210
                            
                            
                            
                            263,310Credit
      agreement
                            
                            
                            105,345
                            
                            
                            
                            126,262Secured
      term loan
                            
                            
                            101,880
                            
                            
                            
                            114,070Convertible
      senior notes
                            
                            
                            33,926
                            
                            
                            
                            49,452Other
      long-term debt
                            
                            
                            30,930
                            
                            
                            
                            30,930Total
      debt obligations
                            
                            
                            1,454,720
                            
                            
                            
                            1,527,835Intangible
      liabilities on real estate investments
                            
                            
                            37,405
                            
                            
                            
                            39,591Accounts
      payable, accrued expenses and other liabilities
                            
                            
                            21,134
                            
                            
                            
                            18,700Dividends
      and distributions payable
                            
                            
                            5,373
                            
                            
                            
                            3,822Total
      Liabilities
                            
                            
                            1,518,632
                            
                            
                            
                            1,589,948Commitments
      and contingenciesStockholders'
      equity:Preferred
      stock, $0.01 par value, 100,000,000 shares authorized, Series A cumulative
      redeemable preferred, liquidation preference $25.00 per share, 3,204,900
      and 1,400,000 shares issued and outstanding, respectively
                            
                            
                            73,880
                            
                            
                            
                            33,657Common
      stock, $0.01 par value, 500,000,000 shares authorized, 57,471,268 and
      51,709,511 shares issued and outstanding, respectively
                            
                            
                            576
                            
                            
                            
                            517Additional
      paid in capital
                            
                            
                            296,232
                            
                            
                            
                            303,368Accumulated
      other comprehensive loss
                            
                            
                            (20,216
                            )
                            
                            
                            (24,332
                            )Total
      Stockholders' Equity
                            
                            
                            350,472
                            
                            
                            
                            313,210Non-controlling
      interest in consolidated subsidiaries
                            
                            
                            1,167
                            
                            
                            
                            1,257Total
      Equity
                            
                            
                            351,639
                            
                            
                            
                            314,467Total
      Liabilities and Equity
                            
                            $
                            1,870,271
                            
                            
                            $
                            1,904,415
  See notes
to consolidated financial statements.
  56
  CapLease,
Inc. and Subsidiaries
 Consolidated
Statements of Operations
  Year ended December 31,(Amounts in thousands, except per share amounts)
                                  
                                  2010
                                  
                                  
                                  2009
                                  
                                  
                                  2008Revenues:Rental
      revenue
                                  
                                  $
                                  125,662
                                  
                                  
                                  $
                                  134,496
                                  
                                  
                                  $
                                  135,026Interest
      income from loans and securities
                                  
                                  
                                  27,620
                                  
                                  
                                  
                                  30,667
                                  
                                  
                                  
                                  35,040Property
      expense recoveries
                                  
                                  
                                  12,159
                                  
                                  
                                  
                                  11,473
                                  
                                  
                                  
                                  11,457Other
      revenue
                                  
                                  
                                  974
                                  
                                  
                                  
                                  1,532
                                  
                                  
                                  
                                  764Total
      revenues
                                  
                                  
                                  166,415
                                  
                                  
                                  
                                  178,168
                                  
                                  
                                  
                                  182,287Expenses:Interest
      expense
                                  
                                  
                                  84,850
                                  
                                  
                                  
                                  90,270
                                  
                                  
                                  
                                  98,217Property
      expenses
                                  
                                  
                                  24,715
                                  
                                  
                                  
                                  20,442
                                  
                                  
                                  
                                  19,526Loss
      on derivatives
                                  
                                  
                                  –
                                  
                                  
                                  
                                  –
                                  
                                  
                                  
                                  19,496Loss
      on investments
                                  
                                  
                                  7,949
                                  
                                  
                                  
                                  26,885
                                  
                                  
                                  
                                  3,663General
      and administrative expenses
                                  
                                  
                                  10,659
                                  
                                  
                                  
                                  10,894
                                  
                                  
                                  
                                  11,669General
      and administrative expenses-stock based compensation
                                  
                                  
                                  2,541
                                  
                                  
                                  
                                  2,118
                                  
                                  
                                  
                                  1,978Depreciation
      and amortization expense on real property
                                  
                                  
                                  48,409
                                  
                                  
                                  
                                  51,410
                                  
                                  
                                  
                                  53,132Loan
      processing expenses
                                  
                                  
                                  268
                                  
                                  
                                  
                                  309
                                  
                                  
                                  
                                  314Total
      expenses
                                  
                                  
                                  179,391
                                  
                                  
                                  
                                  202,328
                                  
                                  
                                  
                                  207,995(Loss)
      gain on extinguishment of debt
                                  
                                  
                                  (293
                                  )
                                  
                                  
                                  9,829
                                  
                                  
                                  
                                  1,713Provision
      for income taxes
                                  
                                  
                                  –
                                  
                                  
                                  
                                  (201
                                  )
                                  
                                  
                                  –Loss
      from continuing operations
                                  
                                  
                                  (13,269
                                  )
                                  
                                  
                                  (14,532
                                  )
                                  
                                  
                                  (23,995
                                  )Income
      from discontinued operations
                                  
                                  
                                  77
                                  
                                  
                                  
                                  514
                                  
                                  
                                  
                                  707Net
      loss before non-controlling interest in consolidated
      subsidiaries
                                  
                                  
                                  (13,192
                                  )
                                  
                                  
                                  (14,018
                                  )
                                  
                                  
                                  (23,288
                                  )Non-controlling
      interest in consolidated subsidiaries
                                  
                                  
                                  52
                                  
                                  
                                  
                                  51
                                  
                                  
                                  
                                  124Net
      loss
                                  
                                  
                                  (13,140
                                  )
                                  
                                  
                                  (13,967
                                  )
                                  
                                  
                                  (23,164
                                  )Dividends
      allocable to preferred shares
                                  
                                  
                                  (5,618
                                  )
                                  
                                  
                                  (2,844
                                  )
                                  
                                  
                                  (2,844
                                  )Net
      loss allocable to common stockholders
                                  
                                  $
                                  (18,758
                                  )
                                  
                                  $
                                  (16,811
                                  )
                                  
                                  $
                                  (26,008
                                  )Earnings
      per share:Net
      loss per common share, basic and diluted
                                  
                                  $
                                  (0.33
                                  )
                                  
                                  $
                                  (0.34
                                  )
                                  
                                  $
                                  (0.57
                                  )Weighted
      average number of common shares outstanding, basic and
    diluted
                                  
                                  
                                  56,189
                                  
                                  
                                  
                                  49,297
                                  
                                  
                                  
                                  45,526Dividends
      declared per common share
                                  
                                  $
                                  0.25
                                  
                                  
                                  $
                                  0.21
                                  
                                  
                                  $
                                  0.60Dividends
      declared per preferred share
                                  
                                  $
                                  2.03
                                  
                                  
                                  $
                                  2.03
                                  
                                  
                                  $
                                  2.03
  See notes
to consolidated financial statements.
  57
  CapLease,
Inc. and Subsidiaries
 Consolidated
Statements of Changes in Equity
  Stockholders' Equity(Amounts in thousands)
                          
                          Preferred
                            Stock
                          
                          
                          Common
                            Stock
                            at Par
                          
                          
                          Additional
                            Paid-In
                            Capital
                          
                          
                          Accumulated
                            Other
                            Comprehensive
                            Income
                            (Loss)
                          
                          
                          Non-controlling
                            Interest
                          
                          
                          Total
                            EquityBalance
      at December 31, 2007
                          
                          $
                          33,657
                          
                          
                          $
                          444
                          
                          
                          $
                          348,359
                          
                          
                          $
                          (26,020
                          )
                          
                          $
                          2,616
                          
                          
                          $
                          359,056Incentive
      stock plan compensation expense
                          
                          
                          –
                          
                          
                          
                          –
                          
                          
                          
                          1,978
                          
                          
                          
                          –
                          
                          
                          
                          –
                          
                          
                          
                          1,978Incentive
      stock plan grants issued and forfeited
                          
                          
                          –
                          
                          
                          
                          4
                          
                          
                          
                          (4
                          )
                          
                          
                          –
                          
                          
                          
                          –
                          
                          
                          
                          –Net
      loss
                          
                          
                          –
                          
                          
                          
                          –
                          
                          
                          
                          (23,164
                          )
                          
                          
                          –
                          
                          
                          
                          –
                          
                          
                          
                          (23,164
                          )Non-controlling
      interest in consolidated subsidiaries
                          
                          
                          –
                          
                          
                          
                          –
                          
                          
                          
                          –
                          
                          
                          
                          –
                          
                          
                          
                          (124
                          )
                          
                          
                          (124
                          )Issuance
      of common stock
                          
                          
                          –
                          
                          
                          
                          25
                          
                          
                          
                          19,624
                          
                          
                          
                          –
                          
                          
                          
                          –
                          
                          
                          
                          19,649Operating
      partnership units redeemed for common stock
                          
                          
                          –
                          
                          
                          
                          1
                          
                          
                          
                          1,013
                          
                          
                          
                          –
                          
                          
                          
                          (1,014
                          )
                          
                          
                          –Dividends
      declared - preferred
                          
                          
                          –
                          
                          
                          
                          –
                          
                          
                          
                          (2,844
                          )
                          
                          
                          –
                          
                          
                          
                          –
                          
                          
                          
                          (2,844
                          )Dividends
      declared - common
                          
                          
                          –
                          
                          
                          
                          –
                          
                          
                          
                          (27,397
                          )
                          
                          
                          –
                          
                          
                          
                          –
                          
                          
                          
                          (27,397
                          )Distributions
      declared-operating partnership units
                          
                          
                          –
                          
                          
                          
                          –
                          
                          
                          
                          –
                          
                          
                          
                          –
                          
                          
                          
                          (137
                          )
                          
                          
                          (137
                          )Amortization
      of losses on securities previously classified as available for
      sale
                          
                          
                          –
                          
                          
                          
                          –
                          
                          
                          
                          –
                          
                          
                          
                          505
                          
                          
                          
                          
                          
                          
                          
                          505Increase
      (decrease) in fair value of securities available for sale
                          
                          
                          –
                          
                          
                          
                          –
                          
                          
                          
                          –
                          
                          
                          
                          (9,398
                          )
                          
                          
                          –
                          
                          
                          
                          (9,398
                          )Increase
      (decrease) in fair value of derivatives
                          
                          
                          –
                          
                          
                          
                          –
                          
                          
                          
                          –
                          
                          
                          
                          4,522
                          
                          
                          
                          –
                          
                          
                          
                          4,522Reclassification
      of derivative items into earnings
                          
                          
                          –
                          
                          
                          
                          –
                          
                          
                          
                          –
                          
                          
                          
                          20,126
                          
                          
                          
                          –
                          
                          
                          
                          20,126Realized
      gain (loss) on derivatives
                          
                          
                          –
                          
                          
                          
                          –
                          
                          
                          
                          –
                          
                          
                          
                          (17,853
                          )
                          
                          
                          –
                          
                          
                          
                          (17,853
                          )Balance
      at December 31, 2008
                          
                          
                          33,657
                          
                          
                          
                          474
                          
                          
                          
                          317,565
                          
                          
                          
                          (28,118
                          )
                          
                          
                          1,341
                          
                          
                          
                          324,919Incentive
      stock plan compensation expense
                          
                          
                          –
                          
                          
                          
                          –
                          
                          
                          
                          2,118
                          
                          
                          
                          –
                          
                          
                          
                          –
                          
                          
                          
                          2,118Incentive
      stock plan grants issued and forfeited
                          
                          
                          –
                          
                          
                          
                          11
                          
                          
                          
                          (11
                          )
                          
                          
                          –
                          
                          
                          
                          –
                          
                          
                          
                          –Net
      loss
                          
                          
                          –
                          
                          
                          
                          –
                          
                          
                          
                          (13,967
                          )
                          
                          
                          –
                          
                          
                          
                          –
                          
                          
                          
                          (13,967
                          )Non-controlling
      interest in consolidated subsidiaries
                          
                          
                          –
                          
                          
                          
                          –
                          
                          
                          
                          –
                          
                          
                          
                          –
                          
                          
                          
                          (51
                          )
                          
                          
                          (51
                          )Issuance
      of common stock
                          
                          
                          –
                          
                          
                          
                          32
                          
                          
                          
                          11,014
                          
                          
                          
                          –
                          
                          
                          
                          –
                          
                          
                          
                          11,046Dividends
      declared-preferred
                          
                          
                          –
                          
                          
                          
                          –
                          
                          
                          
                          (2,844
                          )
                          
                          
                          –
                          
                          
                          
                          –
                          
                          
                          
                          (2,844
                          )Dividends
      declared-common
                          
                          
                          –
                          
                          
                          
                          –
                          
                          
                          
                          (10,507
                          )
                          
                          
                          –
                          
                          
                          
                          –
                          
                          
                          
                          (10,507
                          )Distributions
      declared-operating partnership units
                          
                          
                          –
                          
                          
                          
                          –
                          
                          
                          
                          –
                          
                          
                          
                          –
                          
                          
                          
                          (33
                          )
                          
                          
                          (33
                          )Amortization
      of losses on securities previously classified as available for
      sale
                          
                          
                          –
                          
                          
                          
                          –
                          
                          
                          
                          –
                          
                          
                          
                          562
                          
                          
                          
                          –
                          
                          
                          
                          562Increase
      (decrease) in fair value of securities available for sale
                          
                          
                          –
                          
                          
                          
                          –
                          
                          
                          
                          –
                          
                          
                          
                          2,463
                          
                          
                          
                          –
                          
                          
                          
                          2,463Reclassification
      of derivative items into earnings
                          
                          
                          –
                          
                          
                          
                          –
                          
                          
                          
                          –
                          
                          
                          
                          761
                          
                          
                          
                          –
                          
                          
                          
                          761Balance
      at December 31, 2009
                          
                          
                          33,657
                          
                          
                          
                          517
                          
                          
                          
                          303,368
                          
                          
                          
                          (24,332
                          )
                          
                          
                          1,257
                          
                          
                          
                          314,467Incentive
      stock plan compensation expense
                          
                          
                          –
                          
                          
                          
                          –
                          
                          
                          
                          2,541
                          
                          
                          
                          –
                          
                          
                          
                          –
                          
                          
                          
                          2,541Incentive
      stock plan grants issued and forfeited
                          
                          
                          –
                          
                          
                          
                          5
                          
                          
                          
                          (5
                          )
                          
                          
                          –
                          
                          
                          
                          –
                          
                          
                          
                          –Net
      loss
                          
                          
                          –
                          
                          
                          
                          –
                          
                          
                          
                          (13,140
                          )
                          
                          
                          –
                          
                          
                          
                          –
                          
                          
                          
                          (13,140
                          )Non-controlling
      interest in consolidated subsidiaries
                          
                          
                          –
                          
                          
                          
                          –
                          
                          
                          
                          –
                          
                          
                          
                          –
                          
                          
                          
                          (52
                          )
                          
                          
                          (52
                          )Issuance
      of common stock
                          
                          
                          –
                          
                          
                          
                          54
                          
                          
                          
                          25,048
                          
                          
                          
                          –
                          
                          
                          
                          –
                          
                          
                          
                          25,102Issuance
      of preferred stock
                          
                          
                          40,223
                          
                          
                          
                          –
                          
                          
                          
                          –
                          
                          
                          
                          –
                          
                          
                          
                          
                          
                          
                          
                          40,223Repurchase
      of convertible senior notes-equity component
                          
                          
                          –
                          
                          
                          
                          –
                          
                          
                          
                          (1,050
                          )
                          
                          
                          –
                          
                          
                          
                          –
                          
                          
                          
                          (1,050
                          )Dividends
      declared-preferred
                          
                          
                          –
                          
                          
                          
                          –
                          
                          
                          
                          (6,501
                          )
                          
                          
                          –
                          
                          
                          
                          –
                          
                          
                          
                          (6,501
                          )Dividends
      declared-common
                          
                          
                          –
                          
                          
                          
                          –
                          
                          
                          
                          (14,029
                          )
                          
                          
                          –
                          
                          
                          
                          –
                          
                          
                          
                          (14,029
                          )Distributions
      declared-operating partnership units
                          
                          
                          –
                          
                          
                          
                          –
                          
                          
                          
                          –
                          
                          
                          
                          –
                          
                          
                          
                          (38
                          )
                          
                          
                          (38
                          )Amortization
      of losses on securities previously classified as available for
      sale
                          
                          
                          –
                          
                          
                          
                          –
                          
                          
                          
                          –
                          
                          
                          
                          1,765
                          
                          
                          
                          –
                          
                          
                          
                          1,765Increase
      (decrease) in fair value of securities available for sale
                          
                          
                          –
                          
                          
                          
                          –
                          
                          
                          
                          –
                          
                          
                          
                          1,759
                          
                          
                          
                          –
                          
                          
                          
                          1,759Reclassification
      of derivative items into earnings
                          
                          
                          –
                          
                          
                          
                          –
                          
                          
                          
                          –
                          
                          
                          
                          592
                          
                          
                          
                          –
                          
                          
                          
                          592Balance
      at December 31, 2010
                          
                          $
                          73,880
                          
                          
                          $
                          576
                          
                          
                          $
                          296,232
                          
                          
                          $
                          (20,216
                          )
                          
                          $
                          1,167
                          
                          
                          $
                          351,639
  See notes
to consolidated financial statements.
  58
  CapLease,
Inc. and Subsidiaries
 Consolidated
Statements of Cash Flows
  Year ended December 31,(Amounts in thousands)
                      
                      2010
                      
                      
                      2009
                      
                      
                      2008Operating
      activitiesNet
      loss
                      
                      $
                      (13,140
                      )
                      
                      $
                      (13,967
                      )
                      
                      $
                      (23,164
                      )Adjustments
      to reconcile net loss to cash provided by operating
      activities:Depreciation
      and amortization
                      
                      
                      48,465
                      
                      
                      
                      51,936
                      
                      
                      
                      54,349Stock
      based compensation
                      
                      
                      2,541
                      
                      
                      
                      2,118
                      
                      
                      
                      1,978Amortization
      of above and below market leases
                      
                      
                      1,663
                      
                      
                      
                      1,344
                      
                      
                      
                      1,436Gain
      attributable to non-controlling interest in consolidated
      subsidiaries
                      
                      
                      (52
                      )
                      
                      
                      (51
                      )
                      
                      
                      (124
                      )Loss
      (gain) on extinguishment of debt
                      
                      
                      293
                      
                      
                      
                      (9,829
                      )
                      
                      
                      (1,713
                      )Loss
      on investments
                      
                      
                      7,949
                      
                      
                      
                      26,885
                      
                      
                      
                      3,663Loss
      on derivatives
                      
                      
                      –
                      
                      
                      
                      –
                      
                      
                      
                      19,496Straight-lining
      of rents
                      
                      
                      (4,189
                      )
                      
                      
                      (1,377
                      )
                      
                      
                      (6,145
                      )Amortization
      of discounts/premiums, and origination fees/costs, net
                      
                      
                      (625
                      )
                      
                      
                      (495
                      )
                      
                      
                      (376
                      )Amortization
      of debt issuance costs, leasing commissions and fair market value of debt
      issued or assumed
                      
                      
                      2,785
                      
                      
                      
                      3,603
                      
                      
                      
                      3,069Changes
      in operating assets and liabilities:Structuring
      fees receivable
                      
                      
                      767
                      
                      
                      
                      770
                      
                      
                      
                      712Other
      assets
                      
                      
                      (1,203
                      )
                      
                      
                      (4,216
                      )
                      
                      
                      11,928Accounts
      payable, accrued expenses and other liabilities
                      
                      
                      2,433
                      
                      
                      
                      (59
                      )
                      
                      
                      (258
                      )Deposits
      and escrows
                      
                      
                      2
                      
                      
                      
                      (48
                      )
                      
                      
                      (492
                      )Net cash provided by operating
      activities
                      
                      
                      47,689
                      
                      
                      
                      56,614
                      
                      
                      
                      64,359Investing
      activitiesPurchases
      of real estate investments
                      
                      
                      (33,513
                      )
                      
                      
                      –
                      
                      
                      
                      –Real
      estate improvements, additions, rebates and construction in
      progress
                      
                      
                      (8,077
                      )
                      
                      
                      (1,389
                      )
                      
                      
                      224Proceeds
      from sale of real estate investments
                      
                      
                      3,410
                      
                      
                      
                      6,544
                      
                      
                      
                      –Leasing
      commission costs
                      
                      
                      (1,298
                      )
                      
                      
                      (794
                      )
                      
                      
                      –Proceeds
      from sale of loans
                      
                      
                      –
                      
                      
                      
                      41,206
                      
                      
                      
                      –Additions
      to loans held for investment
                      
                      
                      –
                      
                      
                      
                      (790
                      )
                      
                      
                      –Principal
      received from borrowers
                      
                      
                      11,205
                      
                      
                      
                      15,458
                      
                      
                      
                      6,863Purchase
      of commercial mortgage-backed securities
                      
                      
                      –
                      
                      
                      
                      (496
                      )
                      
                      
                      –Proceeds
      from sale of securities
                      
                      
                      –
                      
                      
                      
                      7,475
                      
                      
                      
                      –Repayments
      of commercial mortgage-backed securities
                      
                      
                      3,256
                      
                      
                      
                      3,134
                      
                      
                      
                      2,480Deposits
      on potential equity investments
                      
                      
                      (350
                      )
                      
                      
                      –
                      
                      
                      
                      –Return
      of deposits on potential equity investments
                      
                      
                      350
                      
                      
                      
                      –
                      
                      
                      
                      –Purchases
      of furniture, fixtures, equipment and leasehold
    improvements
                      
                      
                      (34
                      )
                      
                      
                      (6
                      )
                      
                      
                      (20
                      )Net cash provided by (used in) investing
      activities
                      
                      
                      (25,051
                      )
                      
                      
                      70,342
                      
                      
                      
                      9,547Financing
      activitiesRepayments
      of repurchase agreement obligations
                      
                      
                      –
                      
                      
                      
                      –
                      
                      
                      
                      (232,870
                      )Borrowings
      from mortgages on real estate investments
                      
                      
                      1,752
                      
                      
                      
                      1,574
                      
                      
                      
                      1,414Repayments
      of mortgages on real estate investments
                      
                      
                      (16,105
                      )
                      
                      
                      (13,650
                      )
                      
                      
                      (11,560
                      )Repayments
      of collateralized debt obligations
                      
                      
                      (9,139
                      )
                      
                      
                      –
                      
                      
                      
                      –Repayments
      on secured term loan
                      
                      
                      (12,191
                      )
                      
                      
                      (9,649
                      )
                      
                      
                      (5,801
                      )Borrowings
      from credit agreement
                      
                      
                      15,610
                      
                      
                      
                      –
                      
                      
                      
                      210,392Repayments
      on credit agreement
                      
                      
                      (36,526
                      )
                      
                      
                      (63,000
                      )
                      
                      
                      (21,131
                      )Convertible
      senior notes repurchased
                      
                      
                      (17,335
                      )
                      
                      
                      (9,583
                      )
                      
                      
                      (1,272
                      )Collateralized
      debt obligations repurchased
                      
                      
                      –
                      
                      
                      
                      (2,881
                      )
                      
                      
                      –Debt
      issuance costs
                      
                      
                      (815
                      )
                      
                      
                      (645
                      )
                      
                      
                      (1,783
                      )Escrows
      held with mortgage lender
                      
                      
                      –
                      
                      
                      
                      212
                      
                      
                      
                      600Funds
      used in hedging and risk management activities
                      
                      
                      –
                      
                      
                      
                      –
                      
                      
                      
                      (17,853
                      )Common
      stock issued, net of offering costs
                      
                      
                      25,102
                      
                      
                      
                      11,046
                      
                      
                      
                      19,649Preferred
      stock issued, net of offering costs
                      
                      
                      40,223
                      
                      
                      
                      –
                      
                      
                      
                      –Distributions
      to non-controlling interest
                      
                      
                      (37
                      )
                      
                      
                      (23
                      )
                      
                      
                      (189
                      )Dividends
      paid on common and preferred stock
                      
                      
                      (18,981
                      )
                      
                      
                      (10,250
                      )
                      
                      
                      (39,110
                      )Net cash used in financing
    activities
                      
                      
                      (28,442
                      )
                      
                      
                      (96,849
                      )
                      
                      
                      (99,514
                      )Net
      (decrease) increase in cash and cash equivalents
                      
                      
                      (5,804
                      )
                      
                      
                      30,107
                      
                      
                      
                      (25,608
                      )Cash
      and cash equivalents at beginning of period
                      
                      
                      38,546
                      
                      
                      
                      8,439
                      
                      
                      
                      34,047Cash
      and cash equivalents at end of period
                      
                      $
                      32,742
                      
                      
                      $
                      38,546
                      
                      
                      $
                      8,439
  See notes
to consolidated financial statements.
  59
  CapLease,
Inc. and Subsidiaries
 Consolidated
Statements of Cash Flows – continued
  Year ended December 31,(Amounts in thousands)
                        
                        2010
                        
                        
                        2009
                        
                        
                        2008Supplemental
      disclosure of cash flow informationCash
      paid during the year for interest expense (excluding capitalized
      interest)
                        
                        $
                        81,026
                        
                        
                        $
                        86,332
                        
                        
                        $
                        95,312Cash
      paid during the year for income taxes
                        
                        
                        201
                        
                        
                        
                        –
                        
                        
                        
                        –Distributions
      declared but not paid
                        
                        
                        10
                        
                        
                        
                        9
                        
                        
                        
                        –Dividends
      declared but not paid
                        
                        
                        5,363
                        
                        
                        
                        3,813
                        
                        
                        
                        711Supplemental
      disclosure of noncash operating, investing and financing
      informationValue
      of in-place leases and above-market leases acquired
                        
                        $
                        2,820
                        
                        
                        $
                        –
                        
                        
                        $
                        –Securities
      transferred to loans held for investment
                        
                        
                        –
                        
                        
                        
                        –
                        
                        
                        
                        24,453Mortgage
      notes payable transferred on properties sold
                        
                        
                        –
                        
                        
                        
                        14,400
                        
                        
                        
                        –Operating
      partnership units redeemed in exchange for common shares
                        
                        
                        –
                        
                        
                        
                        –
                        
                        
                        
                        1,014
  See notes
to consolidated financial statements.
  60
  CapLease,
Inc. and Subsidiaries
 Notes to
Consolidated Financial Statements
 (Dollar
amounts in thousands, except per share amounts)
 
 December
31, 2010, 2009 and 2008
 
 1. Organization
and Business
  CapLease,
Inc. (“CapLease” and collectively with its majority-owned subsidiaries, the
“Company”) is a real estate investment trust, or REIT, that invests primarily in
single tenant commercial real estate assets subject to long-term leases to high
credit quality tenants. The Company focuses on properties that are subject to a
net lease, or a lease that requires the tenant to pay all or substantially all
property operating expenses, such as utilities, real estate taxes, insurance and
routine maintenance. The Company also continues to be opportunistic and has made
and expects to continue to make investments in single tenant properties where
the owner has exposure to property operating expenses when we determine we can
sufficiently underwrite that exposure and isolate a predictable cash
flow.
  The
Company’s primary business line is and it expects will continue to be the
ownership of single tenant properties. The Company also has a portfolio of first
mortgage loans and other debt investments on single tenant properties and may
continue to make such debt investments from time to time on an opportunistic
basis in the future.
  CapLease
has made an election to qualify, and believes it is operating so as to qualify,
as a REIT for federal income tax purposes. As such, it will generally not be
subject to federal income tax on that portion of its taxable income that is
distributed to stockholders if it distributes at least 90% of its taxable income
to its stockholders by prescribed dates and complies with various other
requirements.
  CapLease
conducts its business through a variety of subsidiaries. CapLease owns most of
its owned properties through its predecessor and operating partnership,
Caplease, LP (the “Operating Partnership”). CapLease is the indirect sole
general partner of, and owns approximately 99.7% of the common equity of, the
Operating Partnership.
  CapLease
completed its initial public offering of common stock in March 2004, and
completed its initial public offering of its 8.125% Series A cumulative
redeemable preferred stock in October 2005. As of December 31, 2010, CapLease
had 57,471,268 shares of common stock and 3,204,900 shares of 8.125% Series A
cumulative redeemable preferred stock outstanding. See Note 13.
  2. Summary
of Significant Accounting Policies
  Basis
of Presentation and Principles of Consolidation
  The
accompanying consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States, or GAAP, and
include the assets, liabilities, and results of operations of the Company.
Results of operations of properties acquired are included in the Consolidated
Statements of Operations from the date of acquisition. The Company accounts for
properties that it intends to dispose of in accordance with the Financial
Accounting Standards Board (“FASB”) Accounting Codification Statement (“ASC”)
360-10-45. All significant intercompany transactions, balances and accounts have
been eliminated in consolidation.
  Use
of Estimates
  Management
of the Company has made a number of estimates and assumptions relating to the
reporting of assets and liabilities, revenues and expenses and the disclosure of
contingent assets and liabilities to prepare these consolidated financial
statements in conformity with GAAP. Actual results could differ from those
estimates.
  Risks
and Uncertainties
  In the
normal course of business, among the risks the Company encounters are credit
risk and market risk. Credit risk is the risk of default on the Company’s
leases, loans, securities and any derivative instruments that results from a
lessee’s, borrower’s or derivative counterparty’s inability or unwillingness to
make contractually required payments. Market risk reflects changes in the value
of investments in real estate, loans, securities or derivative instruments due
to changes in interest rates or other market factors, including the value of
real estate held by the Company, and the collateral underlying loans and
securities. Management believes that the carrying values of its investments are
reasonable taking into consideration these risks along with estimated collateral
values, payment histories, and other relevant information.
  Accounting
for Real Estate
  Real
estate is carried on the Company’s Consolidated Balance Sheet at cost, net of
accumulated depreciation and amortization. Depreciation and amortization are
determined by the straight-line method over the remaining estimated economic
useful lives of the properties. The Company generally depreciates building and
building improvements over periods not exceeding 40 years. As a result of the
Company’s adoption of FASB ASC 805 on January 1, 2009, direct costs incurred in
acquiring completed properties that meet the classification of a business are
now required to be charged to operations as incurred. Prior to January 1, 2009
and under previous accounting guidance, these costs were required to be
capitalized and amortized over the estimated useful life of the asset acquired.
Expenditures for maintenance and repairs of owned properties are charged to
operations as incurred. Significant renovations which extend the useful life of
the properties are capitalized.
  61
  CapLease,
Inc. and Subsidiaries
 Notes to
Consolidated Financial Statements
 (Dollar
amounts in thousands, except per share amounts)
 
 December
31, 2010, 2009 and 2008
 
 The
Company reviews its owned real properties for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable, in accordance with FASB ASC 360-10-35-21. The evaluation
includes estimating and reviewing anticipated future undiscounted cash flows to
be derived from the asset. If such cash flows are less than the asset’s carrying
value, an impairment charge is recognized to earnings to the extent by which the
asset’s carrying value exceeds the estimated fair value. Estimating future cash
flows is highly subjective and includes an evaluation of factors such as the
anticipated cash flows from the property, which may include rent from current
leases in place and projected future leases, estimated capital expenditures, and
an estimate of proceeds to be realized upon sale of the property. The Company’s
estimates could differ materially from actual results. The Company recognized no
impairment losses on long-lived assets during the year ended December 31, 2010.
The Company recognized $15,999 of impairment losses on long-lived assets during
the year ended December 31, 2009, including a $11,923 write-down to estimated
fair value during the fourth quarter of 2009 on a property that is now vacant
(see Note 3), a $2,853 loss on an owned property that was sold during the second
quarter of 2009 (see Note 6), and a $1,223 loss on an owned property that was
sold during the first quarter of 2010 (see Note 6). The Company recognized $354
of impairment losses on long-lived assets during the year ended December 31,
2008, related to the property it sold during the first quarter of 2010 (see Note
6).
  The
Company’s purchase price of rental real estate acquired is allocated to the
following based on estimated fair values on the acquisition date:
  ·
              acquired
      tangible assets, consisting of land, building and improvements;
      and
  ·
              identified
      intangible assets and liabilities, consisting of above-market and
      below-market leases, in-place leases and tenant
    relationships.
  The fair
value of tangible and intangible assets acquired is considered to be a Level 3
input in accordance with the fair value measurement topic in the applicable
accounting guidance as described in Note 7 below. In estimating the fair
value of the tangible and intangible assets acquired, the Company considers
information obtained about each property as a result of its due diligence
activities and other market data, and utilizes various valuation methods, such
as estimated cash flow projections utilizing appropriate discount and
capitalization rates, estimates of replacement costs, and available market
information. The fair value of the tangible assets of an acquired property
considers the value of the property as if it were vacant (the “dark
value”).
  Above-market
and below-market lease values for acquired properties are recorded based on the
present value of the differences between (i) the contractual amounts to be paid
pursuant to each in-place lease and (ii) management’s estimate of fair market
lease rates for each corresponding in-place lease. Fair market lease rates are
measured over a period equal to the remaining term of the lease for above-market
leases and the initial term plus the term of any below-market rate renewal
options for below-market leases. In computing present value, the Company
considers the costs which would need to be invested to achieve the fair market
lease rates. The Company uses a discount rate which reflects the risks
associated with the leases acquired. The capitalized above-market lease values
are amortized as a reduction of base rental revenue over the remaining term of
the respective leases, and the capitalized below-market lease values are
amortized as an increase to base rental revenue over the remaining initial terms
plus the terms of any below-market renewal options of the respective
leases.
  Other
intangible assets acquired include amounts for in-place lease values and tenant
relationship values which are based on management’s evaluation of the specific
characteristics of each tenant’s lease and the Company’s overall relationship
with the respective tenant. Factors considered by management in its analysis of
in-place lease values include estimates of the dark value of the property,
carrying costs during the hypothetical expected time it would take management to
find a tenant to lease the space for the existing lease term (a “lease-up
period”) considering current market conditions, and costs to execute similar
leases. Management estimates carrying costs, including such factors as real
estate taxes, insurance and other operating expenses during the expected
lease-up period, considering current market conditions and costs to execute
similar leases. In estimating costs to execute similar leases, management
considers leasing commissions and other related expenses. Characteristics
considered by management in estimating the value of tenant relationships include
the nature and extent of the Company’s existing business relationships with the
tenant, growth prospects for developing new business with the tenant, the
tenant’s credit quality and expectations of lease renewals. The value of
in-place leases is amortized as a component of depreciation expense over the
remaining initial terms of the respective leases. The value of tenant
relationship intangibles, if any, is amortized as a component of depreciation
expense over the anticipated life of the relationships. Through December 31,
2010, the Company has assigned no value to tenant relationships on any of its
acquisitions.
  62
  CapLease,
Inc. and Subsidiaries
 Notes to
Consolidated Financial Statements
 (Dollar
amounts in thousands, except per share amounts)
 
 December
31, 2010, 2009 and 2008
 
 When a
lease is terminated, the net impact, if any, of (i) writing-off all related
intangible assets and liabilities and any straight-line rent adjustment, (ii)
any lease termination payments received, and (iii) recording the property at its
lower of the carry amount and estimated fair value, is recognized through the
Company’s Consolidated Statement of Operations. Any net gain is included as a
component of “Other revenue” and any net loss is included as a component of
“Loss on investments.”
  For
property acquisitions where the Company assumes existing mortgage debt, the debt
is recorded at its estimated fair value, based on management’s estimate of
current market yields available for comparable financing. The Company amortizes
any discount or premium as part of interest expense on the related debt using
the effective interest method.
  Development
Activities
  Project
costs and expenses associated with the development, construction and lease-up of
a real estate project are capitalized as construction in progress. Once the
development and construction of the building is substantially completed, the
costs capitalized to construction in progress are transferred to (i) land and
(ii) buildings and improvements.
  Loan
Investments
  The
Company classifies its loans as long-term investments, as its strategy is to
hold the loans for the foreseeable future or until maturity. Loan investments
are carried on the Company's Consolidated Balance Sheet at amortized cost
(unpaid principal balance adjusted for unearned discount or premium and loan
origination fees), net of any allowance for loan losses. Unearned discounts or
premiums and loan origination fees are amortized as a component of interest
income using the effective interest method over the life of the
loan.
  From time
to time, the Company may determine to sell a loan in which case it must
reclassify the asset as held for sale. Loans held for sale are carried at lower
of cost or market value. As of December 31, 2010, the Company had not classified
any of its loans as held for sale.
  The
Company evaluates its loan investments for possible impairment on a quarterly
basis. The Company’s impairment analysis includes both a general reserve
component under FASB ASC 310-10-35-10, and an asset-specific component under
FASB ASC 310-10-35-16. The general reserve component covers performing loans and
in accordance with FASB ASC 310-10-35-10 provisions for loan losses are recorded
when (i) available information as of each balance sheet date indicates that it
is probable a loss has occurred in the portfolio and (ii) the amount of the loss
can be reasonably estimated. Actual loan losses are then charged against the
allowance when management believes that uncollectibility of a loan balance is
confirmed. Subsequent recoveries, if any, are credited to the allowance.
Significant judgment is required in determining reserve balances for the
performing loan portfolio, including estimates of the likelihood of default and
lease rejection given the credit characteristics of the tenant, and estimates of
stressed collateral values and potential bankruptcy claim recoveries. These
estimates are highly subjective and could differ materially from actual results.
As of December 31, 2010, the Company has a general loan loss reserve in
accordance with FASB ASC 310-10-35-10 of $500. See Note 4.
  The
asset-specific component of the loan loss impairment analysis is conducted in
accordance with FASB ASC 310-10-35-16, and covers specific loans where the
Company has deemed it probable that it will not be able to collect all amounts
due according to the contractual terms of the loan. Any resulting loan specific
loss is measured based on the present value of expected future cash flows from
the loan or the fair value of the loan collateral, if the loan is collateral
dependent. Significant judgment is required in determining any resulting loan
specific loss, including factors such as the status of the loans (i.e., current
or actual or expected payment or other defaults), the credit quality of the
underlying tenants, the present value of expected future cash flows on the
loans, the fair value of any collateral, and the amount and status of any senior
debt. These estimates are highly subjective and could differ materially from
actual results. The Company’s accounting policy is to continue to accrue
interest income on specific impaired loans as long as it concludes it is likely
to collect it. As of December 31, 2010, the Company had an asset-specific loan
loss reserve of $444 on a single impaired loan. See Note 4.
  Commercial
Mortgage-Backed Securities
  The
Company designates its commercial mortgage-backed securities and other real
estate securities (“CMBS”) investments pursuant to FASB ASC 320-10. FASB ASC
320-10 creates two classifications that are relevant with respect to the
Company’s securities investments:
  ·
              “Held
      to maturity” are those securities that the Company has the positive intent
      and ability to hold until maturity. All of the Company’s securities
      classified as held to maturity were transferred to this classification
      (from “available for sale” classification) in January 2008. For a security
      transferred into the held to maturity category, the security is recorded
      at estimated fair value on the date of transfer, with any unrealized gain
      or loss amortized against the related fair value adjustment recorded as a
      component of Other Comprehensive Income (Loss) within Stockholders’ Equity
      over the expected term of the security using the effective interest
      method.
   63
  CapLease,
Inc. and Subsidiaries
 Notes to
Consolidated Financial Statements
 (Dollar
amounts in thousands, except per share amounts)
 
 December
31, 2010, 2009 and 2008
 
 ·
              “Available
      for sale” are those securities that the Company does not hold for the
      purpose of selling in the near-term, but may dispose of prior to maturity.
      They are presented on the Consolidated Balance Sheet at fair value with
      any temporary changes in fair value included in Accumulated Other
      Comprehensive Income (Loss), a component of Stockholders’ Equity on the
      Company’s Consolidated Balance
Sheet.
  The
Company classifies its securities investments that are financed in its March
2005 collateralized debt obligation or in the December 2007 secured term loan
transaction discussed at Note 9, as “held to maturity,” and all other securities
investments, including those financed within the credit agreement discussed at
Note 9, as “available for sale.”
  Any
premiums or discounts on securities are amortized as a component of interest
income using the effective interest method.
  The
Company estimates fair value on all securities investments quarterly based on a
variety of inputs. Under applicable accounting guidance, securities where the
fair value is less than the Company’s cost are deemed “impaired,” and,
therefore, must be measured for “other-than-temporary impairment.” If an
impaired security (i.e., fair value below cost) is intended to be sold or
required to be sold prior to expected recovery of the impairment loss, the full
amount of the loss is charged to earnings as other-than-temporary impairment.
Otherwise, impairment losses on the security must be further analyzed for
separation into two categories: (i) credit losses and (ii) losses due to factors
other than credit. The portion which is considered credit loss is charged to
earnings as other-than-temporary impairment. The portion which is due to other
factors is not charged to earnings. Also, if the security is classified as
available for sale, the non-credit portion of the impairment loss is charged to
other comprehensive income (loss), a component of equity on the Company’s
Consolidated Balance Sheet. The Company had losses on securities charged to the
Statement of Operations of $7,949 during the year ended December 31, 2010, $133
during the year ended December 31, 2009, and $1,000 during the year ended
December 31, 2008. See Note 5.
  Structuring
Fees Receivable
  Structuring
fees receivable represent fees which the Company is entitled to receive over
time for structuring, originating and/or selling loans and are initially
recorded at the discounted value of expected cash receipts, and are periodically
evaluated for impairment. The Company amortizes the receivable balance as cash
is collected, allocating the cash received to principal and
interest.
  Deferred
Fees and Costs
  In
connection with its leasing efforts, the Company may incur primarily two types
of costs: (i) allowances paid to the tenant or on its behalf for the
construction of leasehold improvements, or tenant improvement allowances, and
(ii) commissions paid to leasing brokers, or leasing commissions. Tenant
improvement allowances are initially capitalized as part of “Construction in
progress” and then transferred to “Building and improvements” at completion and
depreciated on a straight-line basis over periods not exceeding 40 years.
Leasing commissions are capitalized as “Deferred leasing costs” and amortized on
a straight-line basis over the term of the related lease.
  In
accordance with applicable accounting guidance, the Company defers the
recognition of fees and expenses associated with the origination of its loans
held for investment. These items include lender fee income, rate lock income,
direct loan origination costs, certain legal fees, insurance costs, rating
agency fees and certain other expenses. Deferred fees and costs are recognized
as an adjustment to the effective yield over the life of the related
asset.
  Risk
Management Transactions
  The
Company may enter into risk management transactions as part of its overall
portfolio financing strategy. These transactions are intended to manage the
Company’s exposure to changes in interest rates associated with its expected
future debt issuances.
  64
  CapLease,
Inc. and Subsidiaries
 Notes to
Consolidated Financial Statements
 (Dollar
amounts in thousands, except per share amounts)
 
 December
31, 2010, 2009 and 2008
 
 If the
Company employs risk management transactions, they will be treated as cash flow
hedges under applicable accounting guidance as long as they have been designated
and qualify as such, which basically means so long as the Company has satisfied
a variety of technical accounting requirements, such as hedge documentation
requirements and initial and subsequent quarterly hedge effectiveness tests. If
the cash flow hedge criteria are met, the transactions are marked to fair value
at each reporting date and recorded as an asset or liability, depending on the
Company’s rights or obligations under the applicable contract. The effective
portion of the Company’s realized and unrealized gains and losses on such
transactions are treated as a component of “Other Comprehensive Income (Loss)”
on the Company’s Consolidated Balance Sheet and are not reported as a component
of current income or loss on the Company’s Consolidated Statement of Operations.
The effective portion of the Company’s realized gains and losses, which
generally represent the net payments the Company makes or receives on the
interest rate swaps, are then reclassified and amortized as part of interest
expense on the Company’s Consolidated Statement of Operations beginning at
issuance of the related debt and continuing over the expected term of such
debt.
  If cash
flow hedge criteria are not met or the hedge is deemed ineffective, some or all
of the realized and unrealized gains and losses on such transactions are treated
as a component of current income or loss on the Company’s Consolidated Statement
of Operations.
  If the
Company employs risk management transactions, no assurance can be made that the
Company will satisfy the cash flow hedge requirements and as to the portion of
the Company’s gains and losses that will be deemed effective under applicable
accounting guidance. Changes in management’s initial assumptions regarding any
proposed debt issuance (e.g., timing and the amount and type of debt) and
changes in the shape of the swap curve (which represents the market’s
expectations for future LIBOR rates) are among the factors that could cause the
Company to include a greater portion of its gains and losses from the associated
risk management transactions as current income or loss.
  Cash
and Cash Equivalents
  The
Company defines cash equivalents as highly liquid investments purchased with
maturities of three months or less at date of purchase. From time to time, the
Company’s account balance held at financial institutions exceeds Federal
Depository Insurance Corporation (“FDIC”) insurance coverage and, as a result,
there is a concentration of credit risk related to the balance on deposit in
excess of FDIC insurance coverage. The Company believes that the risk of loss is
not significant.
  Revenue
Recognition
  The
Company recognizes rental revenue on real estate on a straight-line basis over
the non-cancelable term of the lease. The excess of straight-line rents over
base rents under the lease is included in “Accrued rental income” on the
Company’s Consolidated Balance Sheet and any excess of base rents over the
straight-line amount is included as “Deferred rental income” on the Company’s
Consolidated Balance Sheet. The Company’s leases also generally require the
tenants to pay directly or reimburse the Company for occupancy and operating
costs of the properties, or in certain cases reimburse the Company for increases
in certain operating costs and real estate taxes above their base year costs.
The Company recognizes such income in the period the related expenses are
incurred.
  Interest
income from loans, securities, and structuring fees receivable, is recognized on
the accrual basis of accounting. Interest income from securities (including
interest-only strips) is recognized over the life of the investment using the
effective interest method. The cost basis of interest-only strips is adjusted to
reflect any prepayments from underlying assets, using the initial
yield-to-maturity at the purchase date. The Company has adopted the
cost-recovery method, in which all receipts are applied to reduce the Company’s
cost basis, on a limited number of its securities investments.
  On
occasion, the Company may consider a loan to be non-performing and place the
loan on non-accrual status. While on non-accrual status, the loan is accounted
for on either a cash basis, in which case interest income is recognized only
upon actual receipt, or on a cost-recovery basis based upon management’s
judgment as to the collectibility of the investment.
  Lease
Enhancement Mechanisms
  The
Company utilizes the following lease enhancement mechanisms, primarily as part
of its lending programs:
  ·
              casualty
      and condemnation insurance policies that protect the Company from any
      right the tenant may have to terminate the underlying net lease or abate
      rent as a result of a casualty or condemnation;
  and
  ·
              with
      respect to a double net lease, borrower reserve funds that protect the
      Company from any rights the tenant may have to terminate the underlying
      net lease or abate rent as a result of the failure of the property owner
      to maintain and repair the property or related common
    areas.
  Costs
incurred by the Company for lease enhancement mechanisms as part of the
Company’s lending programs are typically charged to the borrowers. In instances
where not fully absorbed by the borrower, costs are treated as a cost of loan
origination under applicable accounting guidance. Costs for lease enhancement
mechanisms for the Company’s owned real properties are treated as a cost of
financing and are amortized as part of interest expense over the expected term
of the related financing.
  65
  CapLease,
Inc. and Subsidiaries
 Notes to
Consolidated Financial Statements
 (Dollar
amounts in thousands, except per share amounts)
 
 December
31, 2010, 2009 and 2008
 
 Marketing
and Advertising Costs
  The
Company expenses marketing and advertising costs as incurred. Marketing and
advertising expense totaled $200, $145, and $431, in 2010, 2009, and 2008,
respectively.
  Income
Taxes
  CapLease
has made an election to qualify, and believes it is operating so as to qualify,
as a REIT for federal income tax purposes. As such, it will generally not be
subject to federal income tax on that portion of its taxable income that is
distributed to stockholders if it distributes at least 90% of its taxable income
to its stockholders by prescribed dates and complies with various other
requirements. From time to time, the Company may conduct a portion of its
business through a taxable REIT subsidiary (“TRS”), and the income from the
activities of the TRS is subject to federal and state taxation at the applicable
corporate rates.
  Other
Comprehensive Income (Loss)
  In
accordance with applicable accounting guidance, the Company recognizes temporary
changes in the fair value of its securities available for sale as a component of
“Other Comprehensive Income (Loss)” on the Company’s Consolidated Balance Sheet.
The Company also recognizes the change in fair value, and realized gains and
losses from the effective portion of its cash flow hedges as a component of
“Other Comprehensive Income (Loss)” on the Company’s Consolidated Balance Sheet.
Realized gains and losses from the effective portion of the cash flow hedges are
then amortized as a component of interest expense on the Company’s Consolidated
Statement of Operations over the term of the related financing, using the
effective interest method.
  Earnings
per Share
  In
accordance with FASB ASC 260-10-15, the Company presents both basic and diluted
earnings per share (“EPS”). Basic EPS excludes dilution and is computed by
dividing net income (loss) allocable to common stockholders by the weighted
average number of shares outstanding for the period. Diluted earnings per share
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock,
where such exercise or conversion would result in a lower EPS amount. The
Company’s computation of diluted earnings per share does not include shares of
common stock that may be issued in the future upon conversion of the convertible
senior notes issued in October 2007, as the impact would not be dilutive. The
number of weighted average common shares not included was 3,648,768, 5,014,100,
and 6,627,296, respectively, for the years ended December 31, 2010, December 31,
2009, and December 31, 2008.
  The
following summarizes the Company’s EPS computations for the years ended December
31, 2010, December 31, 2009, and December 31, 2008 (in thousands, except per
share amounts):
  December 31,2010
                        
                        
                        2009
                        
                        
                        2008Net
      loss allocable to common stockholders
                        
                        $
                        (18,758
                        )
                        
                        $
                        (16,811
                        )
                        
                        $
                        (26,008
                        )Weighted
      average number of common shares outstanding, basic and
    diluted
                        
                        
                        56,189
                        
                        
                        
                        49,297
                        
                        
                        
                        45,526Loss
      per share, basic and diluted
                        
                        $
                        (0.33
                        )
                        
                        $
                        (0.34
                        )
                        
                        $
                        (0.57
                        )Non-vested
      shares included in weighted average number of shares outstanding
      above
                        
                        
                        1,739
                        
                        
                        
                        1,801
                        
                        
                        
                        930
  Recently
Issued Accounting Pronouncements
  In
June 2009, the FASB issued new accounting guidance (formerly SFAS
No. 166, Accounting for
Transfers of Financial Assets — an amendment of FASB Statement
No. 140) which requires additional information regarding transfers
of financial assets, including securitization transactions, and where companies
have continuing exposure to the risks related to transferred financial assets.
The guidance eliminates the concept of a “qualifying special-purpose entity,”
changes the requirements for derecognizing financial assets, and requires
additional disclosures. The guidance was effective for the Company on January 1,
2010. The Company’s adoption of this guidance on January 1, 2010 did not have a
material effect on the Company’s consolidated financial
statements.
  66
  CapLease,
Inc. and Subsidiaries
 Notes to
Consolidated Financial Statements
 (Dollar
amounts in thousands, except per share amounts)
 
 December
31, 2010, 2009 and 2008
 
 In
June 2009, the FASB issued new accounting guidance (formerly SFAS
No. 167, Amendments to
FASB Interpretation No. 46(R)) which modifies how a company
determines when an entity that is insufficiently capitalized or is not
controlled through voting (or similar rights) should be consolidated. The
guidance clarifies that the determination of whether a company is required to
consolidate an entity is based on, among other things, an entity’s purpose and
design and a company’s ability to direct the activities of the entity that most
significantly impact the entity’s economic performance. The guidance requires an
ongoing reassessment of whether a company is the primary beneficiary of a
variable interest entity. The guidance also requires additional disclosures
about a company’s involvement in variable interest entities and any significant
changes in risk exposure due to that involvement. The guidance was effective for
the Company on January 1, 2010. The Company’s adoption of this guidance on
January 1, 2010 did not have a material effect on the Company’s consolidated
financial statements.
  In
January 2010, the FASB issued new accounting guidance ASU 2010-06, Fair Value Measurements and
Disclosures,requiring new disclosures and clarification of existing
disclosures for assets and liabilities that are measured at fair value on either
a recurring or non-recurring basis. The guidance requires the separate
disclosure of significant transfers in and out of Level 1 and Level 2 fair value
measurements along with the reasons for the transfers. The guidance also
requires separate information about purchases, sales, issuances and settlement
activity within Level 3 fair value measurements on a gross basis rather than one
net number. The new disclosures and clarifications of existing disclosures are
effective for interim and annual reporting periods beginning after December 15,
2009, except for the disclosures about purchases, sales, issuances and
settlement activity within Level 3 fair value measurements. Those disclosures
are effective for fiscal years beginning after December 15, 2010, and for
interim periods within those fiscal years. The Company’s adoption of this ASU on
January 1, 2010 did not have a material effect on the Company’s consolidated
financial statements.
  In
February 2010, the FASB issued new accounting guidance ASU 2010-09, Subsequent Events, which
amends ASC 855. The amendments remove the requirement for an SEC filer to
disclose the date through which subsequent events have been evaluated in both
issued and revised financial statements. This amendment alleviates potential
conflicts between GAAP and SEC requirements. The new guidance became effective
immediately upon final issuance. The Company’s adoption of this ASU did not have
a material effect on its consolidated financial statements.
  In March
2010, the FASB issued new accounting guidance ASU 2010-11, Derivatives and Hedging,
which amends ASC 815-15. The amendments clarify the scope exemption for embedded
credit derivative features related to the transfer of credit risk in the form of
subordination of one financial instrument to another. The new guidance is
effective for each reporting entity at the beginning of its first fiscal quarter
beginning after June 15, 2010. The Company’s adoption of this ASU on July 1,
2010 did not have a material effect on its consolidated financial
statements.
  In July 2010, the FASB issued
new accounting guidance ASU 2010-20,Disclosures
about the Credit Quality of Financing Receivables and the Allowance for Credit
Losses, which
amends various sections of ASC 310-10 and outlines specific disclosures that
will be required for the allowance for credit losses and all finance
receivables. Finance receivables includes loans, lease receivables and other
arrangements with a contractual right to receive money on demand or on fixed or
determinable dates that is recognized as an asset on an entity's statement of
financial position. The amendment requires companies to provide disaggregated
levels of disclosure by portfolio segment and class to enable users of the
financial statement to understand the nature of credit risk, how the risk is
analyzed in determining the related allowance for credit losses and changes to
the allowance during the reporting period. The required disclosures under this
amendment as of the end of a reporting period are effective for the Company's
December 31, 2010 reporting period and disclosures regarding activities
during a reporting period are effective for the Company's March 31, 2011
interim reporting period. The Company’s adoption of this ASU did not have a
material effect on the Company’s consolidated financial
statements.
  Reclassifications
  Certain
prior year amounts have been reclassified to conform to the current
presentation. There was no effect on net loss or equity related to these
reclassifications.
  67
  CapLease,
Inc. and Subsidiaries
 Notes to
Consolidated Financial Statements
 (Dollar
amounts in thousands, except per share amounts)
 
 December
31, 2010, 2009 and 2008
 
 3. Real
Estate Investments
  Real
estate held for investment and related intangible liabilities on real estate
investments consisted of the following at December 31, 2010 and December 31,
2009:
  December 31,2010
                        
                        
                        2009Real
      estate investments, at cost:Land
                        
                        $
                        190,521
                        
                        
                        $
                        189,021Building
      and improvements
                        
                        
                        1,268,320
                        
                        
                        
                        1,237,249Construction
      in progress, land
                        
                        
                        951
                        
                        
                        
                        -Construction
      in progress, building and improvements
                        
                        
                        5,557
                        
                        
                        
                        310Intangible
      assets
                        
                        
                        183,543
                        
                        
                        
                        180,722Less:
      Accumulated depreciation and amortization
                        
                        
                        (250,493
                        )
                        
                        
                        (198,483
                        )Real
      estate investments, net
                        
                        $
                        1,398,399
                        
                        
                        $
                        1,408,819Intangible
      liabilities on real estate investments:Intangible
      liabilities
                        
                        $
                        47,908
                        
                        
                        $
                        47,908Less:
      Accumulated amortization
                        
                        
                        (10,503
                        )
                        
                        
                        (8,317
                        )Intangible
      liabilities on real estate investments, net
                        
                        $
                        37,405
                        
                        
                        $
                        39,591
 
 During
the three months ended December 31, 2010, the Company completed the following
real estate acquisition:
  Month Acquired
                                  
                                  Tenant or Guarantor
                                  
                                  Location
                                  
                                  Purchase
                                    Price
                                  
                                  Lease Expires
                                  
                                  Net Rentable
                                    Square FeetDecember
                                  
                                  Cooper Tire & Rubber
      Company
                                  
                                  500 Bartram Parkway,
      Franklin, IN
                                  
                                  $
                                  32,500
                                  
                                  May
      2021
                                  
                                  
                                  807,042
 
 There
were no acquisition costs or interest charges capitalized as part of buildings
and improvements for the above acquisition.
  Development
in Process
  In August
2010, the Company entered into a joint venture that is developing a
warehouse/distribution building for Michelin North America, Inc. in Louisville,
Kentucky with a construction budget of $8,391. The Company owns a 99% ownership
interest in and will fund all of the construction costs associated with the
project. Therefore, the Company consolidates the joint venture for financial
accounting purposes.
  Construction
activity and funding of the project commenced during the third quarter and the
project is scheduled to be completed during the beginning of the second quarter
of 2011.
  The table
below details the Company’s construction in progress associated with the
Michelin joint venture as of December 31, 2010. The information included in
the table below represents management’s estimates and expectations at
December 31, 2010 which are subject to change. The Company’s disclosures
regarding certain projections or estimates of completion dates may not reflect
actual results.
  68
  CapLease,
Inc. and Subsidiaries
 Notes to
Consolidated Financial Statements
 (Dollar
amounts in thousands, except per share amounts)
 
 December
31, 2010, 2009 and 2008
 
 Location
                
                Tenant
                
                Property Type
                
                Approximate
                    Square
                    Feet
                
                
                Lease
                    Term
                    (years)(1)
                
                
                Construction
                    in Progress at
                    12/31/10
                
                
                Estimated
                    Remaining
                    Funding
                
                
                Estimated
                    Total
                    Investment(2)
                
                Estimated
                    Completion
                    DateLouisville,
                  Kentucky
                
                Michelin
      North America, Inc.
                
                Warehouse/
                  distribution
                
                
                150,000
                
                
                
                10
                
                
                $
                3,222
                
                
                $
                5,169
                
                
                $
                8,391
                
                Beginning
      of
                  2Q
      2011
 
 (1)
              The
      lease is scheduled to commence upon substantial completion of the building
      and the satisfaction of certain other
  conditions.
  (2)
              Interest
      and fees the Company will earn during the construction period are expected
      to reduce the total investment to
$8,069.
  Straight-Line
Rent Adjustment
  The
impact on rental revenue of the straight-line rent adjustment under FASB ASC
840-20-25-1 may be recorded on the Company’s Consolidated Balance Sheet through
accrued rental income and deferred rental income. As of December 31, 2010 and
December 31, 2009, the straight-line rent adjustment was recorded entirely
through accrued rental income, as follows:
  December 31,2010
                          
                          
                          2009Accrued
      Rental Income
                          
                          $
                          39,506
                          
                          
                          $
                          35,317
  Accrued
rental income is included in “Other assets” on the Company’s Consolidated
Balance Sheet. See Note 8. Deferred rental income, if any, is included in
“Accounts payable, accrued expenses and other liabilities” on the Company’s
Consolidated Balance Sheet. See Note 10.
  Depreciation
and Amortization Expense
  Depreciation
expense and amortization of intangible assets and liabilities on real estate
investments for the years ended December 31, 2010, December 31, 2009 and
December 31, 2008, were as follows:
  December 31,2010
                    
                    
                    2009
                    
                    
                    2008Depreciation
      on real estate (included in depreciation and amortization
      expense)
                    
                    $
                    32,171
                    
                    
                    $
                    32,804
                    
                    
                    $
                    32,783Amortization
      of in-place leases (included in depreciation and amortization
      expense)
                    
                    
                    15,989
                    
                    
                    
                    18,530
                    
                    
                    
                    20,349Amortization
      of above-market leases (included as a reduction of rental
      revenue)
                    
                    
                    3,849
                    
                    
                    
                    3,849
                    
                    
                    
                    3,849Amortization
      of below-market leases (included as an increase to rental
      revenue)
                    
                    
                    2,186
                    
                    
                    
                    1,593
                    
                    
                    
                    2,535
  As of
December 31, 2010, Company’s weighted average amortization period on intangible
assets was 7.5 years, and the weighted average amortization period on intangible
liabilities was 26.0 years.
  69
  CapLease,
Inc. and Subsidiaries
 Notes to
Consolidated Financial Statements
 (Dollar
amounts in thousands, except per share amounts)
 
 December
31, 2010, 2009 and 2008
 
 Scheduled
amortization on existing intangible assets and liabilities on real estate
investments as of December 31, 2010, on real estate investments is as
follows:
  Intangible
                      Assets
                    
                    
                    Intangible
                      Liabilities2011
                    
                    $
                    19,390
                    
                    
                    $
                    2,1862012
                    
                    
                    14,972
                    
                    
                    
                    2,1862013
                    
                    
                    9,300
                    
                    
                    
                    2,0512014
                    
                    
                    8,942
                    
                    
                    
                    1,9542015
                    
                    
                    8,283
                    
                    
                    
                    1,678Thereafter
                    
                    
                    24,692
                    
                    
                    
                    27,350$
                    85,579
                    
                    
                    $
                    37,405
 
 Owned
Property Investment and Financing Strategy
  Substantially
all of the Company’s owned properties are subject to financing and have been
pledged as collateral to the Company’s lender that has provided the applicable
financing. The Company’s strategy is to own and finance on a long-term basis
each property through a separate and distinct special purpose entity, or SPE,
with each property and the related lease or leases on the property generally
representing the sole assets of the SPE and the sole collateral available to the
Company’s lender in the event the Company defaults on the debt that finances the
property. Also see Note 9.
  Hartford,
Connecticut Property
  As of
December 31, 2010, the Company performed an impairment analysis of its
investment in the property in Hartford, Connecticut leased to Travelers
Corporation.  The Company concluded that no impairment loss was necessary
as the estimated future cash flows from the investment are in excess of the
Company’s carry value of the property of $19,939.  The cash flows are based
on estimates the Company believes to be reasonable and contemplate rent for the
remaining lease term plus management’s estimates of future lease cash
flows.
  Johnston,
Rhode Island Property
  The
Company recognized an impairment loss on its Johnston, Rhode Island property as
of December 31, 2009. The Company estimated the fair value of the property based
on a variety of assumptions, including the time expected to lease up the
building, expected rents and operating expenses, an estimate of amounts the
Company expects to invest to improve the building, and an estimate of sale
proceeds in connection with a potential sale of the property at a future date.
These estimates are highly subjective and could differ materially from actual
results. Based on the Company’s impairment analysis, it recognized an impairment
loss of $11,923 on this property which is included in “Loss on investments” in
the Consolidated Statement of Operations for the year ended December 31,
2009.
  As of
December 31, 2010, the Company’s carry value of the Johnston, Rhode Island
property was $26,812.
  Omaha,
Nebraska Properties
  At
December 31, 2009, the Company terminated in advance of the June 2010 scheduled
maturity its lease with the sole tenant at each of the two Omaha, Nebraska
properties (one on West Dodge Road, which is referred to as the “Dodge
Building,” and the other on Farnam Street, which is referred to as the “Landmark
Building”), and assumed the subleases that had been previously entered into by
the tenant.
  In
connection with the lease termination, the Company received $812 from the tenant
to settle various obligations under the lease. This payment was included as a
component of “Other revenue” on the Company’s Consolidated Statement of
Operations for the year ended December 31, 2009.
  Prior to
the lease termination, the Company had the following lease-related
liabilities:
  ·
              $7,150
      of intangible liabilities on the properties (representing below market
      lease intangibles); and
  ·
              $1,430
      of deferred rental income on the properties (representing the aggregate
      straight-line rent adjustment for rent received in
    advance).
  70
  CapLease,
Inc. and Subsidiaries
 Notes to
Consolidated Financial Statements
 (Dollar
amounts in thousands, except per share amounts)
 
 December
31, 2010, 2009 and 2008
 
 In
addition to the lease termination payment, the Company recorded the following
items of income (expense) on its Consolidated Statement of Operations as a
component of “Other revenue” for the year ended December 31, 2009:
  Extinguishment
      of intangible liabilities
                    
                    $
                    7,150Recognition
      of deferred rental income
                    
                    
                    1,430Write-down
      of building to fair value
                    
                    
                    (8,580
                    )Total
                    
                    $
                    –
  The
Company performed an impairment analysis of the properties in connection with
the lease termination. As it did with the Johnston, Rhode Island property, the
Company estimated the fair value of the properties based on a variety of
assumptions. Based on the analysis, management concluded that a write-down to
fair value was appropriate for the two Omaha properties, as reflected above.
Inclusive of the related income items from the extinguishment of the lease
liabilities, there was no net impairment charge on the properties.
  As of
December 31, 2010, the Company’s carry value of the Omaha, Nebraska properties
was $29,618 for the Landmark Building and $11,736 for the Dodge
Building.
  4. Loans
Held for Investment
  Loans
held for investment at December 31, 2010 and December 31, 2009, are summarized
in the following table. These investments consist predominantly of mortgage
loans on properties subject to leases to investment grade tenants. As of
December 31, 2010, the weighted average credit rating of the underlying tenants
was BBB+ from Standard & Poor’s.
  Except as
described below, as of December 31, 2010, none of the Company’s loans held for
investment were on non-accrual status or past due 90 days or more.
  December 31,2010
                      
                      
                      2009Principal
                      
                      $
                      214,049
                      
                      
                      $
                      225,242(Discount)
      Premium
                      
                      
                      (2,664
                      )
                      
                      
                      (2,642
                      )Cost
      basis
                      
                      
                      211,385
                      
                      
                      
                      222,600Allowance
      for loan losses
                      
                      
                      (944
                      )
                      
                      
                      (944
                      )Carrying
      amount of loans
                      
                      
                      210,441
                      
                      
                      
                      221,656Deferred
      origination fees, net
                      
                      
                      (401
                      )
                      
                      
                      (445
                      )Total
                      
                      $
                      210,040
                      
                      
                      $
                      221,211
 
 As of
December 31, 2010, the Company’s loan investments carried interest rates ranging
from 5.00% to 9.32%, compared to 5.28% to 10.00% as of December 31, 2009. At
December 31, 2010 and December 31, 2009, the weighted average effective interest
rate on the Company’s loan investments, as measured against its cost basis, was
6.7% and 6.8%, respectively.
  The
Company’s loan portfolio is comprised primarily of fully amortizing or nearly
fully amortizing first mortgage loans on single tenant commercial real estate.
Payments of debt service on the Company’s loans is, in substantially all cases,
funded directly by rent payments typically paid into a lockbox account by the
underlying tenant. Therefore, the Company’s monitoring of the credit quality of
its loans held for investment is focused primarily on an analysis of the tenant,
including review of tenant credit ratings (including changes in ratings) and
other measures of tenant credit quality, trends in the tenant’s industry and
general economic conditions, and an analysis of measures of collateral coverage,
such as an estimate of the loan’s loan-to-value (LTV) ratio (principal amount
outstanding divided by estimated value of the property) and its remaining term
until maturity.
  71
 CapLease,
Inc. and Subsidiaries
 Notes to
Consolidated Financial Statements
 (Dollar
amounts in thousands, except per share amounts)
 
 December
31, 2010, 2009 and 2008
  The
following table is a summary of the Company’s loans held for investment by
credit category with the credit ratings of the underlying tenants presented as
of each applicable balance sheet date:
  Credit rating (1) (2)
                          
                          Cost Basis
                            December 31, 2010
                          
                          
                          Cost Basis
                            December 31, 2009Investment
      grade rating of A- or A3 and above
                          
                          $
                          39,780
                          
                          
                          $
                          40,814Investment
      grade rating of below A- or A3
                          
                          
                          113,001
                          
                          
                          
                          116,813Implied
      investment grade rating
                          
                          
                          38,285
                          
                          
                          
                          39,491Non-investment
      grade rating
                          
                          
                          18,887
                          
                          
                          
                          24,038Unrated
                          
                          
                          1,432
                          
                          
                          
                          1,444$
                          211,385
                          
                          
                          $
                          222,600
  (1)
              Reflects
      the underlying tenant's or lease guarantor's actual or implied senior
      unsecured credit rating from Standard & Poor's or equivalent rating if
      rated only by Moody's Investors
Service.
  (2)
              The
      Company implies an investment grade credit rating for tenants that are not
      publicly rated by Standard & Poor’s or Moody’s but (i) are 100% owned
      by an investment grade parent, (ii) for which the Company has obtained a
      private investment grade rating from either Standard & Poor’s or
      Moody’s, or (iii) are governmental entity branches or units of another
      investment grade rated governmental
entity.
 
 As of
December 31, 2010, the Company has a general loan loss reserve in accordance
with FASB ASC 310-10-35-10 of $500, reflecting management’s estimate of losses
that have probably occurred in its mortgage loan portfolio. The loan loss
reserve was established at December 31, 2008, and to date the Company has not
had any actual losses charged against the allowance.
  As of
December 31, 2010, the Company had one loan investment which is on non-accrual
status and past due more than 90 days. The loan, which has remaining principal
outstanding of $1,444, has been classified as impaired in accordance with FASB
ASC 310-10-35-16. The Company intends to account for any interest income it
collects on the impaired loan on a cost-recovery basis. The Company performed an
impairment analysis for the impaired loan as of December 31, 2010, and concluded
that no loss reserve beyond a reserve of $444 recorded at June 30, 2009, was
warranted. The credit category of this loan in the above table is
unrated.
  72
 CapLease,
Inc. and Subsidiaries
 Notes to
Consolidated Financial Statements
 (Dollar
amounts in thousands, except per share amounts)
 
 December
31, 2010, 2009 and 2008
 The
following tables summarize certain financial information with respect to the
Company’s impaired loan:
  Carrying Amount
                      
                      
                      Average carrying amountBorrower
                      
                      12/31/2010
                      
                      
                      12/31/2009
                      
                      
                      2010
                      
                      
                      2009West
      End Mortgage Finance Fund I L.P.
                      
                      $
                      988
                      
                      
                      $
                      1,000
                      
                      
                      $
                      999
                      
                      
                      $
                      1,987
 
  Interest Income RecognizedFor the year
                      ended December 31,2010
                    
                    
                    For the year
                      ended December 31,2009Borrower
                    
                    Accrual
                    
                    
                    Cash
                    
                    
                    Accrual
                    
                    
                    CashWest
      End Mortgage Finance Fund I L.P.
                    
                    $
                    –
                    
                    
                    $
                    –
                    
                    
                    $
                    115
                    
                    
                    $
                    115
  During
the quarter and year ended December 31, 2010, the Company received $12 in
payments on the above loan, and the payments were applied to reduce the carry
value of the investment.
  5. Commercial
Mortgage-Backed Securities and Structuring Fees Receivable
  The
following is a summary of the Company’s securities investments at December 31,
2010:
  Description
                        
                        Number of
                          Securities
                        
                        
                        Face
                          Value
                        
                        
                        Carry
                          Value
                        
                        
                        Amortized
                          Cost
                        
                        
                        Fair
                          Value
                        
                        
                        Gross
                          Unrecognized
                          Gain
                        
                        
                        Gross
                          Unrecognized
                          LossHeld
      to Maturity
                        
                        
                        16
                        
                        
                        $
                        153,406
                        
                        
                        $
                        132,168
                        
                        
                        $
                        140,275
                        
                        
                        $
                        113,367
                        
                        
                        $
                        945
                        
                        
                        $
                        (27,853
                        )Available
      For Sale
                        
                        
                        8
                        
                        
                        
                        35,781
                        
                        
                        
                        13,797
                        
                        
                        
                        21,754
                        
                        
                        
                        13,797
                        
                        
                        
                        –
                        
                        
                        
                        (7,958
                        )Total
                        
                        
                        24
                        
                        
                        $
                        189,187
                        
                        
                        $
                        145,965
                        
                        
                        $
                        162,029
                        
                        
                        $
                        127,164
                        
                        
                        $
                        945
                        
                        
                        $
                        (35,811
                        )
  The
following is a summary of the Company’s securities investments at December 31,
2009:
  Description
                        
                        Number of
                          Securities
                        
                        
                        Face
                          Value
                        
                        
                        Carry
                          Value
                        
                        
                        Amortized
                          Cost
                        
                        
                        Fair
                          Value
                        
                        
                        Gross
                          Unrecognized
                          Gain
                        
                        
                        Gross
                          Unrecognized
                          LossHeld
      to Maturity
                        
                        
                        16
                        
                        
                        $
                        155,556
                        
                        
                        $
                        140,013
                        
                        
                        $
                        149,885
                        
                        
                        $
                        100,262
                        
                        
                        $
                        433
                        
                        
                        $
                        (50,056
                        )Available
      For Sale
                        
                        
                        8
                        
                        
                        
                        36,320
                        
                        
                        
                        13,043
                        
                        
                        
                        22,760
                        
                        
                        
                        13,044
                        
                        
                        
                        –
                        
                        
                        
                        (9,717
                        )Total
                        
                        
                        24
                        
                        
                        $
                        191,876
                        
                        
                        $
                        153,056
                        
                        
                        $
                        172,645
                        
                        
                        $
                        113,306
                        
                        
                        $
                        433
                        
                        
                        $
                        (59,773
                        )
  73
  CapLease,
Inc. and Subsidiaries
 Notes to
Consolidated Financial Statements
 (Dollar
amounts in thousands, except per share amounts)
 
 December
31, 2010, 2009 and 2008
  A
detailed schedule of the Company’s securities investments at December 31, 2010
follows:
  Face Amount (1)
                                            
                                            
                                            Amortized CostScheduled
                                            
                                            
                                            December 31,
                                            
                                            
                                            December 31,Description
                                            
                                            2010 Classification
                                            
                                            Maturity Date
                                            
                                            
                                            2010
                                            
                                            
                                            2009
                                            
                                            
                                            2010
                                            
                                            
                                            2009BSCMS
      1999 CLF1, Class E (rated D)
                                            
                                            Available For Sale
                                            
                                            May 2028
                                            
                                            
                                            $
                                            3,326
                                            
                                            
                                            $
                                            3,326
                                            
                                            
                                            $
                                            –
                                            
                                            
                                            $
                                            262BSCMS
      1999 CLF1, Class F (not rated)
                                            
                                            Available
      For Sale
                                            
                                            Sep
      2025
                                            
                                            
                                            
                                            251
                                            
                                            
                                            
                                            251
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            –CMLBC
      2001-CMLB-1, Class H (rated B-)
                                            
                                            Available
      For Sale
                                            
                                            Mar
      2024
                                            
                                            
                                            
                                            11,907
                                            
                                            
                                            
                                            11,907
                                            
                                            
                                            
                                            6,978
                                            
                                            
                                            
                                            6,836CMLBC
      2001-CMLB-1, Class J (rated D)
                                            
                                            Available
      For Sale
                                            
                                            Oct
      2025
                                            
                                            
                                            
                                            6,383
                                            
                                            
                                            
                                            6,383
                                            
                                            
                                            
                                            1,149
                                            
                                            
                                            
                                            1,538NLFC
      1999-LTL-1, Class X (IO) (rated AAA)
                                            
                                            Available
      For Sale
                                            
                                            Jan
      2024
                                            
                                            
                                            
                                            4,392
                                            
                                            
                                            
                                            5,055
                                            
                                            
                                            
                                            4,392
                                            
                                            
                                            
                                            5,055WBCMT
      2004-C15, Class 180ML-E (rated CCC)
                                            
                                            Available
      For Sale
                                            
                                            Nov
      2012(2)
                                            
                                            
                                            
                                            8,000
                                            
                                            
                                            
                                            8,000
                                            
                                            
                                            
                                            8,008
                                            
                                            
                                            
                                            7,979BACMS
      2002-2, Class V-1 (7-Eleven, Inc.) (tenant rated AA-)
                                            
                                            Available
      For Sale
                                            
                                            Sep
      2019
                                            
                                            
                                            
                                            602
                                            
                                            
                                            
                                            553
                                            
                                            
                                            
                                            493
                                            
                                            
                                            
                                            437BACMS
      2002-2, Class V-2 (Sterling Jewelers) (not rated)
                                            
                                            Available
      For Sale
                                            
                                            Jan
      2021
                                            
                                            
                                            
                                            920
                                            
                                            
                                            
                                            845
                                            
                                            
                                            
                                            735
                                            
                                            
                                            
                                            652BACM
      2006-4, Class H (rated CCC)
                                            
                                            Held
      To Maturity
                                            
                                            Aug
      2016
                                            
                                            
                                            
                                            8,000
                                            
                                            
                                            
                                            8,000
                                            
                                            
                                            
                                            400
                                            
                                            
                                            
                                            8,118Banc
      of America 2007-1, Class C (rated B)
                                            
                                            Held
      To Maturity
                                            
                                            Feb
      2017
                                            
                                            
                                            
                                            500
                                            
                                            
                                            
                                            500
                                            
                                            
                                            
                                            173
                                            
                                            
                                            
                                            156CALFS
      1997-CTL1, Class D (rated B-)
                                            
                                            Held
      To Maturity
                                            
                                            Apr
      2016
                                            
                                            
                                            
                                            6,000
                                            
                                            
                                            
                                            6,000
                                            
                                            
                                            
                                            5,952
                                            
                                            
                                            
                                            5,942CMLBC
      2001-CMLB-1, Class E (rated BBB+)
                                            
                                            Held
      To Maturity
                                            
                                            Jul
      2022
                                            
                                            
                                            
                                            9,526
                                            
                                            
                                            
                                            9,526
                                            
                                            
                                            
                                            10,033
                                            
                                            
                                            
                                            10,056CMLBC
      2001-CMLB-1, Class G (rated BB-)
                                            
                                            Held
      To Maturity
                                            
                                            Feb
      2023
                                            
                                            
                                            
                                            9,526
                                            
                                            
                                            
                                            9,526
                                            
                                            
                                            
                                            8,953
                                            
                                            
                                            
                                            8,923JP
      Morgan 2006-LDP9, Class AJ (rated BB-)
                                            
                                            Held
      To Maturity
                                            
                                            Dec
      2016
                                            
                                            
                                            
                                            200
                                            
                                            
                                            
                                            200
                                            
                                            
                                            
                                            99
                                            
                                            
                                            
                                            90NLFC
      1999-LTL-1, Class E (rated BB)
                                            
                                            Held
      To Maturity
                                            
                                            Mar
      2022
                                            
                                            
                                            
                                            11,081
                                            
                                            
                                            
                                            11,081
                                            
                                            
                                            
                                            5,926
                                            
                                            
                                            
                                            5,707Wachovia
      2007-C30, Class AJ (rated B)
                                            
                                            Held
      To Maturity
                                            
                                            Feb
      2017
                                            
                                            
                                            
                                            200
                                            
                                            
                                            
                                            200
                                            
                                            
                                            
                                            95
                                            
                                            
                                            
                                            87Wachovia
      2007-C31, Class AJ (rated B+)
                                            
                                            Held
      To Maturity
                                            
                                            May
      2017
                                            
                                            
                                            
                                            200
                                            
                                            
                                            
                                            200
                                            
                                            
                                            
                                            96
                                            
                                            
                                            
                                            88Wachovia
      2007-C33, Class AJ (rated B+)
                                            
                                            Held
      To Maturity
                                            
                                            Jul
      2017
                                            
                                            
                                            
                                            200
                                            
                                            
                                            
                                            200
                                            
                                            
                                            
                                            96
                                            
                                            
                                            
                                            89WBCMT
      2004-C15, Class 180ML-D (rated CCC+)
                                            
                                            Held
      To Maturity
                                            
                                            Nov
      2012(2)
                                            
                                            
                                            
                                            15,000
                                            
                                            
                                            
                                            15,000
                                            
                                            
                                            
                                            15,013
                                            
                                            
                                            
                                            14,957WBCMT
      2006-C27, Class C (rated BB)
                                            
                                            Held
      To Maturity
                                            
                                            Aug
      2016
                                            
                                            
                                            
                                            11,000
                                            
                                            
                                            
                                            11,000
                                            
                                            
                                            
                                            11,148
                                            
                                            
                                            
                                            11,174Certificated
      Mortgage Loan (with Alcatel-Lucent USA Inc. as tenant) (tenant rated
      B)
                                            
                                            Held
      To Maturity
                                            
                                            Sep
      2020
                                            
                                            
                                            
                                            34,722
                                            
                                            
                                            
                                            35,754
                                            
                                            
                                            
                                            35,172
                                            
                                            
                                            
                                            36,255Certificated
      Mortgage Loan (with CVS Corporation as tenant) (tenant rated
      BBB+)
                                            
                                            Held
      To Maturity
                                            
                                            Jan
      2028
                                            
                                            
                                            
                                            17,480
                                            
                                            
                                            
                                            18,058
                                            
                                            
                                            
                                            17,480
                                            
                                            
                                            
                                            18,058Certificated
      Mortgage Loan (with Koninklijke Ahold, N.V. as tenant) (tenant rated
      BBB)
                                            
                                            Held
      To Maturity
                                            
                                            Jan
      2019
                                            
                                            
                                            
                                            8,032
                                            
                                            
                                            
                                            8,283
                                            
                                            
                                            
                                            8,142
                                            
                                            
                                            
                                            8,413Certificated
      Mortgage Loan (with Yahoo! Inc. as tenant) (tenant implied rating
      BBB-)
                                            
                                            Held
      To Maturity
                                            
                                            Aug
      2026
                                            
                                            
                                            
                                            21,739
                                            
                                            
                                            
                                            22,028
                                            
                                            
                                            
                                            21,496
                                            
                                            
                                            
                                            21,773Total
                                            
                                            
                                            
                                            
                                            
                                            
                                            $
                                            189,187
                                            
                                            
                                            $
                                            191,876
                                            
                                            
                                            $
                                            162,029
                                            
                                            
                                            $
                                            172,645
  (1)
              Reflects
      face amount, or, in the case of the NLFC 1999-LTL-1 Class X (IO) bond,
      amortized cost.
  (2)
              The
      security had an original scheduled maturity in November 2009 and,
      therefore, the Company held the security beyond its original scheduled
      maturity date. See Note 23.
  All
credit ratings in the above table are as of December 31, 2010.
  The
Company evaluated each of its securities for other-than-temporary impairment at
December 31, 2010. The Company determined to recognize an other-than-temporary
impairment of $7,741 on the BACM 2006-4, Class H bond, which effectively reduced
the Company’s cost basis on the bond to its current fair value estimate (based
on broker quotations) of $5.00 per $100.00 of face amount. The loss recognized
is highly subjective and is based on a variety of estimates, including estimates
of the amount of any realized loss on loans in the pool currently in special
servicing, the length of time it will take the special servicer to resolve loans
in default and liquidate the related loan collateral, the amount of future
servicer advances while loans remain in special servicing, and the impact on
scheduled cash flows to the various bond classes of appraisal reductions applied
by the servicer on loans transferred to special servicing. Scheduled payments on
the BACM Class H bond which presently comprise monthly interest coupons on the
Company’s face amount are current and, beginning in 2011, the Company intends to
employ the cost-recovery method for all cash flows received on the
bond.
  At
December 31, 2010, the Company also recognized an other-than-temporary
impairment of $208 on the BSCMS, Class E bond, thereby reducing the Company’s
cost basis on the bond to zero. The 2010 loss on the BSCMS, Class E bond is in
addition to losses of $133 during the year ended December 31, 2009, and $1,000
during the year ended December 31, 2008, on the same bond class. During the
quarter ended December 31, 2010, the BSCMS trust stopped paying scheduled
interest on the Class E bond and the Company does not expect to receive any
future interest or principal payments on this bond class.
  74
  CapLease,
Inc. and Subsidiaries
 Notes to
Consolidated Financial Statements
 (Dollar
amounts in thousands, except per share amounts)
 
 December
31, 2010, 2009 and 2008
 
 Unrealized
gains and losses on securities at December 31, 2010 and December 31, 2009,
included as a component of Other Comprehensive Income (Loss) on the Company’s
Consolidated Balance Sheet, consisted of the following:
  December 31,2010
                        
                        
                        2009Unrealized
      gains on securities previously available for sale
                        
                        $
                        750
                        
                        
                        $
                        801Unrealized
      losses on securities previously available for sale
                        
                        
                        (8,857
                        )
                        
                        
                        (10,673
                        )Unrealized
      losses on securities available for sale
                        
                        
                        (7,958
                        )
                        
                        
                        (9,717
                        )
 
 The
following table summarizes the Company’s securities in an unrealized loss
position as of December 31, 2010.
  Aggregate
                          Fair Value
                        
                        
                        Aggregate
                          Unrealized
                          Loss
                        
                        
                        Number of
                          SecuritiesIn
      unrealized loss position 12 or more months
                        
                        $
                        98,404
                        
                        
                        $
                        35,817
                        
                        
                        
                        12
 
  The
following table summarizes the Company’s securities in an unrealized loss
position as of December 31, 2009.
  Aggregate
                        Fair Value
                      
                      
                      Aggregate
                        Unrealized
                        Loss
                      
                      
                      Number of
                        SecuritiesIn
      unrealized loss position less than 12 months
                      
                      $
                      354
                      
                      
                      $
                      66
                      
                      
                      
                      4In
      unrealized loss position 12 or more months
                      
                      
                      102,925
                      
                      
                      
                      59,707
                      
                      
                      
                      15
 
  Credit
ratings on the 12 securities in a continuous unrealized loss position for more
than 12 months as of December 31, 2010, range from AAA to D with a weighted
average of BB- and those securities have a weighted average maturity of
approximately 7.1 years. Except for the other-than-temporary impairment losses
described above, the Company believes that none of the unrealized losses on
investment securities are other-than-temporary because management expects the
Company will receive all contractual principal and interest related to these
investments. In addition, the Company expects to hold these securities for a
period of time sufficient to allow for a full recovery in fair
value.
  At
December 31, 2010 and December 31, 2009, the weighted average effective interest
rate (yield to maturity on adjusted cost basis) on securities was approximately
8.0% and 7.5%, respectively.
  Structuring
fees receivable of $326 and $1,094 at December 31, 2010 and December 31, 2009,
respectively, represented fees earned by the Company in conjunction with the
structuring and subsequent sale of certain net lease loans. Such fees are
payable to the Company monthly without interest through March 2020 and,
accordingly, have been discounted based on imputed interest rates estimated by
management to approximate market. Structuring fees receivable are shown at their
amortized cost.
  6. Assets
Sold and Discontinued Operations
  Year
Ended December 31, 2010
  The
Company sold one owned property during the year ended December 31, 2010. The
property, which is located in Wyomissing, Pennsylvania and was leased to Cott
Corporation, had been reclassified to discontinued operations at December 31,
2009, in connection with the Company’s expected disposal of the asset. The
impact of the expected sale, as well as a lease termination with the tenant in a
separate transaction, was recognized at the time of the reclassification. The
Company recognized a loss on the lease termination and sale of $1,223, which was
included in “Loss on investments” on the Company’s Consolidated Statement of
Operations during the quarter and year ended December 31, 2009. The Company also
recognized $354 of impairment losses on this property during the year ended
December 31, 2008 (included in “Loss on investments”), representing the
Company’s estimate at that time of the decline in the fair value of the property
below the Company’s carry value.
  75
  CapLease,
Inc. and Subsidiaries
 Notes to
Consolidated Financial Statements
 (Dollar
amounts in thousands, except per share amounts)
 
 December
31, 2010, 2009 and 2008
 
 Year
Ended December 31, 2009
  During
September 2009, the Company sold a $22,244 outstanding principal balance 7.90%
long-term mortgage loan on a property in Danvers, Massachusetts backed by a
Koninklijke Ahold N.V. lease. In connection with the sale of this asset, the
Company recognized a loss of $3,807 during the quarter ended September 30, 2009.
The loss was included in “Loss on investments” in the Company’s Consolidated
Statement of Operations.
  During
August 2009, the Company sold $9,500 of face amount of 6.65% pass through
certificates backed by loans on two office buildings in Sunnyvale, California
leased to Yahoo!, Inc. At the time of the sale, the security was classified as
available for sale. In connection with the sale of this asset, the Company
recognized a loss of $2,105 during the quarter ended September 30, 2009. The
loss was included in “Loss on investments” in the Company’s Consolidated
Statement of Operations.
  During
April 2009, the Company sold the OSHA technological laboratory facility in
Sandy, Utah leased to the United States Government. In connection with the sale
of this property, the Company recognized a loss of $2,853 during the quarter
ended March 31, 2009. The loss was included in “Loss on investments” in the
Company’s Consolidated Statement of Operations. Operating results from this
property are reflected as discontinued operations in the Company’s Consolidated
Statement of Operations.
  During
April 2009, the Company sold a majority participation interest in a long-term
mortgage loan on a property in Framingham, Massachusetts backed by a Lowe’s
Companies Inc. lease. During the quarter ended March 31, 2009, the Company
recorded a loss of $4,397 in connection with the sale of this loan. The loss was
included in “Loss on investments” in the Company’s Consolidated Statement of
Operations.
  7. Fair
Value
  FASB ASC
825-10-50-10 requires disclosure of fair value information about all of the
Company’s financial instruments, whether or not these instruments are measured
at fair value on the Company’s Consolidated Balance Sheet. For purposes of FASB
ASC 825-10-50-10, substantially all of the Company’s assets and liabilities
other than its owned property investments are classified as financial
instruments.
  The
Company estimates that the fair values of cash and cash equivalents, other
assets, accounts payable, accrued expenses and other liabilities, and dividends
payable approximate their carrying values due to the short-term maturities of
these items.
  The
carrying amounts and estimated fair values of the Company’s other financial
instruments at December 31, 2010 and December 31, 2009, are as
follows:
  Carrying Amount
                      
                      
                      Notional Amount
                      
                      
                      Estimated Fair Value12/31/2010
                      
                      
                      12/31/2009
                      
                      
                      12/31/2010
                      
                      
                      12/31/2009
                      
                      
                      12/31/2010
                      
                      
                      12/31/2009Assets:Loans
      held for investment
                      
                      $
                      210,441
                      
                      
                      $
                      221,656
                      
                      
                      $
                      214,049
                      
                      
                      $
                      225,242
                      
                      
                      $
                      223,099
                      
                      
                      $
                      219,185Commercial
      mortgage-backed securities
                      
                      
                      145,965
                      
                      
                      
                      153,056
                      
                      
                      
                      189,187
                      
                      
                      
                      191,876
                      
                      
                      
                      127,164
                      
                      
                      
                      113,306Structuring
      fees receivable
                      
                      
                      326
                      
                      
                      
                      1,094
                      
                      
                      
                      N/A
                      
                      
                      
                      N/A
                      
                      
                      
                      326
                      
                      
                      
                      1,094Liabilities:Mortgages
      on real estate investments
                      
                      $
                      928,429
                      
                      
                      $
                      943,811
                      
                      
                      $
                      925,264
                      
                      
                      $
                      939,616
                      
                      
                      $
                      979,570
                      
                      
                      $
                      902,408Collateralized
      debt obligations
                      
                      
                      254,210
                      
                      
                      
                      263,310
                      
                      
                      
                      254,361
                      
                      
                      
                      263,500
                      
                      
                      
                      220,907
                      
                      
                      
                      150,114Credit
      agreement
                      
                      
                      105,345
                      
                      
                      
                      126,262
                      
                      
                      
                      105,345
                      
                      
                      
                      126,262
                      
                      
                      
                      105,345
                      
                      
                      
                      126,262Secured
      term loan
                      
                      
                      101,880
                      
                      
                      
                      114,070
                      
                      
                      
                      101,880
                      
                      
                      
                      114,070
                      
                      
                      
                      95,145
                      
                      
                      
                      98,641Convertible
      senior notes
                      
                      
                      33,926
                      
                      
                      
                      49,452
                      
                      
                      
                      35,009
                      
                      
                      
                      52,444
                      
                      
                      
                      35,004
                      
                      
                      
                      46,956Other
      long-term debt
                      
                      
                      30,930
                      
                      
                      
                      30,930
                      
                      
                      
                      30,930
                      
                      
                      
                      30,930
                      
                      
                      
                      28,095
                      
                      
                      
                      21,925
 
 The fair
values indicated above are indicative of the interest rate and credit spread
environment as of December 31, 2010 and December 31, 2009, respectively, and may
not take into consideration the effects of subsequent interest rate, credit
spread fluctuations, or changes in the ratings of the underlying tenants on the
related leases. The methodologies used and key assumptions made to estimate fair
values are as follows:
  Loans held for investment—The
fair value of the Company’s fixed-rate loan portfolio is estimated with a
discounted cash flow analysis, utilizing scheduled cash flows and discount rates
estimated by management to approximate those that a willing buyer and seller
might use.
  76
  CapLease,
Inc. and Subsidiaries
 Notes to
Consolidated Financial Statements
 (Dollar
amounts in thousands, except per share amounts)
 
 December
31, 2010, 2009 and 2008
 
 Commercial mortgage-backed
securities—The fair values of the securities reflect management’s best
estimate and require a considerable amount of judgment and assumptions.
Management evaluates a variety of inputs and then estimates fair value based on
those inputs. The primary inputs evaluated by management are broker quotations,
collateral values, subordination levels, and liquidity of the
security.
  Structuring fees
receivable—The fair value of structuring fees receivable is estimated
with a discounted cash flow analysis, utilizing scheduled cash flows and
discount rates estimated by management to approximate those that a willing buyer
and seller might use.
  Credit agreement—Management
believes that the stated interest rate (which floats based on short-term
interest rates) approximates market rates (when compared to similar credit
facilities with similar credit risk). As such, the fair value of these
obligations is estimated to be equal to the outstanding principal
amount.
  Mortgages on real estate
investments, collateralized debt obligations and secured term loan—The
fair value of mortgages payable on real estate investments, collateralized debt
obligations and the secured term loan is estimated using a discounted cash flow
analysis, based on management’s estimates of market interest rates. For
mortgages where the Company has an early prepayment right, management also
considers the prepayment amount to evaluate the fair value.
  Convertible senior notes—The
carry value of convertible senior notes reflects the impact of accounting
guidance for the notes adopted as of January 1, 2009. See Note 9. The fair value
is estimated using a discounted cash flow analysis, based on management’s
estimates of market interest rates, and indications of market yields, where
available.
  Other long-term debt—The fair
value of the Company’s other long-term debt is estimated using a discounted cash
flow analysis, based on management’s estimates of market interest
rates.
  On
January 1, 2008, the Company adopted accounting guidance (codified at FASB ASC
820) that defines fair value, establishes a framework for measuring fair value
in GAAP, and expands disclosures about fair value measurements. The guidance
does not impose any new requirements around which assets and liabilities are to
be measured at fair value, and instead applies to asset and liability balances
required or permitted to be measured at fair value under existing accounting
pronouncements.
  The
guidance applies principally to the Company’s securities classified as
“available for sale,” as that is the only asset or liability which the Company
measures on a recurring basis at fair value.
  FASB ASC
820-10-35-37 establishes a valuation hierarchy based on the transparency of
inputs used in the valuation of an asset or liability. Classification is based
on the lowest level of inputs that is significant to the fair value measurement.
The valuation hierarchy contains three levels:
  ·
              Level
      1 – Quoted prices are available in active markets for identical assets or
      liabilities at the reporting date. As of December 31, 2010, the Company
      has not classified any of its securities available for sale as Level
      1.
  ·
              Level
      2 – Pricing inputs other than quoted prices included within Level 1 that
      are observable for substantially the full term of the asset or liability.
      Level 2 assets include quoted prices for similar assets or liabilities in
      active markets; quoted prices for identical or similar assets or
      liabilities that are not active; and inputs other than quoted prices that
      are observable, such as models or other valuation methodologies. As of
      December 31, 2010, the Company has not classified any of its securities
      available for sale as Level 2.
  ·
              Level
      3 – Inputs reflect management’s best estimate of what market participants
      would use in pricing the asset or liability at the measurement date. These
      valuations require a considerable amount of judgment and assumptions. As
      of December 31, 2010, the Company has classified all of its securities
      available for sale as Level 3. Management evaluates a variety of inputs
      and then estimates fair value based on those inputs. The primary inputs
      evaluated by management are broker quotations (observable), collateral
      values (observable), subordination levels (observable), and liquidity of
      the security (unobservable). These inputs are the factors employed by
      management and to its knowledge other parties in determining where to
      price actual transactions. The Company’s securities available for sale are
      unique in that in most cases the Company owns the entire bond class. As a
      result, the broker quotes obtained by the Company reflect expected pricing
      rather than actual trades and may also reflect distressed transactions in
      inactive markets. Therefore, the Company believes Level 3 is the
      appropriate classification in the fair value hierarchy for the Company’s
      available for sale securities.
  77
  CapLease,
Inc. and Subsidiaries
 Notes to
Consolidated Financial Statements
 (Dollar
amounts in thousands, except per share amounts)
 
 December
31, 2010, 2009 and 2008
 
 The table
below presents the fair value of the Company’s securities available for sale as
of December 31, 2010, aggregated by the level in the fair value hierarchy
within which those measurements fall.
  Quoted Prices in
                        Active Markets for
                        Identical Assets
                        and Liabilities
                        (Level 1)
                      
                      
                      Significant Other
                        Observable
                        Inputs
                        (Level 2)
                      
                      
                      Significant
                        Unobservable
                        Inputs
                        (Level 3)
                      
                      
                      Balance at
                        December 31,2010AssetsSecurities
      available for sale
                      
                      $
                      –
                      
                      
                      $
                      –
                      
                      
                      $
                      13,797
                      
                      
                      $
                      13,797
  The
following table summarizes the change in the fair value for Level 3 items for
the years ended December 31, 2010 and December 31, 2009:
  Year ended
                              December31,
                              2010
                            
                            
                            Year ended
                              December31,
                              2009Securities available for
    saleBeginning
      balance
                            
                            $
                            13,044
                            
                            
                            $
                            13,483Gains
      (losses) included in net income (loss):Included
      in loss on investments
                            
                            
                            (208
                            )
                            
                            
                            (133
                            )Included
      in interest income
                            
                            
                            309
                            
                            
                            
                            455Gains
      included in other comprehensive income
                            
                            
                            1,758
                            
                            
                            
                            559Purchases,
      sales, issuances and settlements (net)
                            
                            
                            (1,106
                            )
                            
                            
                            (1,321
                            )Ending
      balance
                            
                            $
                            13,797
                            
                            
                            $
                            13,044
  8. Other
Assets
  Other
assets as of December 31, 2010 and December 31, 2009, consisted of the
following:
  December 31,2010
                      
                      
                      2009Receivables
      and accrued interest
                      
                      $
                      9,593
                      
                      
                      $
                      11,304Prepaid
      expenses and deposits
                      
                      
                      2,197
                      
                      
                      
                      1,267Reserve
      accounts
                      
                      
                      15,598
                      
                      
                      
                      14,868Funds
      with CDO trustee pending distribution
                      
                      
                      4,697
                      
                      
                      
                      4,697Restricted
      cash
                      
                      
                      1,126
                      
                      
                      
                      276Amounts
      held by servicer
                      
                      
                      666
                      
                      
                      
                      261Accrued
      rental income
                      
                      
                      39,506
                      
                      
                      
                      35,317Debt
      issuance costs, net
                      
                      
                      5,999
                      
                      
                      
                      7,653Deferred
      leasing costs, net
                      
                      
                      1,767
                      
                      
                      
                      718Investment
      in statutory trust
                      
                      
                      930
                      
                      
                      
                      930Other
                      
                      
                      720
                      
                      
                      
                      988Total
                      
                      $
                      82,799
                      
                      
                      $
                      78,279
  9. Debt
Obligations
  Credit
Agreement
  The
Company has financed certain of its portfolio assets pursuant to a credit
agreement it entered into with Wells Fargo Bank, N.A. (as successor to Wachovia
Bank, N.A.) in April 2008. The Company and Wells Fargo entered into an amendment
and restatement of the credit agreement in July 2010, which, among other
things:
  ·
              established
      a maximum revolving credit commitment of
  $140,000;
  78
  CapLease,
Inc. and Subsidiaries
 Notes to
Consolidated Financial Statements
 (Dollar
amounts in thousands, except per share amounts)
 
 December
31, 2010, 2009 and 2008
 
 ·
              extended
      the maturity date of the credit agreement to July 16, 2013, from April 28,
      2011; and
  ·
              set
      the Company’s interest rate on its borrowings at one-month LIBOR plus 275
      basis points (an increase from one-month LIBOR plus 250 basis points at
      June 30, 2010).
  Also in
connection with the July 2010 amendment and restatement, the Company made a
$13,419 principal payment to the lender and agreed to repay another $10,000 of
principal in four equal quarterly installments beginning on October 1, 2010, the
first two installments of which have been paid. The Company’s outstanding
borrowings under the agreement were $105,345 as of December 31,
2010.
  The
agreement is a floating rate LIBOR based facility. As of December 31, 2010, the
Company’s effective financing rate on the credit agreement was
3.3%.
  The
Company’s borrowings under the credit agreement are secured by a combination of
first mortgage loan investments, intercompany mortgage loans on owned property
investments, commercial mortgage backed securities and a first lien on the
Company’s ownership interest in the real property located in Johnston, Rhode
Island. The Company’s obligations under the credit agreement are also fully
recourse to all of its other assets. In the event Wells Fargo determines in its
sole discretion that the value of the Company’s collateral assets has declined,
including as a result of an underlying tenant credit rating downgrade or other
adverse tenant-credit event, Wells Fargo may require the Company to prepay a
portion of its borrowings, provided that Wells Fargo may not reduce the value of
any of the Company’s collateral other than CMBS securities due to general credit
spread or interest rate fluctuations.
  The
Company may utilize the undrawn amount of the lender’s revolving credit
commitment to finance assets approved by the lender in its sole discretion at an
advance rate of 60% of the asset’s value (as determined by the lender). The
Company drew $15,610 under the credit agreement during December 2010 to fund a
portion of the purchase price for the Cooper Tire and Rubber Company asset
discussed at Note 3.
  The
Company is required to comply with the following financial covenants under the
credit agreement: minimum liquidity (basically cash and cash equivalents) of at
least $12,000, minimum consolidated tangible net worth (basically stockholders’
equity before accumulated depreciation and amortization) of at least $360,000
plus 75% of the aggregate net proceeds from equity offerings or capital
contributions after July 16, 2010, maximum corporate leverage (basically total
liabilities divided by total assets before accumulated depreciation and
amortization) of 80% and minimum interest coverage (basically EBITDA, or net
income before income taxes, interest expense, depreciation and amortization,
divided by interest expense) of 105%.  As of December 31, 2010, the
Company was in compliance with the above financial covenants.
  Amounts
related to the Company’s credit agreement as of December 31, 2010 and December
31, 2009, were as follows:
  At December 31, 2010
                                
                                
                                At December 31, 2009Borrowings
                                
                                
                                Collateral
                                  Carry Value
                                
                                
                                Borrowings
                                
                                
                                Collateral
                                  Carry ValueCredit AgreementLoans
      held for investment
                                
                                $
                                6,452
                                
                                
                                $
                                11,195
                                
                                
                                $
                                6,757
                                
                                
                                $
                                11,481Intercompany
      mortgage loans and investments in CapLease CDO
                                
                                
                                95,609
                                
                                
                                
                                130,225
                                
                                
                                
                                115,857
                                
                                
                                
                                141,332Commercial
      mortgage-backed securities
                                
                                
                                3,284
                                
                                
                                
                                11,141
                                
                                
                                
                                3,648
                                
                                
                                
                                11,485Owned
      property
                                
                                
                                –
                                
                                
                                
                                26,812
                                
                                
                                
                                –
                                
                                
                                
                                28,131Total
                                
                                $
                                105,345
                                
                                
                                $
                                179,373
                                
                                
                                $
                                126,262
                                
                                
                                $
                                192,429
  For the
years ended December 31, 2010, December 31, 2009 and December 31, 2008, the
following interest rates applied with respect to the Company’s credit agreement
borrowings:
  December 31,2010
                      
                      
                      2009
                      
                      
                      2008Weighted
      average effective financing rate
                      
                      
                      3.66
                      %
                      
                      
                      3.71
                      %
                      
                      
                      5.44
                      %Average
      One-Month LIBOR rate
                      
                      
                      0.27
                      %
                      
                      
                      0.35
                      %
                      
                      
                      2.91
                      %
  79
  CapLease,
Inc. and Subsidiaries
 Notes to
Consolidated Financial Statements
 (Dollar
amounts in thousands, except per share amounts)
 
 December
31, 2010, 2009 and 2008
 
 Mortgages
Notes on Real Estate Investments
  The
Company has financed most of its owned real properties with third party mortgage
debt. The Company’s mortgage notes payable are summarized in the following
table:
  Dec 31, 2010
                                
                                
                                Dec 31, 2009
                                
                                
                                
                                
                                
                                Effective
                                  FinancingProperty Level Debt - Fixed Rate
                                
                                Face
                                
                                
                                CarryValue
                                
                                
                                Face
                                
                                
                                CarryValue
                                
                                
                                Coupon
                                
                                
                                Rate (1)
                                
                                MaturityAbbott Laboratories,
      Waukegan, IL
                                
                                $
                                14,710
                                
                                
                                $
                                14,710
                                
                                
                                $
                                14,920
                                
                                
                                $
                                14,920
                                
                                
                                
                                5.11
                                %
                                
                                
                                5.2
                                %
                                Aug
      2015Aetna
      Life Insurance Company, Fresno, CA
                                
                                
                                16,043
                                
                                
                                
                                16,043
                                
                                
                                
                                16,043
                                
                                
                                
                                16,043
                                
                                
                                
                                5.63
                                %
                                
                                
                                5.7
                                %
                                Dec
      2016Allstate
      Insurance Company, Charlotte, NC
                                
                                
                                19,721
                                
                                
                                
                                19,721
                                
                                
                                
                                19,981
                                
                                
                                
                                19,981
                                
                                
                                
                                5.68
                                %
                                
                                
                                5.7
                                %
                                Jan
      2016Allstate
      Insurance Company, Roanoke, VA
                                
                                
                                20,996
                                
                                
                                
                                20,996
                                
                                
                                
                                21,273
                                
                                
                                
                                21,273
                                
                                
                                
                                5.68
                                %
                                
                                
                                5.8
                                %
                                Jan
      2016AMVESCAP
      PLC, Denver, CO
                                
                                
                                43,700
                                
                                
                                
                                43,700
                                
                                
                                
                                43,700
                                
                                
                                
                                43,700
                                
                                
                                
                                6.03
                                %
                                
                                
                                6.1
                                %
                                Jul
      2016Aon
      Corporation, Glenview, IL
                                
                                
                                60,870
                                
                                
                                
                                60,870
                                
                                
                                
                                62,313
                                
                                
                                
                                62,313
                                
                                
                                
                                5.23
                                %
                                
                                
                                5.8
                                %
                                Nov
      2014Bunge
      North America, Inc., Fort Worth, TX
                                
                                
                                6,262
                                
                                
                                
                                6,262
                                
                                
                                
                                6,262
                                
                                
                                
                                6,262
                                
                                
                                
                                5.45
                                %
                                
                                
                                5.5
                                %
                                May
      2017Cadbury
      Holdings Limited, Whippany, NJ
                                
                                
                                33,237
                                
                                
                                
                                33,237
                                
                                
                                
                                33,881
                                
                                
                                
                                33,881
                                
                                
                                
                                5.26
                                %
                                
                                
                                5.3
                                %
                                Mar
      2015Capital
      One Financial Corporation, Plano, TX
                                
                                
                                19,850
                                
                                
                                
                                19,850
                                
                                
                                
                                20,277
                                
                                
                                
                                20,277
                                
                                
                                
                                5.24
                                %
                                
                                
                                5.3
                                %
                                May
      2013Choice
      Hotels International, Inc., Silver Spring, MD
                                
                                
                                28,025
                                
                                
                                
                                28,025
                                
                                
                                
                                29,094
                                
                                
                                
                                29,094
                                
                                
                                
                                5.30
                                %
                                
                                
                                5.3
                                %
                                May
      2013County
      of Yolo, California, Woodland, CA
                                
                                
                                10,332
                                
                                
                                
                                10,332
                                
                                
                                
                                10,332
                                
                                
                                
                                10,332
                                
                                
                                
                                5.68
                                %
                                
                                
                                5.7
                                %
                                Feb
      2017Farmers
      Group, Inc., Simi Valley, CA
                                
                                
                                25,620
                                
                                
                                
                                25,620
                                
                                
                                
                                25,620
                                
                                
                                
                                25,620
                                
                                
                                
                                5.81
                                %
                                
                                
                                5.8
                                %
                                Jan
      2017Farmers
      New World Life Insurance Company, Mercer Island, WA
                                
                                
                                30,200
                                
                                
                                
                                30,200
                                
                                
                                
                                30,200
                                
                                
                                
                                30,200
                                
                                
                                
                                5.69
                                %
                                
                                
                                5.7
                                %
                                Jan
      2016General
      Motors Financial Company, Inc., Arlington, TX
                                
                                
                                27,190
                                
                                
                                
                                26,937
                                
                                
                                
                                27,682
                                
                                
                                
                                27,395
                                
                                
                                
                                5.28
                                %
                                
                                
                                5.5
                                %
                                Sep
      2017ITT
      Industries, Inc., Herndon, VA
                                
                                
                                40,393
                                
                                
                                
                                40,393
                                
                                
                                
                                40,902
                                
                                
                                
                                40,902
                                
                                
                                
                                5.33
                                %
                                
                                
                                5.4
                                %
                                Jun
      2015Johnson
      Controls, Inc., Largo, FL
                                
                                
                                16,200
                                
                                
                                
                                16,200
                                
                                
                                
                                16,200
                                
                                
                                
                                16,200
                                
                                
                                
                                5.48
                                %
                                
                                
                                5.5
                                %
                                Jan
      2017Koninklijke
      Ahold, N.V., Levittown, PA
                                
                                
                                14,040
                                
                                
                                
                                14,040
                                
                                
                                
                                14,246
                                
                                
                                
                                14,246
                                
                                
                                
                                6.05
                                %
                                
                                
                                6.1
                                %
                                Jul
      2016Lowes
      Companies, Inc., Aliso Viejo, CA
                                
                                
                                41,892
                                
                                
                                
                                41,892
                                
                                
                                
                                42,125
                                
                                
                                
                                42,125
                                
                                
                                
                                5.10
                                %
                                
                                
                                5.4
                                %
                                Jul
      2015Nestle
      Holdings, Inc., Breinigsville, PA; Fort Wayne, IN; and Lathrop,
      CA
                                
                                
                                117,000
                                
                                
                                
                                117,000
                                
                                
                                
                                117,000
                                
                                
                                
                                117,000
                                
                                
                                
                                6.32
                                %
                                
                                
                                5.7
                                %
                                Aug
      2012Omnicom
      Group, Inc., Irving, TX
                                
                                
                                12,784
                                
                                
                                
                                12,784
                                
                                
                                
                                13,080
                                
                                
                                
                                13,080
                                
                                
                                
                                5.24
                                %
                                
                                
                                5.3
                                %
                                May
      2013Pearson
      Plc., Lawrence, KS
                                
                                
                                15,818
                                
                                
                                
                                15,818
                                
                                
                                
                                16,009
                                
                                
                                
                                16,009
                                
                                
                                
                                5.84
                                %
                                
                                
                                5.9
                                %
                                May
      2016T-Mobile
      USA, Inc., Nashville, TN
                                
                                
                                10,749
                                
                                
                                
                                10,749
                                
                                
                                
                                10,885
                                
                                
                                
                                10,885
                                
                                
                                
                                5.59
                                %
                                
                                
                                5.7
                                %
                                Dec
      2016The
      Travelers Corporation, Hartford, CT
                                
                                
                                4,856
                                
                                
                                
                                4,925
                                
                                
                                
                                10,298
                                
                                
                                
                                10,674
                                
                                
                                
                                9.80
                                %
                                
                                
                                5.5
                                %
                                Sep
      2011The
      Travelers Corporation, Hartford, CT
                                
                                
                                17,251
                                
                                
                                
                                17,656
                                
                                
                                
                                15,499
                                
                                
                                
                                16,360
                                
                                
                                
                                10.76
                                %
                                
                                
                                7.7
                                %
                                Oct
      2011Tiffany
      & Co., Parsippany, NJ
                                
                                
                                58,274
                                
                                
                                
                                58,274
                                
                                
                                
                                58,400
                                
                                
                                
                                58,400
                                
                                
                                
                                5.33
                                %
                                
                                
                                5.3
                                %
                                Oct
      2015Time
      Warner Entertainment Company, L.P., Milwaukee, WI
                                
                                
                                17,500
                                
                                
                                
                                17,500
                                
                                
                                
                                17,500
                                
                                
                                
                                17,500
                                
                                
                                
                                5.55
                                %
                                
                                
                                5.6
                                %
                                Dec
      2016TJX
      Companies, Inc., Philadelphia, PA
                                
                                
                                69,547
                                
                                
                                
                                69,547
                                
                                
                                
                                70,209
                                
                                
                                
                                70,209
                                
                                
                                
                                5.57
                                %
                                
                                
                                5.6
                                %
                                Mar
      2016United
      States Government (DEA), Birmingham, AL
                                
                                
                                11,086
                                
                                
                                
                                11,086
                                
                                
                                
                                11,242
                                
                                
                                
                                11,242
                                
                                
                                
                                5.23
                                %
                                
                                
                                5.4
                                %
                                Sep
      2015United
      States Government (EPA), Kansas City, KS
                                
                                
                                19,059
                                
                                
                                
                                21,694
                                
                                
                                
                                19,676
                                
                                
                                
                                22,535
                                
                                
                                
                                7.57
                                %
                                
                                
                                5.4
                                %
                                Oct
      2022United
      States Government (FBI), Albany, NY
                                
                                
                                10,137
                                
                                
                                
                                10,137
                                
                                
                                
                                10,137
                                
                                
                                
                                10,137
                                
                                
                                
                                5.50
                                %
                                
                                
                                5.7
                                %
                                Nov
      2016United
      States Government (FBI), Birmingham, AL
                                
                                
                                18,508
                                
                                
                                
                                18,508
                                
                                
                                
                                18,747
                                
                                
                                
                                18,747
                                
                                
                                
                                5.23
                                %
                                
                                
                                5.3
                                %
                                Sep
      2015United
      States Government (NIH), N. Bethesda, MD
                                
                                
                                59,459
                                
                                
                                
                                59,459
                                
                                
                                
                                60,929
                                
                                
                                
                                60,929
                                
                                
                                
                                5.32
                                %
                                
                                
                                5.6
                                %
                                Sep
      2015United
      States Government (SSA), Austin, TX
                                
                                
                                5,297
                                
                                
                                
                                5,297
                                
                                
                                
                                5,372
                                
                                
                                
                                5,372
                                
                                
                                
                                5.23
                                %
                                
                                
                                5.5
                                %
                                Sep
      2015United
      States Government (VA), Ponce, PR
                                
                                
                                4,708
                                
                                
                                
                                4,836
                                
                                
                                
                                5,308
                                
                                
                                
                                5,477
                                
                                
                                
                                7.30
                                %
                                
                                
                                6.4
                                %
                                Apr
      2016Walgreen
      Co., Pennsauken, NJ
                                
                                
                                1,306
                                
                                
                                
                                1,365
                                
                                
                                
                                1,478
                                
                                
                                
                                1,554
                                
                                
                                
                                7.65
                                %
                                
                                
                                6.0
                                %
                                Oct
      2016Walgreen Co., Portsmouth,
      VA
                                
                                
                                2,644
                                
                                
                                
                                2,766
                                
                                
                                
                                2,796
                                
                                
                                
                                2,937
                                
                                
                                
                                7.20
                                %
                                
                                
                                6.2
                                %
                                Jul
      2018Total
                                
                                $
                                925,264
                                
                                
                                $
                                928,429
                                
                                
                                $
                                939,616
                                
                                
                                $
                                943,811
 
 (1)
                The
      effective rate is the Company’s approximate borrowing cost, including the
      effect of hedge gains or losses and other deferred financing costs
      associated with the related
borrowing.
  The
mortgage notes are non-recourse to the Company subject to limited non-recourse
exceptions and are secured by the respective properties and an assignment of the
relevant leases on the properties. See Note 3 regarding the separate and
distinct nature of the Company’s SPEs. The Company’s book value before
accumulated depreciation and amortization on owned properties encumbered with
mortgage debt aggregated $1,435,087 at December 31, 2010, and $1,431,947 at
December 31, 2009.
  Collateralized
Debt Obligations
  During
March 2005, the Company issued a collateralized debt obligation, or CDO. The CDO
is an entirely fixed rate on-balance sheet financing. The Company aggregated
approximately $300,000 face amount of assets and then transferred these assets
into a wholly-owned securitization vehicle, and initially issued $285,000 face
amount of multi-class notes and $15,000 face amount of preferred equity through
the securitization vehicle. The assets serve as collateral for the Company’s
obligations under the notes. The securitization vehicle is an SPE, with its
business limited to the issuance of the notes and the preferred equity, the
acquisition of the collateral and certain other related matters. The net amount
of the debt the Company initially issued was $268,130, inclusive of a $370
discount to face, as the Company retained the three most junior note classes
aggregating a face amount of $16,500 and the full $15,000 face amount of
preferred equity.
  80
  CapLease,
Inc. and Subsidiaries
 Notes to
Consolidated Financial Statements
 (Dollar
amounts in thousands, except per share amounts)
 
 December
31, 2010, 2009 and 2008
 
 The CDO
notes have a stated maturity in January 2040, although the actual life of the
notes is expected to be substantially shorter. The Company’s weighted average
effective financing rate (inclusive of original issue discount and debt issuance
and hedge costs) on its CDO is approximately 5.6%. The CDO debt is non-recourse
to the Company but is secured by the collateral assets. The Company reduced the
debt outstanding under the CDO by repurchasing $5,000 of the Class A CDO notes
during the year ended December 31, 2009. Amounts related to the Company’s CDO as of
December 31, 2010, were as follows:
  Borrowings
                
                
                Collateral
                  Carry
      ValueLoans held for investment
                
                $
                150,587
                
                
                $
                163,463Intercompany
      mortgage loans on CapLease properties
                
                
                30,521
                
                
                
                33,131Commercial
      mortgage-backed securities
                
                
                73,102
                
                
                
                79,353Total
                
                $
                254,210
                
                
                $
                275,947
  Secured
Term Loan
  During
December 2007, the Company completed a $129,521 secured term loan with KBC Bank,
N.V. Upon closing of the financing, the Company pledged approximately $163,145
principal amount of collateral to secure its obligations under the loan. The
interest coupon on the loan is fixed at 5.81% annually until the loan matures in
January 2018. The Company’s effective financing rate on the loan is
approximately 6.0% annually (inclusive of hedge and closing costs). The loan is
non-recourse to the Company, subject to limited non-recourse exceptions. Amounts
related to the secured term loan as of December 31, 2010, were as
follows:
  Borrowings
                
                
                Collateral
                  Carry
      ValueLoans held for investment
                
                $
                25,390
                
                
                $
                35,211Intercompany
      mortgage loans on CapLease properties
                
                
                30,498
                
                
                
                41,420Commercial
      mortgage-backed securities
                
                
                45,992
                
                
                
                52,814Total
                
                $
                101,880
                
                
                $
                129,445
  Convertible
Senior Notes
  During
October 2007, CapLease issued $75,000 principal amount of 7.50% convertible
senior notes due 2027. The notes represent general unsecured recourse
obligations of CapLease and rank equally in right of payment with all of its
other existing and future obligations that are unsecured and unsubordinated. The
notes are jointly and severally, fully and unconditionally guaranteed, on a
senior unsecured basis by four of CapLease’s subsidiaries, Caplease, LP,
Caplease Debt Funding, LP, Caplease Services Corp. and Caplease Credit
LLC.
  Since
original issuance, CapLease has repurchased an aggregate of $39,991 principal
amount of the notes and, therefore, as of December 31, 2010, the Company had
$35,009 principal amount of convertible senior notes outstanding.
  As of
January 1, 2009, the Company adopted accounting guidance (codified primarily at
FASB ASC 470) that retrospectively changed the accounting for the convertible
senior notes. The guidance affected the accounting for the Company’s convertible
senior notes by requiring the initial proceeds from their sale to be allocated
between a liability component and an equity component in a manner that results
in interest expense on the liability component at the Company’s estimated
nonconvertible debt borrowing rate on the date of issue. The initial bifurcation
between the liability and equity components of the convertible senior notes at
January 1, 2009, was $67,761 and $7,239, respectively. The equity component
carry value remained at $7,239 at December 31, 2009, and was reduced to $6,189
at December 31, 2010, with the decline caused primarily by the Company’s
repurchase of convertible senior notes at par as part of the note tender offer
the Company closed during the quarter ended June 30, 2010.
  81
  CapLease,
Inc. and Subsidiaries
 Notes to
Consolidated Financial Statements
 (Dollar
amounts in thousands, except per share amounts)
 
 December
31, 2010, 2009 and 2008
 
 Convertible
senior notes included the following amounts at December 31, 2010 and December
31, 2009:
  Dec 31, 2010
                          
                          
                          Dec 31, 2009Convertible
      notes - principal
                          
                          $
                          35,009
                          
                          
                          $
                          52,444Unamortized
      debt discount
                          
                          
                          (1,083
                          )
                          
                          
                          (2,992
                          )Convertible
      senior notes - net
                          
                          $
                          33,926
                          
                          
                          $
                          49,452
  The
remaining debt discount will be amortized over the next 22 months, ending in
October 2012.
  The
following table summarizes the Company’s repurchases of convertible senior notes
during the years ended December 31, 2008, 2009 and 2010.
  Quarter Ended
                    
                    Notional
                      Amount
                      of Notes
                      Repurchased
                    
                    
                    Purchase
                      Price
                    
                    
                    Gain (loss) on
                      Extinguishment
                      of DebtDecember
      31, 2008
                    
                    $
                    3,240
                    
                    
                    $
                    1,179
                    
                    
                    $
                    1,713March
      31, 2009
                    
                    
                    5,500
                    
                    
                    
                    2,090
                    
                    
                    
                    2,821June
      30, 2009
                    
                    
                    12,316
                    
                    
                    
                    6,512
                    
                    
                    
                    4,581September
      30, 2009
                    
                    
                    1,500
                    
                    
                    
                    949
                    
                    
                    
                    415March
      31, 2010
                    
                    
                    2,500
                    
                    
                    
                    2,400
                    
                    
                    
                    (96
                    )June
      30, 2010
                    
                    
                    13,500
                    
                    
                    
                    13,500
                    
                    
                    
                    (184
                    )September
      30, 2010
                    
                    
                    1,435
                    
                    
                    
                    1,435
                    
                    
                    
                    (14
                    )
  The notes
bear interest at an annual fixed rate of 7.50% and are scheduled to mature on
October 1, 2027, unless earlier converted, redeemed or repurchased. The
Company’s effective financing rate on the notes, which includes the effect of
the offering discount and expenses of the transaction, is approximately 8.1%.
The Company’s effective interest rate on the liability component of the
instrument as measured under the January 1, 2009 accounting guidance was 10.1%,
11.5% and 11.6%, respectively, at December 31, 2010, December 31, 2009 and
December 31, 2008. The Company recorded interest expense relating to the
convertible senior notes under the January 1, 2009 accounting guidance of
$4,063, $5,666, and $7,159, respectively, for the years ended December 31, 2010,
December 31, 2009 and December 31, 2008.
  Holders
may require CapLease to repurchase their notes, in whole or in part, on October
1, 2012, October 1, 2017 and October 1, 2022, for a cash price equal to 100% of
the principal amount of the notes to be repurchased, plus any accrued and unpaid
interest.
  Holders
will also have the right to require CapLease to repurchase their notes, in whole
or in part for cash, if a change of control or termination of trading occurs
prior to October 1, 2012. The repurchase price will be 100% of the principal
amount of the notes to be repurchased, plus any accrued and unpaid
interest.
  The
holders may convert their notes into cash, shares of CapLease common stock, or
any combination thereof, at CapLease’s option, under certain circumstances,
including in connection with certain change of control events defined in the
note indenture (each, a “change of control”) or a transaction that results in
CapLease’s common stock or other securities into which the notes are convertible
not being approved for listing on a U.S. national securities exchange (a
“termination of trading”). Upon conversion, if CapLease does not elect
otherwise, it will settle its conversion obligation in shares of its common
stock.
  The
initial conversion rate for each $1 principal amount of notes is 88.3704 shares
of CapLease’s common stock, which is equivalent to an initial conversion price
of approximately $11.32 per share. As of December 31, 2010, the if-converted
value of the convertible senior notes does not exceed the principal amount of
the notes. The initial conversion rate will be adjusted for certain events,
including in the event CapLease makes any quarterly cash dividend in excess of
$0.20 per share.
  CapLease
has the right to redeem the notes in whole or in part, for cash at any time or
from time to time on or after October 5, 2012. Prior to October 5,
2012, CapLease may also redeem the notes to preserve its status as a real estate
investment trust. The redemption price will be 100% of the principal amount of
the notes to be redeemed, plus any accrued and unpaid interest.
  82
  CapLease,
Inc. and Subsidiaries
 Notes to
Consolidated Financial Statements
 (Dollar
amounts in thousands, except per share amounts)
 
 December
31, 2010, 2009 and 2008
 
 Trust
Preferred Securities
  In
December 2005, the Operating Partnership issued $30,000 in aggregate principal
amount of fixed/floating rate preferred securities through its wholly-owned
subsidiary, Caplease Statutory Trust I. The trust preferred securities represent
an unsecured subordinated recourse debt obligation of the Company and require
quarterly interest payments calculated at a fixed interest rate equal to 7.68%
per annum through January 30, 2016, and subsequently at a variable interest rate
equal to LIBOR plus 2.60% per annum. The securities must be redeemed on January
30, 2036, and may be redeemed, in whole or in part, at par, at the Company’s
option, beginning on January 30, 2011. The Company’s effective financing rate on
the trust preferred securities, inclusive of deferred issuance costs, is
approximately 8.3% per annum.
  Scheduled
principal amortization and balloon payments for all of the Company’s outstanding
debt obligations as of December 31, 2010, for the next five years and thereafter
are as follows:
  Scheduled
                      Amortization
                    
                    
                    Balloon
                      Payments
                    
                    
                    Total2011
                    
                    $
                    49,219
                    
                    
                    $
                    18,861
                    
                    
                    $
                    68,0802012
                    
                    
                    48,304
                    
                    
                    
                    152,009
                    
                    
                    
                    200,3132013
                    
                    
                    56,389
                    
                    
                    
                    141,349
                    
                    
                    
                    197,7382014
                    
                    
                    45,769
                    
                    
                    
                    53,479
                    
                    
                    
                    99,2482015
                    
                    
                    23,725
                    
                    
                    
                    443,625
                    
                    
                    
                    467,349Thereafter
                    
                    
                    40,297
                    
                    
                    
                    381,694
                    
                    
                    
                    421,992$
                    263,703
                    
                    
                    $
                    1,191,017
                    
                    
                    $
                    1,454,720
 
  10.
              Accounts
      payable, accrued expenses and other
liabilities
  Accounts
payable, accrued expenses and other liabilities as of December 31, 2010 and
December 31, 2009, consisted of the following:
  December
      31,2010
                    
                    
                    2009Accounts
      payable and other liabilities
                    
                    $
                    4,105
                    
                    
                    $
                    1,039Accrued
      interest
                    
                    
                    7,131
                    
                    
                    
                    7,623Accrued
      expenses
                    
                    
                    5,559
                    
                    
                    
                    5,487Unearned
      rental income
                    
                    
                    4,339
                    
                    
                    
                    4,551Total
                    
                    $
                    21,134
                    
                    
                    $
                    18,700
 
 11.
              Risk
      Management Transactions
  As part
of its financing strategy, the Company may use interest rate swap transactions
to manage its exposure to interest rate fluctuations on assets not yet financed
with long-term fixed rate debt. During the years ended December 31, 2010, and
December 31, 2009, the Company had no open interest rate swap
positions.
  During
most of 2008, the Company had a single open interest rate swap, intended to
manage the Company’s exposure to interest rate movements for a planned long-term
financing of assets financed on its credit agreement with Wells Fargo Bank.
During November 2008, the Company closed the swap as a result of unprecedented
credit market dislocations and associated declines in the 10-Year Treasury and
other benchmark market interest rates.
  During
the quarter ended December 31, 2008, the full amount of the realized loss on
closing the swap of $15,216, along with $2,862 of related losses previously
deferred in Other Comprehensive Income/Loss on the Company’s Consolidated
Balance Sheet, was charged directly to the Company’s Consolidated Statement of
Operations, as the swap position no longer represented an effective cash flow
hedge under applicable accounting guidance. See Note 2. In addition, during 2008
and prior to closing the swap position as described above, the Company had
another $1,418 of losses on the position recorded through the Company’s
Consolidated Statements of Operations. These losses primarily include hedge
ineffectiveness resulting from changes in (i) management’s estimates of when the
related hedged debt was expected to be issued, and (ii) the shape of the yield
curve. The above losses are included in “(Gain) loss on derivatives” on the
Company’s Consolidated Statements of Operations.
  83
  CapLease,
Inc. and Subsidiaries
 Notes to
Consolidated Financial Statements
 (Dollar
amounts in thousands, except per share amounts)
 
 December
31, 2010, 2009 and 2008
 
 As of
December 31, 2010, the Company had $4,152 of net realized losses on derivatives
deferred on the Company’s Consolidated Balance Sheet as a component of
Accumulated Other Comprehensive Income/(Loss) related to prior interest rate
swaps for certain of the Company’s long-term debt issuances. Within the next
twelve months, the Company estimates that $562 of these losses will be
reclassified to the Company's Consolidated Statements of Operations as
additional interest expense.
  The
Company classifies the cash flows from derivatives as a financing activity on
the Consolidated Statements of Cash Flows.
  12.
              Commitments
      and Contingencies
  The
Company is involved from time to time in litigation arising in the ordinary
course of business. The Company is not currently involved in any matter which
management believes will have a material adverse effect on the Company’s
business, results of operations or financial condition. However, periodic
settlements and/or professional or other fees and expenses related to any matter
could have an adverse impact on our results of operations in the quarterly or
annual period in which they are recognized.
  As an
owner of commercial real estate, the Company is subject to potential
environmental costs. At December 31, 2010, the Company was not aware of any
environmental concerns that would have a material adverse effect on the
Company’s business, results of operations or financial condition.
  As of
December 31, 2010, the Company was obligated under non-cancelable operating
lease agreements for office space and copy machines. The future minimum lease
payments under these lease agreements at December 31, 2010 were:
  2011
                          
                          $
                          7682012
                          
                          
                          7662013
                          
                          
                          5782014
                          
                          
                          132015
                          
                          
                          7Thereafter
                          
                          
                          –$
                          2,132
  Included
in general and administrative expense is rent expense of approximately $546,
$657, and $669 for the years ended December 31, 2010, December 31, 2009 and
December 31, 2008, respectively.
  13.
              Stockholders’
      Equity
  Stock
Issuances
  CapLease’s
authorized capital stock consists of 500,000,000 shares of common stock, $0.01
per share, and 100,000,000 shares of preferred stock, $0.01 per share. As of
December 31, 2010, CapLease had 57,471,268 shares of common stock, and 3,204,900
shares of 8.125% Series A cumulative redeemable preferred stock
outstanding.
 84
 CapLease,
Inc. and Subsidiaries
 Notes to
Consolidated Financial Statements
 (Dollar
amounts in thousands, except per share amounts)
 
 December
31, 2010, 2009 and 2008
 Common
Stock
  The
following table summarizes CapLease’s common stock issuances from its
incorporation date (October 31, 2003) through December 31, 2010.
  Date
                                                
                                                Shares
                                                
                                                
                                                Offering
                                                  Price
                                                  (actual or
                                                  average)
                                                
                                                
                                                Net
                                                  Proceeds
                                                  (after
                                                  expenses)
                                                
                                                Transaction descriptionPre-IPO
      CapitalizationNovember
      2003
                                                
                                                
                                                139,134
                                                
                                                
                                                $
                                                0.10
                                                
                                                
                                                $
                                                14
                                                
                                                Initial
      capitalization – issuances to current and former employees of the
      Operating PartnershipMarch
      2004
                                                
                                                
                                                3,968,800
                                                
                                                
                                                N.A.
                                                
                                                
                                                N.A.
                                                
                                                Initial
      capitalization – issuances of CapLease common stock in exchange for the
      acquisition of the Operating Partnership from its former
      ownersMarketed
      OfferingsMarch
      2004
                                                
                                                
                                                23,000,000
                                                
                                                
                                                $
                                                10.50
                                                
                                                
                                                $
                                                221,778
                                                
                                                Initial
      public offering of CapLease common stockMay
      2006
                                                
                                                
                                                5,747,000
                                                
                                                
                                                $
                                                10.55
                                                
                                                
                                                $
                                                57,282
                                                
                                                Follow-on
      public offering of CapLease common stockMay/June
      2007
                                                
                                                
                                                10,350,000
                                                
                                                
                                                $
                                                10.75
                                                
                                                
                                                $
                                                104,682
                                                
                                                Follow-on
      public offering of CapLease common stockDirect
      PlacementsSeptember
      2008
                                                
                                                
                                                1,317,524
                                                
                                                
                                                $
                                                7.59
                                                
                                                
                                                $
                                                9,957
                                                
                                                Direct
      issuance of CapLease common stock to institutional
buyerMarch
      2010
                                                
                                                
                                                3,144,654
                                                
                                                
                                                $
                                                4.77
                                                
                                                
                                                $
                                                14,985
                                                
                                                Direct
      issuance of CapLease common stock to institutional
buyerOP
      Unit ExchangeSeptember
      2008
                                                
                                                
                                                107,131
                                                
                                                
                                                N.A.
                                                (1)
                                                
                                                N.A.
                                                
                                                Issuance
      of CapLease common stock in exchange for the same number of Operating
      Partnership unitsDRIP/DSP
      Plan IssuancesVarious
      2007
                                                
                                                
                                                1,111,641
                                                
                                                
                                                $
                                                10.38
                                                
                                                
                                                $
                                                11,538
                                                
                                                Issuances
      of CapLease common stock through CapLease Dividend Reinvestment and Direct
      Stock Purchase PlanVarious
      2008
                                                
                                                
                                                1,222,855
                                                
                                                
                                                $
                                                7.96
                                                
                                                
                                                $
                                                9,692
                                                
                                                Issuances
      of CapLease common stock through CapLease Dividend Reinvestment and Direct
      Stock Purchase PlanVarious
      2009
                                                
                                                
                                                807,661
                                                
                                                
                                                $
                                                3.60
                                                
                                                
                                                $
                                                2,910
                                                
                                                Issuances
      of CapLease common stock through CapLease Dividend Reinvestment and Direct
      Stock Purchase PlanVarious
      2010
                                                
                                                
                                                103
                                                
                                                
                                                $
                                                5.85
                                                
                                                
                                                $
                                                1
                                                
                                                Issuances
      of CapLease common stock through CapLease Dividend Reinvestment and Direct
      Stock Purchase PlanATM
      IssuancesNovember/December
      2006
                                                
                                                
                                                160,900
                                                
                                                
                                                $
                                                11.91
                                                
                                                
                                                $
                                                1,851
                                                
                                                Issuances
      of CapLease common stock through “at the market offering” (“ATM”)
      programVarious
      2009
                                                
                                                
                                                2,410,800
                                                
                                                
                                                $
                                                3.49
                                                
                                                
                                                $
                                                8,136
                                                
                                                Issuances
      of CapLease common stock through ATM programVarious
      2010
                                                
                                                
                                                2,137,500
                                                
                                                
                                                $
                                                4.86
                                                
                                                
                                                $
                                                10,117
                                                
                                                Issuances
      of CapLease common stock through ATM programCapLease
      2004 Stock Incentive Plan
    AwardsVarious
      (2004 – 2010)
                                                
                                                
                                                3,369,955
                                                
                                                
                                                N.A.
                                                
                                                
                                                N.A.
                                                
                                                Issuances
      of CapLease common stock through CapLease 2004 Stock Incentive Plan (See
      Note 14)Less:
      Stock RepurchasesOctober
      2007
                                                
                                                
                                                (1,524,390
                                                )
                                                
                                                $
                                                9.84
                                                
                                                
                                                $
                                                (7,976
                                                )
                                                Repurchase
      of CapLease common stock in connection with convertible senior note
      issuanceTotal
                                                
                                                
                                                57,471,2681Units
      were originally issued at a price of $11.40 per
      unit.
  8.125% Series A Cumulative
Redeemable Preferred Stock
  In
October 2005, CapLease issued 1,400,000 shares of 8.125% Series A cumulative
redeemable preferred stock in a public offering at a price to the public of
$25.00 per share. The Company received net proceeds in the transaction (after
deducting underwriting discounts and commissions and offering expenses) of
approximately $33,657.
  On March
31, 2010, CapLease issued 1,800,000 shares of 8.125% Series A cumulative
redeemable preferred stock in a public offering at a price of $23.06 per share,
resulting in an effective annual yield of 9.00%. The Company received net
proceeds in the transaction (after deducting underwriting discounts and
commissions and offering expenses) of approximately $40,109, including $884 of
accrued dividends.
 
 85
  CapLease,
Inc. and Subsidiaries
 Notes to
Consolidated Financial Statements
 (Dollar
amounts in thousands, except per share amounts)
 
 December
31, 2010, 2009 and 2008
 
 During
the quarter ended December 31, 2010, CapLease issued an aggregate of 4,300
shares of 8.125% Series A cumulative redeemable preferred stock through its “at
the market offering” program with Brinson Patrick Securities Corporation at an
average price of $24.95 per share, for net proceeds of $106. For the full year
ended December 31, 2010, CapLease issued an aggregate of 4,900 shares of 8.125%
Series A cumulative redeemable preferred stock through this  program
at an average price of $24.96 per share, for net proceeds of $120.
  The
Series A preferred stock ranks senior to CapLease’s common stock and junior to
all of the Company’s existing and future indebtedness. Investors in the Series A
preferred stock are entitled to receive cumulative cash distributions at a rate
of 8.125% per annum of the $25.00 liquidation preference per share (equivalent
to $2.03125 per annum per share). The annual dividend rate will increase to
9.125% if the Series A preferred stock is delisted from the New York Stock
Exchange following a change of control of CapLease.
  If
CapLease liquidates, dissolves or wind ups its operations, the Series A
preferred stock holders will have the right to receive $25.00 per share, plus
all accrued and unpaid dividends (whether or not declared) to the date of
payment, before any payment is made to CapLease’s common stock holders. The
Series A preferred stock does not have any stated maturity date and is not
subject to any sinking fund or mandatory redemption provisions. CapLease may
redeem the Series A preferred stock for cash at its option, in whole or from
time to time in part, at a redemption price of $25.00 per share, plus accrued
and unpaid dividends (whether or not declared) to the redemption
date.
  Holders
of Series A preferred stock generally have no voting rights. However, Series A
preferred stock holders will have limited voting rights if CapLease fails to pay
dividends on the Series A preferred stock for six or more quarterly periods
(whether or not consecutive), or if CapLease issues shares of capital stock
senior to the Series A preferred stock or makes changes to the terms of the
Series A preferred stock that would be materially adverse to the rights of
holders of Series A preferred stock.
  The
Series A preferred stock is not convertible into or exchangeable for CapLease’s
common stock or any of the Company’s other securities or property.
  Dividends
  The
following table summarizes the dividend history on shares of CapLease common
stock for the periods indicated.
  Quarter
                              Ended
                            
                            Record
                              Date
                            
                            Payment
                              Date
                            
                            Dividend
                              Per Share
                            
                            
                            Total
                              Amount12/31/2007
                            
                            12/31/2007
                            
                            1/15/2008
                            
                            $
                            0.20
                            
                            
                            $
                            8,8703/31/2008
                            
                            3/31/2008
                            
                            4/15/2008
                            
                            
                            0.20
                            
                            
                            
                            8,9496/30/2008
                            
                            6/30/2008
                            
                            7/15/2008
                            
                            
                            0.20
                            
                            
                            
                            8,9739/30/2008
                            
                            9/30/2008
                            
                            10/15/2008
                            
                            
                            0.20
                            
                            
                            
                            9,4753/31/2009
                            
                            3/31/2009
                            
                            4/15/2009
                            
                            
                            0.05
                            
                            
                            
                            2,3966/30/2009
                            
                            6/30/2009
                            
                            7/15/2009
                            
                            
                            0.05
                            
                            
                            
                            2,4339/30/2009
                            
                            9/30/2009
                            
                            10/15/2009
                            
                            
                            0.05
                            
                            
                            
                            2,57712/31/2009
                            
                            12/31/2009
                            
                            1/15/2010
                            
                            
                            0.06
                            
                            
                            
                            3,1033/31/2010
                            
                            3/31/2010
                            
                            4/15/2010
                            
                            
                            0.06
                            
                            
                            
                            3,4316/30/2010
                            
                            6/30/2010
                            
                            7/15/2010
                            
                            
                            0.06
                            
                            
                            
                            3,4319/30/2010
                            
                            9/30/2010
                            
                            10/15/2010
                            
                            
                            0.06
                            
                            
                            
                            3,43112/31/2010
                            
                            12/31/2010
                            
                            1/18/2011
                            
                            
                            0.065
                            
                            
                            
                            3,736
  The
Company did not declare a dividend on CapLease common stock during the fourth
quarter of 2008.
  86
  CapLease,
Inc. and Subsidiaries
 Notes to
Consolidated Financial Statements
 (Dollar
amounts in thousands, except per share amounts)
 
 December
31, 2010, 2009 and 2008
 
 The
following table summarizes the dividend history on shares of CapLease Series A
preferred stock for the periods indicated.
  Quarter
                              Ended
                            
                            Record
                              Date
                            
                            Payment
                              Date
                            
                            Dividend
                              Per Share
                            
                            
                            Total
                              Amount12/31/2007
                            
                            12/31/2007
                            
                            1/15/2008
                            
                            $
                            0.5078125
                            
                            
                            $
                            7113/31/2008
                            
                            3/31/2008
                            
                            4/15/2008
                            
                            
                            0.5078125
                            
                            
                            
                            7116/30/2008
                            
                            6/30/2008
                            
                            7/15/2008
                            
                            
                            0.5078125
                            
                            
                            
                            7119/30/2008
                            
                            9/30/2008
                            
                            10/15/2008
                            
                            
                            0.5078125
                            
                            
                            
                            71112/31/2008
                            
                            12/31/2008
                            
                            1/15/2009
                            
                            
                            0.5078125
                            
                            
                            
                            7113/31/2009
                            
                            3/31/2009
                            
                            4/15/2009
                            
                            
                            0.5078125
                            
                            
                            
                            7116/30/2009
                            
                            6/30/2009
                            
                            7/15/2009
                            
                            
                            0.5078125
                            
                            
                            
                            7119/30/2009
                            
                            9/30/2009
                            
                            10/15/2009
                            
                            
                            0.5078125
                            
                            
                            
                            71112/31/2009
                            
                            12/31/2009
                            
                            1/15/2010
                            
                            
                            0.5078125
                            
                            
                            
                            7113/31/2010
                            
                            3/31/2010
                            
                            4/15/2010
                            
                            
                            0.5078125
                            
                            
                            
                            1,6256/30/2010
                            
                            6/30/2010
                            
                            7/15/2010
                            
                            
                            0.5078125
                            
                            
                            
                            1,6259/30/2010
                            
                            9/30/2010
                            
                            10/15/2010
                            
                            
                            0.5078125
                            
                            
                            
                            1,62512/31/2010
                            
                            12/31/2010
                            
                            1/18/2011
                            
                            
                            0.5078125
                            
                            
                            
                            1,627
  14.
              Stock
      Based Compensation
  The
Company adopted a stock incentive plan for its employees and directors during
March 2004 in connection with its initial public offering. 5,123,000 shares of
common stock are authorized for issuance under the stock plan. As of December
31, 2010, the Company had awarded 3,369,955 shares of common stock under the
stock plan, all in the form of stock awards to executive officers, other
employees and directors of the Company. As of December 31, 2010, the Company has
not awarded any options, stock appreciation rights or other stock based
compensation under the stock plan.
  A summary
of the Company’s activity under the stock plan from January 1, 2009 through
December 31, 2010, is presented below:
  Number of
                        SharesStock
      Awards at January 1, 2009
                      
                      
                      1,791,195Granted
      During the Year Ended December 31, 2009
                      
                      
                      1,107,600
                      (1)Forfeited
      During the Year Ended December 31, 2009
                      
                      
                      (8,340
                      )Stock
      Awards at January 1, 2010
                      
                      
                      2,890,455Granted
      During the Year Ended December 31, 2010
                      
                      
                      479,500
                      (2)Stock
      Awards at December 31, 2010
                      
                      
                      3,369,955
 
 (1)
              Shares
      are scheduled to vest between March 2010 and March 2014, but will
      generally be forfeited if the recipient either terminates his employment
      with the Company or ceases to be a member of CapLease’s Board of Directors
      at any time prior to the vesting date. Vesting of an aggregate of 523,572
      shares is also subject to satisfaction of objective and subjective
      performance criteria, to be determined by CapLease’s Compensation
      Committee.
 (2)
              Shares
      are scheduled to vest between March 2011 and March 2015, but will
      generally be forfeited if the recipient either terminates his employment
      with the Company or ceases to be a member of CapLease’s Board of Directors
      at any time prior to the vesting date. Vesting of an aggregate of 241,125
      shares is also subject to satisfaction of objective and subjective
      performance criteria, to be determined by CapLease’s Compensation
      Committee.
  87
 
 CapLease,
Inc. and Subsidiaries
 Notes to
Consolidated Financial Statements
 (Dollar
amounts in thousands, except per share amounts)
 
 December
31, 2010, 2009 and 2008
 
 A summary
of the status of unvested shares from January 1, 2009 through December 31, 2010,
is presented below:
  Shares
                                Awarded
                                Under Plan
                              
                              
                              Shares Priced
                                Under FASB
                                ASC 718-10-30
                              
                              
                              Weighted
                                Average
                                Fair ValueNonvested
      at January 1, 2009
                              
                              
                              930,232
                              
                              
                              
                              606,800
                              
                              
                              $
                              9.66Current
      period awards
                              
                              
                              1,107,600
                              
                              
                              
                              688,741
                              
                              
                              
                              2.23Prior
      period awards
                              
                              
                              N/A
                              
                              
                              
                              119,140
                              
                              
                              
                              1.88Vested
                              
                              
                              (228,476
                              )
                              
                              
                              (228,476
                              )
                              
                              
                              6.77Forfeited
                              
                              
                              (8,340
                              )
                              
                              
                              (8,340
                              )
                              
                              
                              4.31Nonvested
      at January 1, 2010
                              
                              
                              1,801,016
                              
                              
                              
                              1,177,865
                              
                              
                              
                              4.17Current
      period awards
                              
                              
                              479,500
                              
                              
                              
                              286,600
                              
                              
                              
                              4.84Prior
      period awards
                              
                              
                              N/A
                              
                              
                              
                              198,966
                              
                              
                              
                              4.84Vested
                              
                              
                              (541,149
                              )
                              
                              
                              (541,149
                              )
                              
                              
                              3.84Nonvested
      at December 31, 2010
                              
                              
                              1,739,367
                              
                              
                              
                              1,122,282
                              
                              
                              
                              4.62
 
 The
Company uses the closing stock price on the grant date as its estimate of the
fair value of the award.
  As the
immediately preceding table indicates, not all Company share awards have been
valued for purposes of FASB ASC 718-10-30, as the Company’s stock awards include
shares awarded with vesting dependent upon satisfaction of performance criteria
and with the performance criteria on a portion of the shares to be determined in
the future. “Prior period awards” represent share awards made in a prior period
which have been valued for purposes of FASB ASC 718-10-30 in the current period
when the CapLease Compensation Committee determined the performance
criteria.
  As of
December 31, 2010, $3,153 of unvested shares (fair value at the grant dates) is
expected to be charged to the Company’s Consolidated Statement of Operations
ratably over the remaining vesting period (through March 2015). As of December
31, 2010, the grant date fair value for awards of 31,350 restricted shares made
in 2007, 78,690 restricted shares made in 2008, 314,145 restricted shares made
in 2009 and 192,900 restricted shares made in 2010, has not yet been determined
because the grant date (as defined under at FASB ASC 718-10-20) has not yet
occurred.
  15.
              Other
      Comprehensive Income
  Comprehensive
income (loss) is defined as the change in equity of a business enterprise during
a period from transactions and other events and circumstances, excluding those
resulting from investments by and distributions to owners. For the Company’s
purposes, comprehensive income (loss) represents net income (loss), as presented
in the Company’s Consolidated Statements of Operations, adjusted for unrealized
gains or losses on securities available for sale and amortization of unrealized
losses on securities previously classified as available for sale, and
amortization of realized losses on derivatives reclassified into interest
expense.
  The
Company’s comprehensive income (loss) for the years ended December 31, 2010,
December 31, 2009, and December 31, 2008, is summarized below.
  2010
                    
                    
                    2009
                    
                    
                    2008Net
      loss
                    
                    $
                    (13,140
                    )
                    
                    $
                    (13,967
                    )
                    
                    $
                    (23,164
                    )Increase
      (decrease) in fair value of securities available for sale
                    
                    
                    1,759
                    
                    
                    
                    2,463
                    
                    
                    
                    (9,398
                    )Increase
      in fair value of derivatives
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    4,522Amortization
      of unrealized loss on securities previously classified as available for
      sale
                    
                    
                    1,765
                    
                    
                    
                    562
                    
                    
                    
                    505Reclassification
      of derivative items into earnings
                    
                    
                    592
                    
                    
                    
                    761
                    
                    
                    
                    20,126Realized
      loss on derivatives
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    (17,853
                    )Comprehensive
      income (loss)
                    
                    $
                    (9,024
                    )
                    
                    $
                    (10,181
                    )
                    
                    $
                    (25,262
                    )
  FASB ASC
220-10-45-6 divides comprehensive income (loss) into “net income (loss)” and
“other comprehensive income (loss).” Other comprehensive income (loss) is
defined as revenues, expenses, gains and losses that under GAAP are included in
comprehensive income (loss) but excluded from net income (loss). Other
comprehensive income (loss) is a component of Stockholders’ Equity and is shown
on the Company’s Consolidated Statement of Changes in Stockholders’ Equity
(fourth column). The following table summarizes the Company’s Accumulated Other
Comprehensive Income (Loss) as reported on the Consolidated Statement of Changes
in Stockholders’ Equity.
  88
  CapLease,
Inc. and Subsidiaries
 Notes to
Consolidated Financial Statements
 (Dollar
amounts in thousands, except per share amounts)
 
 December
31, 2010, 2009 and 2008
 
 December 31,2010
                        
                        
                        2009Net
      unrealized losses on securities available for sale
                        
                        $
                        (7,958
                        )
                        
                        $
                        (9,717
                        )Net
      unrealized losses on securities previously classified as
                          available for sale
                        
                        
                        (8,107
                        )
                        
                        
                        (9,872
                        )Net
      realized losses on derivatives
                        
                        
                        (4,151
                        )
                        
                        
                        (4,743
                        )Accumulated
      other comprehensive loss
                        
                        $
                        (20,216
                        )
                        
                        $
                        (24,332
                        )
 
 16.
              Non-Controlling
      Interests
  During
June 2006, CapLease’s Operating Partnership issued 263,157 units of limited
partnership to an unaffiliated third party. All of these units were issued in
connection with the Company’s acquisition of a property in June 2006 from the
third party. During June 2008, the units of limited partnership became
redeemable by the holder, at its option, on the basis of one unit for either one
share of CapLease common stock or cash equal to the fair market value of a share
of common stock at the time of the redemption. The units of limited partnership
do not have a liquidation preference. During September 2008, the non-controlling
interest holder redeemed 107,131 units for the same number of shares of CapLease
common stock. As of December 31, 2010, the Operating Partnership had issued and
outstanding 156,026 units of limited partnership.
  Cash
distributions by the Operating Partnership are paid in the following priority:
first, to the non-controlling interest holder until such holder receives the
amount it would have received if the holder’s units of limited partnership
interest were converted to an equal number of shares of CapLease common stock,
and then, to CapLease. Since July 2006, at the same time CapLease has paid a
cash dividend to its common stockholders, the non-controlling interest holder
has been paid a cash dividend of the same amount per limited partnership
unit.
  17.
              Rental
      Income
  The
Company is the lessor to tenants under operating leases with expiration dates
ranging from 2011
to 2026.
The minimum rental amounts due under the leases are generally subject to
scheduled fixed increases. The leases generally also require that the tenants
pay for or reimburse the Company for the occupancy and operating costs of the
properties, or in certain cases reimburse the Company for increases in certain
operating costs and real estate taxes above their base year costs. Approximate
future minimum rents to be received over the next five years and thereafter for
non-cancelable operating leases in effect at December 31, 2010, are as
follows:
  2011
                      
                      $
                      126,6952012
                      
                      
                      125,5272013
                      
                      
                      97,3582014
                      
                      
                      94,2202015
                      
                      
                      92,666Thereafter
                      
                      
                      359,048$
                      895,514
 
 18.
              Concentration
      Risks
  The
Company has historically relied on Wells Fargo Bank, N. A. (as successor to
Wachovia Bank, N. A.) to provide a significant portion of its cash for financing
its portfolio investments, including through short-term borrowing facilities to
facilitate the Company’s portfolio investment and mortgage financings on its
owned real properties. Deterioration in the financial condition of Wells Fargo
Bank, N. A. could have a negative impact on the Company’s business, operating
results and financial condition. As of December 31, 2010, Wells Fargo Bank, N.
A. carried a senior unsecured credit rating of AA from Standard &
Poor’s.
  During
2010, approximately 12.4% of the Company’s total revenues were derived from one
tenant (the United States Government).
  89
  CapLease,
Inc. and Subsidiaries
 Notes to
Consolidated Financial Statements
 (Dollar
amounts in thousands, except per share amounts)
 
 December
31, 2010, 2009 and 2008
 
 19.
              401(k)
      Plan
  The
Company has a 401(k) Savings/Retirement Plan (the “401(k) Plan”) in place to
cover eligible employees of the Company. The 401(k) Plan permits eligible
employees of the Company to defer a portion of their annual compensation,
subject to certain limitations imposed by the Internal Revenue Code. The
employee’s elective deferrals are immediately vested and non-forfeitable upon
contribution to the 401(k) Plan. For the years ended December 31, 2010, December
31, 2009 and December 31, 2008, the Company made matching contributions of $297,
$234, and $312, respectively.
 
 20.
              Pro
      Forma Condensed Consolidated Statements of Operations
      (Unaudited)
  The
accompanying unaudited Pro Forma Condensed Consolidated Statements of Operations
are presented as if, at January 1, 2009, the Company acquired the real property
purchased during December 2010 which has been accounted for as a business
combination. Earnings per share are presented using the weighted average shares
outstanding during the relevant periods.  In management's opinion, all
adjustments necessary to reflect the effects of the above transactions have been
made.
  The
unaudited Pro Forma Condensed Consolidated Statements of Operations are not
necessarily indicative of what the actual results of operations would have been
assuming the acquisition transactions had occurred at the date indicated above,
nor do they purport to represent our future results of operations.
  For the twelve months
                      ended December 31,2010
                    
                    
                    2009Total
      revenues
                    
                    $
                    169,583
                    
                    
                    $
                    181,368Loss
      from continuing operations
                    
                    
                    (11,706
                    )
                    
                    
                    (12,978
                    )Loss
      per basic and diluted common share from continuing
    operations
                    
                    
                    (0.21
                    )
                    
                    
                    (0.26
                    )Net
      loss allocable to common stockholders
                    
                    
                    (17,235
                    )
                    
                    
                    (15,257
                    )Net
      loss per basic and diluted common share
                    
                    
                    (0.31
                    )
                    
                    
                    (0.31
                    )
  21.
              Segment
      Reporting
  FASB ASC
280 establishes the manner in which public businesses report information about
operating segments in annual and interim financial reports issued to
stockholders. FASB ASC 280-10-50 defines a segment as a component of an
enterprise about which separate financial information is available and that is
evaluated regularly to allocate resources and assess performance. The Company
conducts its business through two segments: operating real estate (including its
investments in owned properties) and debt investments (including its loan
investments as well as its investments in securities). For segment reporting
purposes, the Company does not allocate interest income on short-term
investments or general and administrative expenses.
  Selected
results of operations for the years ended December 31, 2010 are as
follows:
  Corporate /
                      Unallocated
                    
                    
                    Operating
                      Real Estate
                    
                    
                    Debt
                      Investments
                    
                    
                    TotalTotal
      revenues
                    
                    $
                    856
                    
                    
                    $
                    138,438
                    
                    
                    $
                    27,121
                    
                    
                    $
                    166,415Total
      expenses
                    
                    
                    19,799
                    
                    
                    
                    133,647
                    
                    
                    
                    25,945
                    
                    
                    
                    179,391Loss
      on extinguishment of debt
                    
                    
                    (293
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (293
                    )Income
      (Loss) from continuing operations
                    
                    
                    (19,237
                    )
                    
                    
                    4,791
                    
                    
                    
                    1,177
                    
                    
                    
                    (13,269
                    )Total
      assets
                    
                    
                    48,213
                    
                    
                    
                    1,463,362
                    
                    
                    
                    358,696
                    
                    
                    
                    1,870,271
  90
  CapLease,
Inc. and Subsidiaries
 Notes to
Consolidated Financial Statements
 (Dollar
amounts in thousands, except per share amounts)
 
 December
31, 2010, 2009 and 2008
  Selected
results of operations for the years ended December 31, 2009 are as
follows:
  Corporate /
                      Unallocated
                    
                    
                    Operating
                      Real Estate
                    
                    
                    Debt
                      Investments
                    
                    
                    TotalTotal
      revenues
                    
                    $
                    492
                    
                    
                    $
                    147,408
                    
                    
                    $
                    30,268
                    
                    
                    $
                    178,168Total
      expenses
                    
                    
                    21,210
                    
                    
                    
                    150,516
                    
                    
                    
                    30,602
                    
                    
                    
                    202,328Gain
      on extinguishment of debt
                    
                    
                    9,829
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    9,829Provision
      for income tax
                    
                    
                    201
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    201Loss
      from continuing operations
                    
                    
                    (11,090
                    )
                    
                    
                    (3,109
                    )
                    
                    
                    (333
                    )
                    
                    
                    (14,532
                    )Total
      assets
                    
                    
                    54,618
                    
                    
                    
                    1,471,987
                    
                    
                    
                    377,810
                    
                    
                    
                    1,904,415
  Selected
results of operations for the year ended December 31, 2008 are as
follows:
  Corporate /
                      Unallocated
                    
                    
                    Operating
                      Real Estate
                    
                    
                    Debt
                      Investments
                    
                    
                    TotalTotal
      revenues
                    
                    $
                    777
                    
                    
                    $
                    147,172
                    
                    
                    $
                    34,338
                    
                    
                    $
                    182,287Total
      expenses
                    
                    
                    23,457
                    
                    
                    
                    144,776
                    
                    
                    
                    39,762
                    
                    
                    
                    207,995Gain
      on extinguishment of debt
                    
                    
                    1,713
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    1,713Income
      (loss) from continuing operations
                    
                    
                    (20,967
                    )
                    
                    
                    2,396
                    
                    
                    
                    (5,424
                    )
                    
                    
                    (23,995
                    )Total
      assets
                    
                    
                    26,620
                    
                    
                    
                    1,566,405
                    
                    
                    
                    452,500
                    
                    
                    
                    2,045,525
 
 22.
              Quarterly
      Financial Information (Unaudited)
  The
following table sets forth selected quarterly financial data for the Company for
2010 and 2009.
  Revenue
                            
                            
                            Net income(loss)
                              applicable to
                              commonshares
                            
                            
                            Basic anddiluted
                              income(loss) per
                              commonshare2010December
      31
                            
                            $
                            41,777
                            
                            
                            $
                            (10,439
                            )
                            
                            $
                            (0.18
                            )September
      30
                            
                            
                            41,366
                            
                            
                            
                            (2,779
                            )
                            
                            
                            (0.05
                            )June
      30
                            
                            
                            41,603
                            
                            
                            
                            (2,704
                            )
                            
                            
                            (0.05
                            )March
      31
                            
                            
                            41,669
                            
                            
                            
                            (2,836
                            )
                            
                            
                            (0.05
                            )2009December
      31
                            
                            
                            43,632
                            
                            
                            
                            (14,039
                            )
                            
                            
                            (0.27
                            )September
      30
                            
                            
                            44,961
                            
                            
                            
                            (4,084
                            )
                            
                            
                            (0.08
                            )June
      30
                            
                            
                            44,450
                            
                            
                            
                            5,955
                            
                            
                            
                            0.12March
      31
                            
                            
                            45,126
                            
                            
                            
                            (4,642
                            )
                            
                            
                            (0.10
                            )
  The
totals for the year may differ from the sum of the quarters as a result of
weighting and rounding.
 
 23.
              Subsequent
      Events
  During
February 2011, the Company sold two of its commercial-mortgage backed securities
investments. Both of the securities are secured by portions of the mortgage
financing on the office building located at 180 Maiden Lane, New York, New York
(WBCMT 2004-C15, Class 180ML-D and Class 180ML-E).  The sale was executed
primarily because the securities were beyond their original scheduled maturity
date of November 2009 and the sale enabled the Company to realize a return of
substantially all of the outstanding principal.  The total of $23,000
face amount of securities were sold at a dollar price of $98 per $100 of face
amount, and the Company expects to recognize a loss on investment during the
first quarter of 2011 of approximately $500. The
aggregate carrying amount of these securities was $22,236 as of December 31,
2010.The proceeds from the sale of the Class D bond (face amount of
$15,000) will be utilized to reduce principal outstanding in the Company’s CDO,
and the proceeds from the sale of the Class E bond (face amount of $8,000) will
be utilized for general corporate purposes, including to reduce principal
outstanding under the credit agreement and to reinvest in new
assets.
  
 91
 CapLease,
Inc. and Subsidiaries
 Schedule
of Real Estate and Accumulated Depreciation
 
 December
31, 2010
 (amounts
in thousands)
  Schedule
III
 
 Initial Cost
                                                                                  
                                                                                  
                                                                                  Cost Capitalized Subsequent to
                                                                                    Acquisition
                                                                                  
                                                                                  
                                                                                  Gross Amount at Which
                                                                                    Carried at Close of PeriodDescription
                                                                                  
                                                                                  Encumbrances
                                                                                  
                                                                                  
                                                                                  Land
                                                                                  
                                                                                  
                                                                                  Building
      and
                                                                                        Improvements
                                                                                  
                                                                                  
                                                                                  Land
                                                                                  
                                                                                  
                                                                                  Building
      and
                                                                                        Improvements
                                                                                  
                                                                                  
                                                                                  Land
                                                                                  
                                                                                  
                                                                                  Building
      and
                                                                                        Improvements
                                                                                  
                                                                                  
                                                                                  Total
                                                                                  
                                                                                  
                                                                                  Accumulated
                                                                                      Depreciation
                                                                                  
                                                                                  Date of Construction
                                                                                  
                                                                                  Date Acquired
                                                                                  
                                                                                  Life on Which
                                                                                    Depreciation
                                                                                    is ComputedAbbott Laboratories, Columbus,
      OH
                                                                                  
                                                                                  $
                                                                                  5,293
                                                                                  
                                                                                  
                                                                                  $
                                                                                  1,025
                                                                                  
                                                                                  
                                                                                  $
                                                                                  10,066
                                                                                  
                                                                                  
                                                                                  $
                                                                                  -
                                                                                  
                                                                                  
                                                                                  $
                                                                                  -
                                                                                  
                                                                                  
                                                                                  $
                                                                                  1,025
                                                                                  
                                                                                  
                                                                                  $
                                                                                  10,066
                                                                                  
                                                                                  
                                                                                  $
                                                                                  11,091
                                                                                  
                                                                                  
                                                                                  $
                                                                                  1,549
                                                                                  
                                                                                  1980, renovated in
      2003-2004
                                                                                  
                                                                                  11/5/2004
                                                                                  
                                                                                  VariousAbbott
      Laboratories, Waukegan, IL
                                                                                  
                                                                                  
                                                                                  15,809
                                                                                  
                                                                                  
                                                                                  
                                                                                  2,500
                                                                                  
                                                                                  
                                                                                  
                                                                                  15,430
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  2,500
                                                                                  
                                                                                  
                                                                                  
                                                                                  15,430
                                                                                  
                                                                                  
                                                                                  
                                                                                  17,930
                                                                                  
                                                                                  
                                                                                  
                                                                                  2,081
                                                                                  
                                                                                  2000
                                                                                  
                                                                                  8/9/2005
                                                                                  
                                                                                  VariousAetna
      Life Insurance Company, Fresno, CA
                                                                                  
                                                                                  
                                                                                  18,484
                                                                                  
                                                                                  
                                                                                  
                                                                                  3,000
                                                                                  
                                                                                  
                                                                                  
                                                                                  19,462
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  849
                                                                                  
                                                                                  
                                                                                  
                                                                                  3,000
                                                                                  
                                                                                  
                                                                                  
                                                                                  20,311
                                                                                  
                                                                                  
                                                                                  
                                                                                  23,311
                                                                                  
                                                                                  
                                                                                  
                                                                                  3,325
                                                                                  
                                                                                  1
      story office 1969, 2 story office 1984, 2 story parking 1997, interior
      renovated in 2000 & 2008, parking lot reconstructed in
      2008
                                                                                  
                                                                                  10/19/2006
                                                                                  
                                                                                  VariousAllstate
      Insurance Company, Charlotte, NC
                                                                                  
                                                                                  
                                                                                  21,790
                                                                                  
                                                                                  
                                                                                  
                                                                                  7,100
                                                                                  
                                                                                  
                                                                                  
                                                                                  14,594
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  7,100
                                                                                  
                                                                                  
                                                                                  
                                                                                  14,594
                                                                                  
                                                                                  
                                                                                  
                                                                                  21,694
                                                                                  
                                                                                  
                                                                                  
                                                                                  1,835
                                                                                  
                                                                                  1973,
      renovated in the 1990s
                                                                                  
                                                                                  12/21/2005
                                                                                  
                                                                                  VariousAllstate
      Insurance Company, Roanoke, VA
                                                                                  
                                                                                  
                                                                                  23,198
                                                                                  
                                                                                  
                                                                                  
                                                                                  3,200
                                                                                  
                                                                                  
                                                                                  
                                                                                  20,930
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  3,200
                                                                                  
                                                                                  
                                                                                  
                                                                                  20,930
                                                                                  
                                                                                  
                                                                                  
                                                                                  24,130
                                                                                  
                                                                                  
                                                                                  
                                                                                  2,632
                                                                                  
                                                                                  1969/70,
      with an addition in 1981
                                                                                  
                                                                                  12/21/2005
                                                                                  
                                                                                  VariousAMVESCAP
      PLC, Denver, CO
                                                                                  
                                                                                  
                                                                                  51,124
                                                                                  
                                                                                  
                                                                                  
                                                                                  7,200
                                                                                  
                                                                                  
                                                                                  
                                                                                  55,395
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  591
                                                                                  
                                                                                  
                                                                                  
                                                                                  7,200
                                                                                  
                                                                                  
                                                                                  
                                                                                  55,986
                                                                                  
                                                                                  
                                                                                  
                                                                                  63,186
                                                                                  
                                                                                  
                                                                                  
                                                                                  6,648
                                                                                  
                                                                                  2001,
      first floor renovated in 2008
                                                                                  
                                                                                  3/23/2006
                                                                                  
                                                                                  VariousAon
      Corporation, Glenview, IL
                                                                                  
                                                                                  
                                                                                  64,526
                                                                                  
                                                                                  
                                                                                  
                                                                                  11,000
                                                                                  
                                                                                  
                                                                                  
                                                                                  68,686
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  1,231
                                                                                  
                                                                                  
                                                                                  
                                                                                  11,000
                                                                                  
                                                                                  
                                                                                  
                                                                                  69,917
                                                                                  
                                                                                  
                                                                                  
                                                                                  80,917
                                                                                  
                                                                                  
                                                                                  
                                                                                  10,969
                                                                                  
                                                                                  1976,
      renovated in 1999-2001
                                                                                  
                                                                                  8/19/2004
                                                                                  
                                                                                  VariousBaxter
      International, Inc., Bloomington, IN
                                                                                  
                                                                                  
                                                                                  4,536
                                                                                  
                                                                                  
                                                                                  
                                                                                  1,200
                                                                                  
                                                                                  
                                                                                  
                                                                                  9,181
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  1,200
                                                                                  
                                                                                  
                                                                                  
                                                                                  9,181
                                                                                  
                                                                                  
                                                                                  
                                                                                  10,381
                                                                                  
                                                                                  
                                                                                  
                                                                                  1,427
                                                                                  
                                                                                  1996,
      renovation and warehouse addition in 2004
                                                                                  
                                                                                  10/13/2004
                                                                                  
                                                                                  VariousBunge
      North America, Inc., Fort Worth, TX
                                                                                  
                                                                                  
                                                                                  8,022
                                                                                  
                                                                                  
                                                                                  
                                                                                  650
                                                                                  
                                                                                  
                                                                                  
                                                                                  8,880
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  650
                                                                                  
                                                                                  
                                                                                  
                                                                                  8,880
                                                                                  
                                                                                  
                                                                                  
                                                                                  9,530
                                                                                  
                                                                                  
                                                                                  
                                                                                  821
                                                                                  
                                                                                  2005
                                                                                  
                                                                                  4/19/2007
                                                                                  
                                                                                  VariousCadbury
      Holdings Limited, Whippany, NJ
                                                                                  
                                                                                  
                                                                                  35,265
                                                                                  
                                                                                  
                                                                                  
                                                                                  6,300
                                                                                  
                                                                                  
                                                                                  
                                                                                  38,994
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  1,232
                                                                                  
                                                                                  
                                                                                  
                                                                                  6,300
                                                                                  
                                                                                  
                                                                                  
                                                                                  40,226
                                                                                  
                                                                                  
                                                                                  
                                                                                  46,526
                                                                                  
                                                                                  
                                                                                  
                                                                                  5,530
                                                                                  
                                                                                  2005
                                                                                  
                                                                                  1/6/2005
                                                                                  
                                                                                  VariousCapital
      One Financial Corporation, Plano, TX
                                                                                  
                                                                                  
                                                                                  20,748
                                                                                  
                                                                                  
                                                                                  
                                                                                  6,670
                                                                                  
                                                                                  
                                                                                  
                                                                                  18,816
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  6,670
                                                                                  
                                                                                  
                                                                                  
                                                                                  18,816
                                                                                  
                                                                                  
                                                                                  
                                                                                  25,486
                                                                                  
                                                                                  
                                                                                  
                                                                                  2,601
                                                                                  
                                                                                  1999,
      renovated in 2005
                                                                                  
                                                                                  6/23/2005
                                                                                  
                                                                                  VariousChoice
      Hotels International, Inc., Silver Spring, MD
                                                                                  
                                                                                  
                                                                                  28,025
                                                                                  
                                                                                  
                                                                                  
                                                                                  5,500
                                                                                  
                                                                                  
                                                                                  
                                                                                  37,385
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  1,133
                                                                                  
                                                                                  
                                                                                  
                                                                                  5,500
                                                                                  
                                                                                  
                                                                                  
                                                                                  38,519
                                                                                  
                                                                                  
                                                                                  
                                                                                  44,019
                                                                                  
                                                                                  
                                                                                  
                                                                                  5,671
                                                                                  
                                                                                  Building
      10720 - 1981, 10750 - 1971, 10770 - 1986
                                                                                  
                                                                                  11/23/2004
                                                                                  
                                                                                  VariousCooper
      Tire & Rubber Company, Franklin, IN
                                                                                  
                                                                                  
                                                                                  15,610
                                                                                  
                                                                                  
                                                                                  
                                                                                  1,500
                                                                                  
                                                                                  
                                                                                  
                                                                                  28,242
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  1,500
                                                                                  
                                                                                  
                                                                                  
                                                                                  28,242
                                                                                  
                                                                                  
                                                                                  
                                                                                  29,742
                                                                                  
                                                                                  
                                                                                  
                                                                                  21
                                                                                  
                                                                                  2009
                                                                                  
                                                                                  12/21/2010
                                                                                  
                                                                                  VariousCounty
      of Yolo, California, Woodland, CA
                                                                                  
                                                                                  
                                                                                  12,183
                                                                                  
                                                                                  
                                                                                  
                                                                                  2,300
                                                                                  
                                                                                  
                                                                                  
                                                                                  12,850
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  2,300
                                                                                  
                                                                                  
                                                                                  
                                                                                  12,850
                                                                                  
                                                                                  
                                                                                  
                                                                                  15,150
                                                                                  
                                                                                  
                                                                                  
                                                                                  1,260
                                                                                  
                                                                                  2001
                                                                                  
                                                                                  1/30/2007
                                                                                  
                                                                                  VariousCrozer-Keystone
      Health System, Ridley, PA
                                                                                  
                                                                                  
                                                                                  2,984
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  5,015
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  864
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  5,879
                                                                                  
                                                                                  
                                                                                  
                                                                                  5,879
                                                                                  
                                                                                  
                                                                                  
                                                                                  914
                                                                                  
                                                                                  1977,
      renovated in 2004
                                                                                  
                                                                                  8/9/2004
                                                                                  
                                                                                  VariousCVS
      Corporation, Randolph, MA
                                                                                  
                                                                                  
                                                                                  7,288
                                                                                  
                                                                                  
                                                                                  
                                                                                  6,300
                                                                                  
                                                                                  
                                                                                  
                                                                                  7,801
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  6,300
                                                                                  
                                                                                  
                                                                                  
                                                                                  7,801
                                                                                  
                                                                                  
                                                                                  
                                                                                  14,101
                                                                                  
                                                                                  
                                                                                  
                                                                                  1,220
                                                                                  
                                                                                  1965,
      renovated in the 1980's and 1993
                                                                                  
                                                                                  9/29/2004
                                                                                  
                                                                                  VariousFarmers
      Group, Inc., Simi Valley, CA
                                                                                  
                                                                                  
                                                                                  31,690
                                                                                  
                                                                                  
                                                                                  
                                                                                  10,620
                                                                                  
                                                                                  
                                                                                  
                                                                                  28,127
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  10,620
                                                                                  
                                                                                  
                                                                                  
                                                                                  28,127
                                                                                  
                                                                                  
                                                                                  
                                                                                  38,747
                                                                                  
                                                                                  
                                                                                  
                                                                                  2,754
                                                                                  
                                                                                  Office
      240M SF 1982, Training Facility (w/office) 21M SF  1999 &
      Warehouse 10M SF 1982
                                                                                  
                                                                                  1/31/2007
                                                                                  
                                                                                  VariousFarmers
      New World Life Insurance Company, Mercer Island, WA
                                                                                  
                                                                                  
                                                                                  31,429
                                                                                  
                                                                                  
                                                                                  
                                                                                  24,000
                                                                                  
                                                                                  
                                                                                  
                                                                                  10,035
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  24,000
                                                                                  
                                                                                  
                                                                                  
                                                                                  10,035
                                                                                  
                                                                                  
                                                                                  
                                                                                  34,035
                                                                                  
                                                                                  
                                                                                  
                                                                                  1,261
                                                                                  
                                                                                  1982
                                                                                  
                                                                                  12/22/2005
                                                                                  
                                                                                  VariousGeneral
      Motors Financial Company, Inc., Arlington, TX
                                                                                  
                                                                                  
                                                                                  26,937
                                                                                  
                                                                                  
                                                                                  
                                                                                  5,820
                                                                                  
                                                                                  
                                                                                  
                                                                                  32,219
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  5,820
                                                                                  
                                                                                  
                                                                                  
                                                                                  32,219
                                                                                  
                                                                                  
                                                                                  
                                                                                  38,039
                                                                                  
                                                                                  
                                                                                  
                                                                                  3,230
                                                                                  
                                                                                  1999
                                                                                  
                                                                                  12/28/2006
                                                                                  
                                                                                  VariousITT
      Industries, Inc., Herndon, VA
                                                                                  
                                                                                  
                                                                                  43,792
                                                                                  
                                                                                  
                                                                                  
                                                                                  5,300
                                                                                  
                                                                                  
                                                                                  
                                                                                  40,221
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  9,528
                                                                                  
                                                                                  
                                                                                  
                                                                                  5,300
                                                                                  
                                                                                  
                                                                                  
                                                                                  49,749
                                                                                  
                                                                                  
                                                                                  
                                                                                  55,049
                                                                                  
                                                                                  
                                                                                  
                                                                                  6,660
                                                                                  
                                                                                  1999,
      interior renovated in 2005-2006
                                                                                  
                                                                                  5/23/2005
                                                                                  
                                                                                  VariousJohnson
      Controls, Inc., Largo, FL
                                                                                  
                                                                                  
                                                                                  19,846
                                                                                  
                                                                                  
                                                                                  
                                                                                  4,600
                                                                                  
                                                                                  
                                                                                  
                                                                                  18,168
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  4,600
                                                                                  
                                                                                  
                                                                                  
                                                                                  18,168
                                                                                  
                                                                                  
                                                                                  
                                                                                  22,768
                                                                                  
                                                                                  
                                                                                  
                                                                                  2,937
                                                                                  
                                                                                  1963
      & 2001
                                                                                  
                                                                                  12/12/2006
                                                                                  
                                                                                  VariousKoninklijke
      Ahold, N.V., Levittown, PA
                                                                                  
                                                                                  
                                                                                  14,736
                                                                                  
                                                                                  
                                                                                  
                                                                                  4,000
                                                                                  
                                                                                  
                                                                                  
                                                                                  15,789
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  4,000
                                                                                  
                                                                                  
                                                                                  
                                                                                  15,789
                                                                                  
                                                                                  
                                                                                  
                                                                                  19,789
                                                                                  
                                                                                  
                                                                                  
                                                                                  1,796
                                                                                  
                                                                                  2006
                                                                                  
                                                                                  6/13/2006
                                                                                  
                                                                                  VariousLowes
      Companies, Inc., Aliso Viejo, CA
                                                                                  
                                                                                  
                                                                                  42,942
                                                                                  
                                                                                  
                                                                                  
                                                                                  26,600
                                                                                  
                                                                                  
                                                                                  
                                                                                  20,831
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  5
                                                                                  
                                                                                  
                                                                                  
                                                                                  26,600
                                                                                  
                                                                                  
                                                                                  
                                                                                  20,836
                                                                                  
                                                                                  
                                                                                  
                                                                                  47,436
                                                                                  
                                                                                  
                                                                                  
                                                                                  2,929
                                                                                  
                                                                                  1965,
      renovated in 2004-2005
                                                                                  
                                                                                  5/31/2005
                                                                                  
                                                                                  VariousMichelin
      North America, Inc. (Development Property), Louisville, KY
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  951
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  2,272
                                                                                  
                                                                                  
                                                                                  
                                                                                  951
                                                                                  
                                                                                  
                                                                                  
                                                                                  2,272
                                                                                  
                                                                                  
                                                                                  
                                                                                  3,223
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  Under
      construction
                                                                                  
                                                                                  9/1/2010
                                                                                  
                                                                                  VariousMulti-Tenant
      (currently vacant), Johnston, RI
                                                                                  
                                                                                  
                                                                                  -
                                                                                  (1)
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  32,986
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  32,986
                                                                                  
                                                                                  
                                                                                  
                                                                                  32,986
                                                                                  
                                                                                  
                                                                                  
                                                                                  6,175
                                                                                  
                                                                                  1973
                                                                                  
                                                                                  4/18/2007
                                                                                  
                                                                                  VariousMulti-Tenant
      (Dodge building), Omaha, NE
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  11,626
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  1,609
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  13,235
                                                                                  
                                                                                  
                                                                                  
                                                                                  13,235
                                                                                  
                                                                                  
                                                                                  
                                                                                  1,498
                                                                                  
                                                                                  1985,
      renovated 2010-2011
                                                                                  
                                                                                  4/18/2007
                                                                                  
                                                                                  Various
  92
 CapLease,
Inc. and Subsidiaries
 Schedule
of Real Estate and Accumulated Depreciation
 
 December
31, 2010
 (amounts
in thousands)
  Schedule
III
 Initial Cost
                                                                                            
                                                                                            
                                                                                            Cost Capitalized Subsequent to
                                                                                              Acquisition
                                                                                            
                                                                                            
                                                                                            Gross Amount at Which
                                                                                              Carried at Close of PeriodDescription
                                                                                            
                                                                                            Encumbrances
                                                                                            
                                                                                            
                                                                                            Land
                                                                                            
                                                                                            
                                                                                            Building and
                                                                                              Improvements
                                                                                            
                                                                                            
                                                                                            Land
                                                                                            
                                                                                            
                                                                                            Building and
                                                                                              Improvements
                                                                                            
                                                                                            
                                                                                            Land
                                                                                            
                                                                                            
                                                                                            Building and
                                                                                              Improvements
                                                                                            
                                                                                            
                                                                                            Total
                                                                                            
                                                                                            
                                                                                            Accumulated
                                                                                              Depreciation
                                                                                            
                                                                                            Date of Construction
                                                                                            
                                                                                            Date Acquired
                                                                                            
                                                                                            Life on Which
                                                                                              Depreciation
                                                                                              is ComputedMulti-Tenant
      (Landmark building), Omaha, NE
                                                                                            
                                                                                            
                                                                                            9,500
                                                                                            
                                                                                            
                                                                                            
                                                                                            -
                                                                                            
                                                                                            
                                                                                            
                                                                                            31,866
                                                                                            
                                                                                            
                                                                                            
                                                                                            -
                                                                                            
                                                                                            
                                                                                            
                                                                                            1,056
                                                                                            
                                                                                            
                                                                                            
                                                                                            -
                                                                                            
                                                                                            
                                                                                            
                                                                                            32,922
                                                                                            
                                                                                            
                                                                                            
                                                                                            32,922
                                                                                            
                                                                                            
                                                                                            
                                                                                            3,304
                                                                                            
                                                                                            1991
                                                                                            
                                                                                            4/18/2007
                                                                                            
                                                                                            VariousN/A
      (Development Property), Simi Valley, CA
                                                                                            
                                                                                            
                                                                                            -
                                                                                            
                                                                                            
                                                                                            
                                                                                            1,025
                                                                                            
                                                                                            
                                                                                            
                                                                                            -
                                                                                            
                                                                                            
                                                                                            
                                                                                            -
                                                                                            
                                                                                            
                                                                                            
                                                                                            -
                                                                                            
                                                                                            
                                                                                            
                                                                                            1,025
                                                                                            
                                                                                            
                                                                                            
                                                                                            -
                                                                                            
                                                                                            
                                                                                            
                                                                                            1,025
                                                                                            
                                                                                            
                                                                                            
                                                                                            -
                                                                                            
                                                                                            
                                                                                            
                                                                                            5/24/2007
                                                                                            
                                                                                            VariousNestle
      Holdings, Inc., Breinigsville, PA
                                                                                            
                                                                                            
                                                                                            53,321
                                                                                            (2)
                                                                                            
                                                                                            
                                                                                            -
                                                                                            
                                                                                            
                                                                                            
                                                                                            77,439
                                                                                            
                                                                                            
                                                                                            
                                                                                            -
                                                                                            
                                                                                            
                                                                                            
                                                                                            -
                                                                                            
                                                                                            
                                                                                            
                                                                                            -
                                                                                            
                                                                                            
                                                                                            
                                                                                            77,439
                                                                                            
                                                                                            
                                                                                            
                                                                                            77,439
                                                                                            
                                                                                            
                                                                                            
                                                                                            7,168
                                                                                            
                                                                                            1994
                                                                                            
                                                                                            4/18/2007
                                                                                            
                                                                                            VariousNestle
      Holdings, Inc., Fort Wayne, IN
                                                                                            
                                                                                            
                                                                                            29,708
                                                                                            (2)
                                                                                            
                                                                                            
                                                                                            -
                                                                                            
                                                                                            
                                                                                            
                                                                                            37,313
                                                                                            
                                                                                            
                                                                                            
                                                                                            -
                                                                                            
                                                                                            
                                                                                            
                                                                                            -
                                                                                            
                                                                                            
                                                                                            
                                                                                            -
                                                                                            
                                                                                            
                                                                                            
                                                                                            37,313
                                                                                            
                                                                                            
                                                                                            
                                                                                            37,313
                                                                                            
                                                                                            
                                                                                            
                                                                                            3,454
                                                                                            
                                                                                            1994
                                                                                            
                                                                                            4/18/2007
                                                                                            
                                                                                            VariousNestle
      Holdings, Inc., Lathrop, CA
                                                                                            
                                                                                            
                                                                                            37,495
                                                                                            (2)
                                                                                            
                                                                                            
                                                                                            -
                                                                                            
                                                                                            
                                                                                            
                                                                                            57,483
                                                                                            
                                                                                            
                                                                                            
                                                                                            -
                                                                                            
                                                                                            
                                                                                            
                                                                                            -
                                                                                            
                                                                                            
                                                                                            
                                                                                            -
                                                                                            
                                                                                            
                                                                                            
                                                                                            57,483
                                                                                            
                                                                                            
                                                                                            
                                                                                            57,483
                                                                                            
                                                                                            
                                                                                            
                                                                                            5,321
                                                                                            
                                                                                            1994
                                                                                            
                                                                                            4/18/2007
                                                                                            
                                                                                            VariousOmnicom
      Group, Inc., Irving, TX
                                                                                            
                                                                                            
                                                                                            13,087
                                                                                            
                                                                                            
                                                                                            
                                                                                            2,620
                                                                                            
                                                                                            
                                                                                            
                                                                                            11,800
                                                                                            
                                                                                            
                                                                                            
                                                                                            -
                                                                                            
                                                                                            
                                                                                            
                                                                                            184
                                                                                            
                                                                                            
                                                                                            
                                                                                            2,620
                                                                                            
                                                                                            
                                                                                            
                                                                                            11,984
                                                                                            
                                                                                            
                                                                                            
                                                                                            14,604
                                                                                            
                                                                                            
                                                                                            
                                                                                            1,640
                                                                                            
                                                                                            1997
                                                                                            
                                                                                            6/23/2005
                                                                                            
                                                                                            VariousPearson
      Plc., Lawrence, KS
                                                                                            
                                                                                            
                                                                                            16,540
                                                                                            
                                                                                            
                                                                                            
                                                                                            1,140
                                                                                            
                                                                                            
                                                                                            
                                                                                            16,557
                                                                                            
                                                                                            
                                                                                            
                                                                                            -
                                                                                            
                                                                                            
                                                                                            
                                                                                            -
                                                                                            
                                                                                            
                                                                                            
                                                                                            1,140
                                                                                            
                                                                                            
                                                                                            
                                                                                            16,557
                                                                                            
                                                                                            
                                                                                            
                                                                                            17,697
                                                                                            
                                                                                            
                                                                                            
                                                                                            1,953
                                                                                            
                                                                                            1997
                                                                                            
                                                                                            4/12/2006
                                                                                            
                                                                                            VariousT-Mobile
      USA, Inc., Nashville, TN
                                                                                            
                                                                                            
                                                                                            10,749
                                                                                            
                                                                                            
                                                                                            
                                                                                            2,450
                                                                                            
                                                                                            
                                                                                            
                                                                                            11,774
                                                                                            
                                                                                            
                                                                                            
                                                                                            -
                                                                                            
                                                                                            
                                                                                            
                                                                                            -
                                                                                            
                                                                                            
                                                                                            
                                                                                            2,450
                                                                                            
                                                                                            
                                                                                            
                                                                                            11,774
                                                                                            
                                                                                            
                                                                                            
                                                                                            14,224
                                                                                            
                                                                                            
                                                                                            
                                                                                            1,216
                                                                                            
                                                                                            2002
                                                                                            
                                                                                            11/14/2006
                                                                                            
                                                                                            VariousThe
      Kroger Co., Various locations in KY (five), GA (four), and TN
      (two)
                                                                                            
                                                                                            
                                                                                            49,421
                                                                                            
                                                                                            
                                                                                            
                                                                                            -
                                                                                            
                                                                                            
                                                                                            
                                                                                            84,702
                                                                                            
                                                                                            
                                                                                            
                                                                                            -
                                                                                            
                                                                                            
                                                                                            
                                                                                            -
                                                                                            
                                                                                            
                                                                                            
                                                                                            -
                                                                                            
                                                                                            
                                                                                            
                                                                                            84,702
                                                                                            
                                                                                            
                                                                                            
                                                                                            84,702
                                                                                            
                                                                                            
                                                                                            
                                                                                            7,841
                                                                                            
                                                                                            Various,
      1995-1996
                                                                                            
                                                                                            4/18/2007
                                                                                            
                                                                                            VariousThe
      Travelers Corporation, Hartford, CT
                                                                                            
                                                                                            
                                                                                            22,581
                                                                                            
                                                                                            
                                                                                            
                                                                                            -
                                                                                            
                                                                                            
                                                                                            
                                                                                            18,317
                                                                                            
                                                                                            
                                                                                            
                                                                                            -
                                                                                            
                                                                                            
                                                                                            
                                                                                            -
                                                                                            
                                                                                            
                                                                                            
                                                                                            -
                                                                                            
                                                                                            
                                                                                            
                                                                                            18,317
                                                                                            
                                                                                            
                                                                                            
                                                                                            18,317
                                                                                            
                                                                                            
                                                                                            
                                                                                            1,938
                                                                                            
                                                                                            1986
                                                                                            
                                                                                            4/18/2007
                                                                                            
                                                                                            VariousTiffany
      & Co., Parsippany, NJ
                                                                                            
                                                                                            
                                                                                            59,901
                                                                                            
                                                                                            
                                                                                            
                                                                                            7,400
                                                                                            
                                                                                            
                                                                                            
                                                                                            62,150
                                                                                            
                                                                                            
                                                                                            
                                                                                            -
                                                                                            
                                                                                            
                                                                                            
                                                                                            47
                                                                                            
                                                                                            
                                                                                            
                                                                                            7,400
                                                                                            
                                                                                            
                                                                                            
                                                                                            62,197
                                                                                            
                                                                                            
                                                                                            
                                                                                            69,597
                                                                                            
                                                                                            
                                                                                            
                                                                                            8,176
                                                                                            
                                                                                            Office
      & Warehouse - 1996-1997, Warehouse Mezzanine - 2000, Garage - 2001,
      East Wing Office - 2002, solar rooftop panels installed in
      2006
                                                                                            
                                                                                            9/28/2005
                                                                                            
                                                                                            VariousTime
      Warner Entertainment Company, L.P., Milwaukee, WI
                                                                                            
                                                                                            
                                                                                            22,492
                                                                                            
                                                                                            
                                                                                            
                                                                                            2,300
                                                                                            
                                                                                            
                                                                                            
                                                                                            22,299
                                                                                            
                                                                                            
                                                                                            
                                                                                            -
                                                                                            
                                                                                            
                                                                                            
                                                                                            -
                                                                                            
                                                                                            
                                                                                            
                                                                                            2,300
                                                                                            
                                                                                            
                                                                                            
                                                                                            22,299
                                                                                            
                                                                                            
                                                                                            
                                                                                            24,599
                                                                                            
                                                                                            
                                                                                            
                                                                                            2,281
                                                                                            
                                                                                            1903,
      renovated in 2001
                                                                                            
                                                                                            11/28/2006
                                                                                            
                                                                                            VariousTJX
      Companies, Inc., Philadelphia, PA
                                                                                            
                                                                                            
                                                                                            73,720
                                                                                            
                                                                                            
                                                                                            
                                                                                            6,100
                                                                                            
                                                                                            
                                                                                            
                                                                                            79,734
                                                                                            
                                                                                            
                                                                                            
                                                                                            -
                                                                                            
                                                                                            
                                                                                            
                                                                                            -
                                                                                            
                                                                                            
                                                                                            
                                                                                            6,100
                                                                                            
                                                                                            
                                                                                            
                                                                                            79,734
                                                                                            
                                                                                            
                                                                                            
                                                                                            85,834
                                                                                            
                                                                                            
                                                                                            
                                                                                            9,586
                                                                                            
                                                                                            2001
                                                                                            
                                                                                            3/10/2006
                                                                                            
                                                                                            VariousUnited
      States Government (DEA), Birmingham, AL
                                                                                            
                                                                                            
                                                                                            11,676
                                                                                            
                                                                                            
                                                                                            
                                                                                            1,000
                                                                                            
                                                                                            
                                                                                            
                                                                                            11,643
                                                                                            
                                                                                            
                                                                                            
                                                                                            -
                                                                                            
                                                                                            
                                                                                            
                                                                                            (126
                                                                                            )
                                                                                            
                                                                                            
                                                                                            1,000
                                                                                            
                                                                                            
                                                                                            
                                                                                            11,517
                                                                                            
                                                                                            
                                                                                            
                                                                                            12,517
                                                                                            
                                                                                            
                                                                                            
                                                                                            1,457
                                                                                            
                                                                                            2005
                                                                                            
                                                                                            8/11/2005
                                                                                            
                                                                                            VariousUnited
      States Government (EPA), Kansas City, KS
                                                                                            
                                                                                            
                                                                                            22,995
                                                                                            
                                                                                            
                                                                                            
                                                                                            250
                                                                                            
                                                                                            
                                                                                            
                                                                                            29,476
                                                                                            
                                                                                            
                                                                                            
                                                                                            -
                                                                                            
                                                                                            
                                                                                            
                                                                                            -
                                                                                            
                                                                                            
                                                                                            
                                                                                            250
                                                                                            
                                                                                            
                                                                                            
                                                                                            29,476
                                                                                            
                                                                                            
                                                                                            
                                                                                            29,726
                                                                                            
                                                                                            
                                                                                            
                                                                                            3,966
                                                                                            
                                                                                            2003
                                                                                            
                                                                                            8/11/2005
                                                                                            
                                                                                            VariousUnited
      States Government (FBI), Albany, NY
                                                                                            
                                                                                            
                                                                                            12,438
                                                                                            
                                                                                            
                                                                                            
                                                                                            3,000
                                                                                            
                                                                                            
                                                                                            
                                                                                            12,869
                                                                                            
                                                                                            
                                                                                            
                                                                                            -
                                                                                            
                                                                                            
                                                                                            
                                                                                            168
                                                                                            
                                                                                            
                                                                                            
                                                                                            3,000
                                                                                            
                                                                                            
                                                                                            
                                                                                            13,037
                                                                                            
                                                                                            
                                                                                            
                                                                                            16,037
                                                                                            
                                                                                            
                                                                                            
                                                                                            1,344
                                                                                            
                                                                                            1998,
      building expanded by 3M SF in 2008.
                                                                                            
                                                                                            10/25/2006
                                                                                            
                                                                                            VariousUnited
      States Government (FBI), Birmingham, AL
                                                                                            
                                                                                            
                                                                                            19,452
                                                                                            
                                                                                            
                                                                                            
                                                                                            2,200
                                                                                            
                                                                                            
                                                                                            
                                                                                            20,171
                                                                                            
                                                                                            
                                                                                            
                                                                                            -
                                                                                            
                                                                                            
                                                                                            
                                                                                            2,440
                                                                                            
                                                                                            
                                                                                            
                                                                                            2,200
                                                                                            
                                                                                            
                                                                                            
                                                                                            22,610
                                                                                            
                                                                                            
                                                                                            
                                                                                            24,810
                                                                                            
                                                                                            
                                                                                            
                                                                                            2,864
                                                                                            
                                                                                            2005,
      building expanded by 10M SF in 2007
                                                                                            
                                                                                            8/11/2005
                                                                                            
                                                                                            VariousUnited
      States Government (NIH), N. Bethesda, MD
                                                                                            
                                                                                            
                                                                                            59,459
                                                                                            
                                                                                            
                                                                                            
                                                                                            10,350
                                                                                            
                                                                                            
                                                                                            
                                                                                            61,537
                                                                                            
                                                                                            
                                                                                            
                                                                                            -
                                                                                            
                                                                                            
                                                                                            
                                                                                            909
                                                                                            
                                                                                            
                                                                                            
                                                                                            10,350
                                                                                            
                                                                                            
                                                                                            
                                                                                            62,446
                                                                                            
                                                                                            
                                                                                            
                                                                                            72,796
                                                                                            
                                                                                            
                                                                                            
                                                                                            8,172
                                                                                            
                                                                                            1989
                                                                                            
                                                                                            9/9/2005
                                                                                            
                                                                                            VariousUnited
      States Government (SSA), Austin, TX
                                                                                            
                                                                                            
                                                                                            5,297
                                                                                            
                                                                                            
                                                                                            
                                                                                            1,100
                                                                                            
                                                                                            
                                                                                            
                                                                                            4,373
                                                                                            
                                                                                            
                                                                                            
                                                                                            -
                                                                                            
                                                                                            
                                                                                            
                                                                                            138
                                                                                            
                                                                                            
                                                                                            
                                                                                            1,100
                                                                                            
                                                                                            
                                                                                            
                                                                                            4,511
                                                                                            
                                                                                            
                                                                                            
                                                                                            5,611
                                                                                            
                                                                                            
                                                                                            
                                                                                            567
                                                                                            
                                                                                            2005
                                                                                            
                                                                                            8/11/2005
                                                                                            
                                                                                            VariousUnited
      States Government (VA), Ponce, PR
                                                                                            
                                                                                            
                                                                                            4,836
                                                                                            
                                                                                            
                                                                                            
                                                                                            2,120
                                                                                            
                                                                                            
                                                                                            
                                                                                            10,252
                                                                                            
                                                                                            
                                                                                            
                                                                                            -
                                                                                            
                                                                                            
                                                                                            
                                                                                            74
                                                                                            
                                                                                            
                                                                                            
                                                                                            2,120
                                                                                            
                                                                                            
                                                                                            
                                                                                            10,326
                                                                                            
                                                                                            
                                                                                            
                                                                                            12,446
                                                                                            
                                                                                            
                                                                                            
                                                                                            1,583
                                                                                            
                                                                                            2000,
      HVAC system replaced in 2008
                                                                                            
                                                                                            11/1/2004
                                                                                            
                                                                                            VariousWalgreen
      Co., Pennsauken, NJ
                                                                                            
                                                                                            
                                                                                            1,365
                                                                                            
                                                                                            
                                                                                            
                                                                                            463
                                                                                            
                                                                                            
                                                                                            
                                                                                            2,629
                                                                                            
                                                                                            
                                                                                            
                                                                                            -
                                                                                            
                                                                                            
                                                                                            
                                                                                            -
                                                                                            
                                                                                            
                                                                                            
                                                                                            463
                                                                                            
                                                                                            
                                                                                            
                                                                                            2,629
                                                                                            
                                                                                            
                                                                                            
                                                                                            3,092
                                                                                            
                                                                                            
                                                                                            
                                                                                            405
                                                                                            
                                                                                            1996
                                                                                            
                                                                                            11/1/2004
                                                                                            
                                                                                            VariousWalgreen
      Co., Portsmouth, VA
                                                                                            
                                                                                            
                                                                                            2,768
                                                                                            
                                                                                            
                                                                                            
                                                                                            618
                                                                                            
                                                                                            
                                                                                            
                                                                                            3,560
                                                                                            
                                                                                            
                                                                                            
                                                                                            -
                                                                                            
                                                                                            
                                                                                            
                                                                                            -
                                                                                            
                                                                                            
                                                                                            
                                                                                            618
                                                                                            
                                                                                            
                                                                                            
                                                                                            3,560
                                                                                            
                                                                                            
                                                                                            
                                                                                            4,178
                                                                                            
                                                                                            
                                                                                            
                                                                                            549
                                                                                            
                                                                                            1998
                                                                                            
                                                                                            11/1/2004
                                                                                            
                                                                                            Various$
                                                                                            1,085,058
                                                                                            
                                                                                            
                                                                                            $
                                                                                            191,472
                                                                                            
                                                                                            
                                                                                            $
                                                                                            1,249,673
                                                                                            
                                                                                            
                                                                                            $
                                                                                            -
                                                                                            
                                                                                            
                                                                                            $
                                                                                            24,204
                                                                                            
                                                                                            
                                                                                            $
                                                                                            191,472
                                                                                            
                                                                                            
                                                                                            $
                                                                                            1,273,877
                                                                                            
                                                                                            
                                                                                            $
                                                                                            1,465,349
                                                                                            
                                                                                            
                                                                                            $
                                                                                            152,529
  (1)Property serves as
collateral under the Company’s credit agreement without any specific borrowings
against the asset.
 (2)Three properties leased
to Nestlé are
cross-collateralized.
  93
 CapLease,
Inc. and Subsidiaries
 Real
Estate and Accumulated Depreciation
 December
31, 2010
 (amounts
in thousands)
 Schedule
III—(Continued)
 Reconciliation
      of real estate owned:Balance-December
      31, 2007
                    
                    
                    
                    
                    $
                    1,466,152Property
      acquisitions
                    
                    $
                    -Costs
      capitalized subsequent to acquisition
                    
                    
                    4,195Balance-December
      31, 2008
                    
                    
                    
                    
                    
                    $
                    1,470,347Property
      acquisitions
                    
                    $
                    -Costs
      capitalized subsequent to acquisition
                    
                    
                    1,389Property
      reclassed to asset held for sale
                    
                    
                    (4,420
                    )Adjustments
      due to lease terminations
                    
                    
                    (8,579
                    )Writedowns
      to reflect asset impairment
                    
                    
                    (13,410
                    )Property
      divestitures
                    
                    
                    (20,234
                    )Balance-December
      31, 2009
                    
                    
                    
                    
                    
                    $
                    1,425,093Property
      acquisitions
                    
                    $
                    30,693Costs
      capitalized subsequent to acquisition
                    
                    
                    9,563Balance-December
      31, 2010
                    
                    
                    
                    
                    
                    $
                    1,465,349Reconciliation
      of accumulated depreciation:Balance-December
      31, 2007
                    
                    
                    
                    
                    
                    $
                    55,875Additions
      during the year:Depreciation
      on property
                    
                    $
                    33,419Balance-December
      31, 2008
                    
                    
                    
                    
                    
                    $
                    89,294Additions
      during the year:Depreciation
      on property
                    
                    $
                    32,991Deductions
      during the year:Property
      reclassed to asset held for sale
                    
                    
                    (245
                    )Accumulated
      depreciation on divested property
                    
                    
                    (1,682
                    )Balance-December
      31, 2009
                    
                    
                    
                    
                    
                    $
                    120,358Additions
      during the year:Depreciation
      on property
                    
                    $
                    32,171Balance-December
      31, 2010
                    
                    
                    
                    
                    
                    $
                    152,529
  94
  CapLease,
Inc. and Subsidiaries
 Schedule
of Loans Held for Investment
  December
31, 2010
 (amounts
in thousands)
 
 Schedule
IV
  Description
                                                                                                                                                                
                                                                                                                                                                Location
                                                                                                                                                                
                                                                                                                                                                Interest
      Rate
                                                                                                                                                                
                                                                                                                                                                Final
                                                                                                                                                                  Maturity
                                                                                                                                                                  Date
                                                                                                                                                                
                                                                                                                                                                Periodic Payment Terms
                                                                                                                                                                
                                                                                                                                                                Prior Liens
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                FaceAmount
                                                                                                                                                                  ofMortgages
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                Carrying
                                                                                                                                                                  Amount of
                                                                                                                                                                  Mortgages(1)
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                Principal Amount of
                                                                                                                                                                  Loans Subject to
                                                                                                                                                                  Delinquent Principalor
                                                                                                                                                                  InterestLong-Term Mortgage
      LoansAutozone,
      Inc.
                                                                                                                                                                
                                                                                                                                                                Douglas
      and Valdosta, GA
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                6.50
                                                                                                                                                                %
                                                                                                                                                                Nov
      2022
                                                                                                                                                                
                                                                                                                                                                Principal
      and Interest are payable monthly at a level amount, over the life to
      maturity
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                N/A
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                $
                                                                                                                                                                1,650
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                $
                                                                                                                                                                1,650
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                $
                                                                                                                                                                -Bank
      of America, N.A.
                                                                                                                                                                
                                                                                                                                                                Mt.
      Airy, MD
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                6.42
                                                                                                                                                                %
                                                                                                                                                                Dec
      2026
                                                                                                                                                                
                                                                                                                                                                Principal
      and Interest are payable monthly at a varying amount, over the life to
      maturity
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                N/A
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                3,249
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                3,249
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                -Bank
      of America, N.A.
                                                                                                                                                                
                                                                                                                                                                Glenview,
      IL
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                6.34
                                                                                                                                                                %
                                                                                                                                                                Dec
      2028
                                                                                                                                                                
                                                                                                                                                                Principal
      and Interest are payable monthly at a varying amount, over the life to
      maturity
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                N/A
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                4,247
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                4,247
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                -Best
      Buy Co., Inc.
                                                                                                                                                                
                                                                                                                                                                Chicago,
      IL
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                6.40
                                                                                                                                                                %
                                                                                                                                                                Mar
      2025
                                                                                                                                                                
                                                                                                                                                                Principal
      and Interest are payable monthly at a varying amount, over the life to
      maturity
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                N/A
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                16,691
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                16,691
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                -City
      of Jasper, Texas
                                                                                                                                                                
                                                                                                                                                                Jasper,
      TX
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                7.00
                                                                                                                                                                %
                                                                                                                                                                Nov
      2024
                                                                                                                                                                
                                                                                                                                                                Principal
      and Interest are payable monthly at a varying amount, over the life to
      maturity
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                N/A
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                1,498
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                1,462
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                -CVS
      Corporation
                                                                                                                                                                
                                                                                                                                                                Asheville,
      NC
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                6.53
                                                                                                                                                                %
                                                                                                                                                                Jan
      2026
                                                                                                                                                                
                                                                                                                                                                Principal
      and Interest are payable monthly at a varying amount, over the life to
      maturity
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                N/A
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                2,034
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                2,080
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                -CVS
      Corporation
                                                                                                                                                                
                                                                                                                                                                Bangor,
      PA
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                6.28
                                                                                                                                                                %
                                                                                                                                                                Jan
      2026
                                                                                                                                                                
                                                                                                                                                                Principal
      and Interest are payable monthly at a level amount, over the life to
      maturity
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                N/A
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                2,064
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                2,035
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                -CVS
      Corporation
                                                                                                                                                                
                                                                                                                                                                Athol,
      MA
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                6.46
                                                                                                                                                                %
                                                                                                                                                                Jan
      2025
                                                                                                                                                                
                                                                                                                                                                Principal
      and Interest are payable monthly at a varying amount, over the life to
      maturity
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                N/A
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                1,235
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                1,235
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                -CVS
      Corporation
                                                                                                                                                                
                                                                                                                                                                Washington,
      DC
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                8.10
                                                                                                                                                                %
                                                                                                                                                                Jan
      2023
                                                                                                                                                                
                                                                                                                                                                Principal
      and Interest are payable monthly at a level amount, over the life to
      maturity
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                N/A
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                2,089
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                2,201
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                -CVS
      Corporation
                                                                                                                                                                
                                                                                                                                                                Bluefield,
      WV
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                8.00
                                                                                                                                                                %
                                                                                                                                                                Jan
      2021
                                                                                                                                                                
                                                                                                                                                                Principal
      and Interest are payable monthly at a varying amount, over the life to
      maturity
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                N/A
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                1,087
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                1,161
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                -CVS
      Corporation
                                                                                                                                                                
                                                                                                                                                                Sunbury,
      PA
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                7.50
                                                                                                                                                                %
                                                                                                                                                                Jan
      2021
                                                                                                                                                                
                                                                                                                                                                Principal
      and Interest are payable monthly at a varying amount, over the life to
      maturity
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                N/A
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                1,341
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                1,316
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                -CVS
      Corporation
                                                                                                                                                                
                                                                                                                                                                Evansville,
      IN
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                6.22
                                                                                                                                                                %
                                                                                                                                                                Jan
      2033
                                                                                                                                                                
                                                                                                                                                                Principal
      and Interest are payable monthly at a level amount, over the life to
      maturity
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                N/A
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                3,149
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                3,149
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                -CVS
      Corporation
                                                                                                                                                                
                                                                                                                                                                Southington,
      CT
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                8.26
                                                                                                                                                                %
                                                                                                                                                                Jan
      2020
                                                                                                                                                                
                                                                                                                                                                Principal
      and Interest are payable monthly at a varying amount, over the life to
      maturity
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                N/A
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                1,530
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                1,665
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                -CVS
      Corporation
                                                                                                                                                                
                                                                                                                                                                Willimantic,
      CT
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                8.26
                                                                                                                                                                %
                                                                                                                                                                Jan
      2023
                                                                                                                                                                
                                                                                                                                                                Principal
      and Interest are payable monthly at a varying amount, over the life to
      maturity
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                N/A
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                1,804
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                1,982
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                -CVS
      Corporation
                                                                                                                                                                
                                                                                                                                                                Stow,
      OH
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                8.26
                                                                                                                                                                %
                                                                                                                                                                Jan
      2020
                                                                                                                                                                
                                                                                                                                                                Principal
      and Interest are payable monthly at a varying amount, over the life to
      maturity
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                N/A
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                2,029
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                2,205
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                -CVS
      Corporation
                                                                                                                                                                
                                                                                                                                                                Oak
      Ridge, NC
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                6.99
                                                                                                                                                                %
                                                                                                                                                                Aug
      2024
                                                                                                                                                                
                                                                                                                                                                Principal
      and Interest are payable monthly at a varying amount, over the life to
      maturity
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                N/A
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                2,762
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                2,762
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                -CVS
      Corporation
                                                                                                                                                                
                                                                                                                                                                Greensboro,
      GA
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                6.52
                                                                                                                                                                %
                                                                                                                                                                Jan
      2030
                                                                                                                                                                
                                                                                                                                                                Principal
      and Interest are payable monthly at a level amount, over the life to
      maturity
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                N/A
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                1,241
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                1,241
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                -
 95
 CapLease,
Inc. and Subsidiaries
 Schedule
of Loans Held for Investment
  December
31, 2010
 (amounts
in thousands)
 
 Schedule
IV
 Description
                                                                                                                                                                
                                                                                                                                                                Location
                                                                                                                                                                
                                                                                                                                                                Interest
      Rate
                                                                                                                                                                
                                                                                                                                                                Final
                                                                                                                                                                  Maturity
                                                                                                                                                                  Date
                                                                                                                                                                
                                                                                                                                                                Periodic Payment Terms
                                                                                                                                                                
                                                                                                                                                                Prior Liens
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                FaceAmount
                                                                                                                                                                  ofMortgages
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                Carrying
                                                                                                                                                                  Amount of
                                                                                                                                                                  Mortgages(1)
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                Principal Amount of
                                                                                                                                                                  Loans Subject to
                                                                                                                                                                  Delinquent Principalor
                                                                                                                                                                  InterestCVS
      Corporation
                                                                                                                                                                
                                                                                                                                                                Shelby
      Twp., MI
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                5.98
                                                                                                                                                                %
                                                                                                                                                                Jan
      2031
                                                                                                                                                                
                                                                                                                                                                Principal
      and Interest are payable monthly at a varying amount, over the life to
      maturity
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                N/A
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                2,401
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                2,401
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                -Harris
      Bankcorp, Inc.
                                                                                                                                                                
                                                                                                                                                                Chicago,
      IL
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                6.81
                                                                                                                                                                %
                                                                                                                                                                Aug
      2025
                                                                                                                                                                
                                                                                                                                                                Principal
      and Interest are payable monthly at a varying amount, over the life to
      maturity
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                N/A
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                3,943
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                3,943
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                -Home
      Depot USA, Inc.
                                                                                                                                                                
                                                                                                                                                                Chelsea,
      MA
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                5.36
                                                                                                                                                                %
                                                                                                                                                                Jan
      2031
                                                                                                                                                                
                                                                                                                                                                Principal
      and Interest are payable monthly at a varying amount, over the life to
      maturity
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                N/A
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                7,807
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                7,807
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                -Home
      Depot USA, Inc.
                                                                                                                                                                
                                                                                                                                                                Tullytown,
      PA
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                6.62
                                                                                                                                                                %
                                                                                                                                                                Jan
      2033
                                                                                                                                                                
                                                                                                                                                                Principal
      and Interest are payable monthly at a varying amount, over the life to
      maturity
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                N/A
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                8,274
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                8,274
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                -Kohls
      Corporation
                                                                                                                                                                
                                                                                                                                                                Chicago,
      IL
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                6.69
                                                                                                                                                                %
                                                                                                                                                                May
      2030
                                                                                                                                                                
                                                                                                                                                                Principal
      and Interest are payable monthly at a varying amount, over the life to
      maturity
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                N/A
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                45,110
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                45,110
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                -Koninklijke
      Ahold, N.V.
                                                                                                                                                                
                                                                                                                                                                Bensalem,
      PA
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                7.24
                                                                                                                                                                %
                                                                                                                                                                May
      2020
                                                                                                                                                                
                                                                                                                                                                Principal
      and Interest are payable monthly at a varying amount, over the life to
      maturity
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                N/A
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                2,549
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                2,587
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                -Koninklijke
      Ahold, N.V.
                                                                                                                                                                
                                                                                                                                                                North
      Kingstown, RI
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                7.50
                                                                                                                                                                %
                                                                                                                                                                Nov
      2025
                                                                                                                                                                
                                                                                                                                                                Principal
      and Interest are payable monthly at a varying amount, over the life to
      maturity
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                N/A
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                6,075
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                6,059
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                -Koninklijke
      Ahold, N.V.
                                                                                                                                                                
                                                                                                                                                                Tewksbury,
      MA
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                7.50
                                                                                                                                                                %
                                                                                                                                                                Jan
      2027
                                                                                                                                                                
                                                                                                                                                                Principal
      and Interest are payable monthly at a varying amount, over the life to
      maturity
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                N/A
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                5,969
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                5,965
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                -Koninklijke
      Ahold, N.V.
                                                                                                                                                                
                                                                                                                                                                Upper
      Darby Township, PA
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                7.29
                                                                                                                                                                %
                                                                                                                                                                Apr
      2024
                                                                                                                                                                
                                                                                                                                                                Principal
      and Interest are payable monthly at a varying amount, over the life to
      maturity
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                N/A
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                5,763
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                5,554
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                -Lowes
      Companies, Inc.
                                                                                                                                                                
                                                                                                                                                                Matamoras,
      PA
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                6.61
                                                                                                                                                                %
                                                                                                                                                                May
      2030
                                                                                                                                                                
                                                                                                                                                                Principal
      and Interest are payable monthly at a varying amount, over the life to
      maturity
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                N/A
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                6,923
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                6,923
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                -Lowes
      Companies, Inc.
                                                                                                                                                                
                                                                                                                                                                Framingham,
      MA
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                0.96
                                                                                                                                                                %
                                                                                                                                                                Sep
      2031
                                                                                                                                                                
                                                                                                                                                                Principal
      and Interest are payable monthly at a level amount, over the life to
      maturity
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                N/A
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                5,585
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                1,530
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                -National
      City Bank
                                                                                                                                                                
                                                                                                                                                                Chicago,
      IL
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                5.89
                                                                                                                                                                %
                                                                                                                                                                Dec
      2024
                                                                                                                                                                
                                                                                                                                                                Principal
      and Interest are payable monthly at a varying amount, over the life to
      maturity
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                N/A
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                2,723
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                2,782
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                -Neiman
      Marcus Group, Inc.
                                                                                                                                                                
                                                                                                                                                                Las
      Vegas, NV
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                6.06
                                                                                                                                                                %
                                                                                                                                                                Nov
      2021
                                                                                                                                                                
                                                                                                                                                                Principal
      and Interest are payable monthly at a varying amount, over the life to
      maturity
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                N/A
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                5,821
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                6,222
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                -United
      States Postal Service
                                                                                                                                                                
                                                                                                                                                                Scammon
      Bay, AK
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                7.05
                                                                                                                                                                %
                                                                                                                                                                Oct
      2021
                                                                                                                                                                
                                                                                                                                                                Principal
      and Interest are payable monthly at a level amount, over the life to
      maturity
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                N/A
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                759
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                771
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                -University
      of Connecticut Health Center
                                                                                                                                                                
                                                                                                                                                                Farmington,
      CT
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                6.34
                                                                                                                                                                %
                                                                                                                                                                Nov
      2024
                                                                                                                                                                
                                                                                                                                                                Principal
      and Interest are payable monthly at a varying amount, over the life to
      maturity
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                N/A
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                18,592
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                19,150
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                -Walgreen
      Co.
                                                                                                                                                                
                                                                                                                                                                Montebello,
      CA
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                6.10
                                                                                                                                                                %
                                                                                                                                                                Feb
      2030
                                                                                                                                                                
                                                                                                                                                                Principal
      and Interest are payable monthly at a level amount, over the life to
      maturity
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                N/A
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                4,147
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                4,147
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                -Walgreen
      Co.
                                                                                                                                                                
                                                                                                                                                                Nacogdoches,
      TX
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                6.80
                                                                                                                                                                %
                                                                                                                                                                Sep
      2030
                                                                                                                                                                
                                                                                                                                                                Principal
      and Interest are payable monthly at a varying amount, over the life to
      maturity
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                N/A
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                3,350
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                3,350
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                -Walgreen
      Co.
                                                                                                                                                                
                                                                                                                                                                Rosemead,
      CA
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                6.26
                                                                                                                                                                %
                                                                                                                                                                Dec
      2029
                                                                                                                                                                
                                                                                                                                                                Principal
      and Interest are payable monthly at a level amount, over the life to
      maturity
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                N/A
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                4,800
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                4,800
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                -Walgreen
      Co.
                                                                                                                                                                
                                                                                                                                                                Dallas,
      TX
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                6.46
                                                                                                                                                                %
                                                                                                                                                                Dec
      2029
                                                                                                                                                                
                                                                                                                                                                Principal
      and Interest are payable monthly at a level amount, over the life to
      maturity
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                N/A
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                3,130
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                3,130
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                -193,421
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                190,836
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                -
 96
 CapLease,
Inc. and Subsidiaries
 Schedule
of Loans Held for Investment
 December
31, 2010
 (amounts
in thousands)
 
 Schedule
IV
 Description
                      
                      Location
                      
                      InterestRate
                      
                      Final
                        Maturity
                        Date
                      
                      Periodic Payment Terms
                      
                      Prior Liens
                      
                      
                      FaceAmount
                        ofMortgages
                      
                      
                      Carrying
                        Amount of
                        Mortgages(1)
                      
                      
                      Principal Amount of
                        Loans Subject to
                        Delinquent Principalor
                        InterestCorporate
      Credit NotesAlbertsons,
      LLC
                      
                      Los
      Angeles, CA
                      
                      
                      6.50
                      %
                      Sep
      2013
                      
                      Principal
      and Interest are payable monthly at a varying amount, over the life to
      maturity
                      
                      
                      N/A
                      
                      
                      
                      154
                      
                      
                      
                      147
                      
                      
                      
                      -Albertsons,
      LLC
                      
                      Norwalk,
      CA
                      
                      
                      6.33
                      %
                      Dec
      2013
                      
                      Principal
      and Interest are payable monthly at a level amount, over the life to
      maturity
                      
                      
                      N/A
                      
                      
                      
                      174
                      
                      
                      
                      173
                      
                      
                      
                      -Best
      Buy Co., Inc.
                      
                      Olathe,
      KS
                      
                      
                      5.40
                      %
                      Jun
      2013
                      
                      Principal
      and Interest are payable monthly at a varying amount, over the life to
      maturity
                      
                      
                      N/A
                      
                      
                      
                      586
                      
                      
                      
                      577
                      
                      
                      
                      -Best
      Buy Co., Inc.
                      
                      Wichita
      Falls, TX
                      
                      
                      6.15
                      %
                      Nov
      2012
                      
                      Principal
      and Interest are payable monthly at a varying amount, over the life to
      maturity
                      
                      
                      N/A
                      
                      
                      
                      186
                      
                      
                      
                      183
                      
                      
                      
                      -CVS
      Corporation
                      
                      Garwood,
      NJ
                      
                      
                      6.12
                      %
                      Aug
      2013
                      
                      Principal
      and Interest are payable monthly at a level amount, over the life to
      maturity
                      
                      
                      N/A
                      
                      
                      
                      290
                      
                      
                      
                      287
                      
                      
                      
                      -CVS
      Corporation
                      
                      Kennett
      Square, PA
                      
                      
                      6.40
                      %
                      Oct
      2012
                      
                      Principal
      and Interest are payable monthly at a level amount, over the life to
      maturity
                      
                      
                      N/A
                      
                      
                      
                      201
                      
                      
                      
                      199
                      
                      
                      
                      -CVS
      Corporation
                      
                      Commerce,
      MI
                      
                      
                      5.85
                      %
                      May
      2013
                      
                      Principal
      and Interest are payable monthly at a varying amount, over the life to
      maturity
                      
                      
                      N/A
                      
                      
                      
                      164
                      
                      
                      
                      162
                      
                      
                      
                      -CVS
      Corporation
                      
                      Rutherford
      College, NC
                      
                      
                      6.12
                      %
                      Oct
      2013
                      
                      Principal
      and Interest are payable monthly at a varying amount, over the life to
      maturity
                      
                      
                      N/A
                      
                      
                      
                      136
                      
                      
                      
                      134
                      
                      
                      
                      -CVS
      Corporation
                      
                      Clemmons,
      NC
                      
                      
                      5.54
                      %
                      Jan
      2015
                      
                      Principal
      and Interest are payable monthly at a level amount, over the life to
      maturity
                      
                      
                      N/A
                      
                      
                      
                      136
                      
                      
                      
                      133
                      
                      
                      
                      -CVS
      Corporation
                      
                      Rockingham,
      NC
                      
                      
                      6.12
                      %
                      Oct
      2013
                      
                      Principal
      and Interest are payable monthly at a level amount, over the life to
      maturity
                      
                      
                      N/A
                      
                      
                      
                      152
                      
                      
                      
                      150
                      
                      
                      
                      -CVS
      Corporation
                      
                      Knox,
      IN
                      
                      
                      7.60
                      %
                      Dec
      2011
                      
                      Principal
      and Interest are payable monthly at a level amount, over the life to
      maturity
                      
                      
                      N/A
                      
                      
                      
                      44
                      
                      
                      
                      44
                      
                      
                      
                      -Federal
      Express Corporation
                      
                      Bellingham,
      WA
                      
                      
                      5.78
                      %
                      Mar
      2015
                      
                      Principal
      and Interest are payable monthly at a varying amount, over the life to
      maturity
                      
                      
                      N/A
                      
                      
                      
                      196
                      
                      
                      
                      194
                      
                      
                      
                      -FedEx
      Ground Package System, Inc.
                      
                      Reno,
      NV
                      
                      
                      5.90
                      %
                      Oct
      2014
                      
                      Principal
      and Interest are payable monthly at a varying amount, over the life to
      maturity
                      
                      
                      N/A
                      
                      
                      
                      629
                      
                      
                      
                      625
                      
                      
                      
                      -FedEx
      Ground Package System, Inc.
                      
                      McCook,
      IL
                      
                      
                      5.89
                      %
                      Feb
      2015
                      
                      Principal
      and Interest are payable monthly at a varying amount, over the life to
      maturity
                      
                      
                      N/A
                      
                      
                      
                      1,345
                      
                      
                      
                      1,337
                      
                      
                      
                      -Hercules
      Incorporated
                      
                      Wilmington,
      DE
                      
                      
                      9.32
                      %
                      May
      2013
                      
                      Principal
      and Interest are payable monthly at a varying amount, over the life to
      maturity
                      
                      
                      N/A
                      
                      
                      
                      12,664
                      
                      
                      
                      12,664
                      
                      
                      
                      -Lowes
      Companies, Inc.
                      
                      N.
      Windham, ME
                      
                      
                      5.28
                      %
                      Sep
      2015
                      
                      Principal
      and Interest are payable monthly at a varying amount, over the life to
      maturity
                      
                      
                      N/A
                      
                      
                      
                      642
                      
                      
                      
                      635
                      
                      
                      
                      -PerkinElmer,
      Inc.
                      
                      Warwick,
      RI
                      
                      
                      7.68
                      %
                      Jan
      2012
                      
                      Principal
      and Interest are payable monthly at a level amount, over the life to
      maturity
                      
                      
                      N/A
                      
                      
                      
                      140
                      
                      
                      
                      140
                      
                      
                      
                      -PerkinElmer,
      Inc.
                      
                      Beltsville,
      MD
                      
                      
                      7.35
                      %
                      Dec
      2011
                      
                      Principal
      and Interest are payable monthly at a level amount, over the life to
      maturity
                      
                      
                      N/A
                      
                      
                      
                      97
                      
                      
                      
                      96
                      
                      
                      
                      -PerkinElmer,
      Inc.
                      
                      Daytona
      Beach, FL
                      
                      
                      7.35
                      %
                      Dec
      2011
                      
                      Principal
      and Interest are payable monthly at a level amount, over the life to
      maturity
                      
                      
                      N/A
                      
                      
                      
                      44
                      
                      
                      
                      44
                      
                      
                      
                      -
  97
 CapLease,
Inc. and Subsidiaries
 Schedule
of Loans Held for Investment
 December
31, 2010
 (amounts
in thousands)
 
 Schedule
IV
 Description
                                                                                                                                      
                                                                                                                                      Location
                                                                                                                                      
                                                                                                                                      InterestRate
                                                                                                                                      
                                                                                                                                      Final
                                                                                                                                        Maturity
                                                                                                                                        Date
                                                                                                                                      
                                                                                                                                      Periodic Payment Terms
                                                                                                                                      
                                                                                                                                      Prior Liens
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      FaceAmount
                                                                                                                                        ofMortgages
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      Carrying
                                                                                                                                        Amount of
                                                                                                                                        Mortgages(1)
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      Principal Amount of
                                                                                                                                        Loans Subject to
                                                                                                                                        Delinquent Principalor
                                                                                                                                        InterestPerkinElmer,
      Inc.
                                                                                                                                      
                                                                                                                                      Phelps,
      NY
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      7.35
                                                                                                                                      %
                                                                                                                                      Dec
      2011
                                                                                                                                      
                                                                                                                                      Principal
      and Interest are payable monthly at a level amount, over the life to
      maturity
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      N/A
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      41
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      41
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      -Staples,
      Inc.
                                                                                                                                      
                                                                                                                                      Odessa,
      TX
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      6.41
                                                                                                                                      %
                                                                                                                                      Sep
      2012
                                                                                                                                      
                                                                                                                                      Principal
      and Interest are payable monthly at a varying amount, over the life to
      maturity
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      N/A
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      106
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      105
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      -Walgreen
      Co.
                                                                                                                                      
                                                                                                                                      Delray
      Beach, FL
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      6.20
                                                                                                                                      %
                                                                                                                                      Jan
      2013
                                                                                                                                      
                                                                                                                                      Principal
      and Interest are payable monthly at a level amount, over the life to
      maturity
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      N/A
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      156
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      156
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      -Walgreen
      Co.
                                                                                                                                      
                                                                                                                                      Waterford,
      MI
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      5.50
                                                                                                                                      %
                                                                                                                                      Jun
      2013
                                                                                                                                      
                                                                                                                                      Principal
      and Interest are payable monthly at a level amount, over the life to
      maturity
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      N/A
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      290
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      283
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      -Walgreen
      Co.
                                                                                                                                      
                                                                                                                                      Riverside,
      CA
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      6.10
                                                                                                                                      %
                                                                                                                                      Dec
      2013
                                                                                                                                      
                                                                                                                                      Principal
      and Interest are payable monthly at a level amount, over the life to
      maturity
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      N/A
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      210
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      208
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      -Walgreen
      Co.
                                                                                                                                      
                                                                                                                                      Jefferson
      City, TN
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      5.49
                                                                                                                                      %
                                                                                                                                      May 2015
                                                                                                                                      
                                                                                                                                      Principal
      and Interest are payable monthly at a level amount, over the life to
      maturity
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      N/A
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      401
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      400
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      -19,184
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      19,117
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      -Mezzanine
      and Other InvestmentsWest
      End Mortgage Finance Fund I L.P.
                                                                                                                                      
                                                                                                                                      Various
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      5.00
                                                                                                                                      %
                                                                                                                                      Delinquent
                                                                                                                                      
                                                                                                                                      Principal
      and Interest are payable monthly at a varying amount, over the life to
      maturity
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      N/A
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      1,444
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      988
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      1,4441,444
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      988
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      1,444Provision
      for valuation loss
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      -
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      (500
                                                                                                                                      )Total
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      $
                                                                                                                                      214,049
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      $
                                                                                                                                      210,441
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      $
                                                                                                                                      1,444
 (1)
                      The aggregate cost
      for federal incometax
      purposes is
$211,385
  98
 
 CapLease,
Inc. and Subsidiaries
 Schedule
of Loans Held for Investment
 December
31, 2010
 (amounts
in thousands)
 Schedule
IV—(Continued)
 
 Balance-December
      31, 2007
                  
                  
                  
                  
                  $
                  270,143Additions
      during the year:New
      loan investmentsDeductions
      during the year:Securities
      reclassified to loan investments
                  
                  $
                  24,453Principal
      received
                  
                  
                  (6,863
                  )Principal
      written-off as uncollectible
                  
                  
                  (498
                  )Allowance
      for loan losses
                  
                  
                  (500
                  )Amortization
      of unearned discounts and premiums
                  
                  
                  (172
                  )Balance-December
      31, 2008
                  
                  
                  
                  
                  
                  $
                  286,563Additions
      during the year:New
      loan investments
                  
                  $
                  790Deductions
      during the year:Loans
      reclassified to available for sale
                  
                  
                  (25,995
                  )Principal
      received
                  
                  
                  (15,458
                  )Allowance
      for loan losses
                  
                  
                  (444
                  )Amortization
      of unearned discounts and premiums
                  
                  
                  (103
                  )Loans
      sold
                  
                  
                  (23,697
                  )Balance-December
      31, 2009
                  
                  
                  
                  
                  
                  $
                  221,656Additions
      during the year:New
      loan investments
                  
                  $
                  -Deductions
      during the year:Principal
      received
                  
                  
                  (11,193
                  )Interest
      payments treated as a reduction of carry value
                  
                  
                  (12
                  )Allowance
      for loan losses
                  
                  
                  -Amortization
      of unearned discounts and premiums
                  
                  
                  (10
                  )$
                  210,441
  99


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 (as defined under Rule 13a-15(e)
under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) 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.




Pursuant
to Rule 13a-15(b) under the Exchange Act, we carried out an evaluation, with the
participation of management, including our Chief Executive Officer and Chief
Financial Officer, of the effectiveness of our disclosure controls and
procedures as of the end of the period covered by this report. Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures were effective.




Changes
in Internal Controls




There has
been no change in our internal control over financial reporting during the
quarter ended December 31, 2010, that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.




Management’s
Report on Internal Control over Financial Reporting




Management’s
Annual Report on Internal Control over Financial Reporting immediately precedes
Item 8. Financial Statements and Supplementary Data, and is incorporated herein
by reference.




Item
9B.   Other Information.




None.


100


PART
III.




Item
10.     Directors, Executive Officers and Corporate
Governance.




The
information required by Item 10 is incorporated by reference herein to the
information contained in our definitive proxy statement related to our 2011
annual meeting of stockholders.




Item
11.     Executive Compensation.




The
information required by Item 11 is incorporated by reference herein to the
information contained in our definitive proxy statement related to our 2011
annual meeting of stockholders.




Item
12.     Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters.




The
information required by Item 12 is incorporated by reference herein to the
information contained in our definitive proxy statement related to our 2011
annual meeting of stockholders.




Item
13.     Certain Relationships and Related Transactions,
and Director Independence.




The
information required by Item 13 is incorporated by reference herein to the
information contained in our definitive proxy statement related to our 2011
annual meeting of stockholders.




Item
14.     Principal Accounting Fees and
Services.




The
information required by Item 14 is incorporated by reference herein to the
information contained in our definitive proxy statement related to our 2011
annual meeting of stockholders.


101




PART
IV.




Item
15.     Exhibits and Financial Statement
Schedules.




(a) and
(c)




The
consolidated financial statements and supplementary data (including financial
statement schedules) are included in this report under Item 8 of Part II
hereof.




See the
exhibit index included herein for a list of exhibits to this
report.




(b)
Exhibits




The
following is a list of exhibits filed as part of this annual report on Form
10-K. Where so indicated, exhibits that were previously filed are incorporated
by reference.




Exhibit
                    No.
                  
                  Description3.1(1)
                  
                  Articles
      of Amendment and Restatement of the registrant3.2(2)
                  
                  Articles
      of Amendment to Articles of Incorporation of the
  registrant3.3(3)
                  
                  Articles
      Supplementary Establishing the Rights and Preferences of the 8.125% Series
      A Cumulative Redeemable Preferred Stock of the
  registrant3.4(5)
                  
                  Articles
      of Amendment to Articles Supplementary with respect to the 8.125% Series A
      Cumulative Redeemable Preferred Stock, dated as of March 17,
      20103.5(6)
                  
                  Articles
      of Amendment to Articles Supplementary with respect to the 8.125% Series A
      Cumulative Redeemable Preferred Stock, dated as of March 29,
      20103.6(1)
                  
                  Amended
      and Restated Bylaws of the registrant3.7(2)
                  
                  First
      Amendment to Amended and Restated Bylaws of the
  registrant4.1(1)
                  
                  Form
      of Certificate evidencing the Common Stock, par value $0.01 per share, of
      the registrant4.2(4)
                  
                  Junior
      Subordinated Indenture between Caplease, LP and JPMorgan Chase Bank,
      National Association, as trustee, dated December 13,
  20054.3(4)
                  
                  Amended
      and Restated Trust Agreement among Caplease, LP, JPMorgan Chase Bank,
      National Association, Chase Bank USA, National Association and the
      Administrative Trustees named therein, dated December 13,
    20054.4(7)
                  
                  Indenture
      among the registrant, Caplease, LP, Caplease Debt Funding, LP, Caplease
      Services Corp., Caplease Credit LLC, and Deutsche Bank Trust Company
      Americas, as trustee (including form of 7.50% Convertible Senior Note due
      2027) dated as of October 9, 20074.5(8)
                  
                  First
      Amended and Restated Limited Partnership Agreement of Caplease, LP, dated
      June 13, 200610.1(9)
                  
                  Promissory
      Note (Note A), dated October 28, 2004, of CLF 1000 Milwaukee Avenue LLC in
      favor of Wachovia Bank, National Association10.2(10)
                  
                  Promissory
      Note, dated December 9, 2004, of the registrant in favor of Wachovia Bank,
      National Association10.3(12)
                  
                  Promissory
      Note, dated February 25, 2005, of CLF Parsippany LLC in favor of Wachovia
      Bank, National Association10.4(14)
                  
                  Indenture,
      dated as of March 10, 2005, by and among Caplease CDO 2005-1, Ltd.,
      Caplease CDO 2005-1 Corp., Caplease Investment Management, LLC and LaSalle
      Bank National Association10.5(21)
                  
                  Sales
      Agreement, dated as of October 9, 2009, between Brinson Patrick
      Securities Corporation and the registrant10.6(5)
                  
                  First
      Amendment to Sales Agreement, dated as of March 17, 2010, between Brinson
      Patrick Securities Corporation and the registrant10.7(23)
                  
                  ATM
      Equity Offering Sales Agreement, dated as of December 8, 2010, by and
      among Merrill Lynch, Pierce, Fenner & Smith Incorporated, the
      registrant and Caplease, LP10.8(15)
                  
                  Promissory
      Note, dated August 16, 2005, of CLF FBI Birmingham LLC in favor of
      Wachovia Bank, National Association10.9(15)
                  
                  Promissory
      Note, dated August 16, 2005, of CLF DEA Birmingham LLC in favor of
      Wachovia Bank, National
Association




102





Exhibit
                    No.
                  
                  Description10.10(15)
                  
                  Promissory
      Note, dated August 16, 2005, of CLF SSA Austin, LP in favor of Wachovia
      Bank, National Association10.11(15)
                  
                  Trust
      Indenture dated as of February 1, 2001 between Unified Government of
      Wyandotte County, Kansas City, Kansas, as issuer, and Security Bank of
      Kansas City, as trustee10.12(15)
                  
                  Lease
      dated as of February 1, 2001 between Unified Government of Wyandotte
      County, Kansas City, Kansas and Kansas EPA Laboratory,
  LLC10.13(15)
                  
                  Promissory
      Note, dated as of September 9, 2005, of Caplease Credit LLC in favor of
      Wachovia Bank, National Association10.14(15)
                  
                  Promissory
      Note, dated as of September 28, 2005, of CLF Sylvan Way LLC in favor of
      Wachovia Bank, National Association10.15(4)
                  
                  Parent
      Guarantee Agreement between the registrant and JPMorgan Chase Bank,
      National Association, as guarantee trustee, dated December 13,
      200510.16(16)
                  
                  Promissory
      Note, dated as of December 21, 2005, of CLF McCullough Drive Charlotte LLC
      and CLF Electric Road Roanoke LLC in favor of LaSalle Bank National
      Association10.17(7)
                  
                  Registration
      Rights Agreement, dated as of October 9, 2007, between the registrant and
      Deutsche Bank Securities Inc., as representative of the several initial
      purchasers of the convertible senior notes due 202710.18(18)
                  
                  Loan
      Agreement, dated as of December 17, 2007, between CapLease 2007-STL
      LLC, as borrower, and KBC Bank, N.V., acting through its New York Branch,
      as lender and administrative agent10.19(22)
                  
                  First
      Amended and Restated Credit Agreement among Caplease Debt Funding, LP, as
      the borrower, PREFCO II Limited Partnership, as a guarantor, the
      registrant, as a guarantor, Caplease, LP, as a guarantor, Caplease
      Services Corp., as a guarantor, and Wells Fargo Bank, National
      Association, as administrative agent and initial lender, dated as of July
      16, 2010*10.20(11)
                  
                  Amended
      and Restated 2004 Stock Incentive Plan of the registrant (Effective March
      10, 2009)*10.21(20)
                  
                  Form
      of Non-Employee Director Restricted Stock Award
  Agreement*10.22
                  
                  Form
      of Executive Officer Restricted Stock Agreement*10.23(13)
                  
                  Form
      of Employment Agreement between each of Paul H. McDowell, William R.
      Pollert, Shawn P. Seale and Robert C. Blanz, and the
      registrant*10.24(19)
                  
                  Amendment
      No. 1 to the Employment Agreement dated as of March 24, 2004 between
      Robert C. Blanz and the registrant, dated February 13,
  2007*10.25(17)
                  
                  Employment
      Agreement, dated as of February 13, 2007, between Paul Hughes and the
      registrant12.1
                  
                  Computation
      of Ratio of Earnings to Fixed Charges and Earnings to Combined Fixed
      Charges and Preferred Stock Dividends21.1
                  
                  List
      of Subsidiaries23.1
                  
                  Consent
      of McGladrey & Pullen, LLP31.1
                  
                  Certification
      of the Chief Executive Officer required by Rule 13a-14(a)/15d-14(a) of the
      Securities Exchange Act of 1934, as amended as adopted pursuant to Section
      302 of the Sarbanes-Oxley Act of 200231.2
                  
                  Certification
      of the Chief Financial Officer required by Rule 13a-14(a)/15d-14(a) of the
      Securities Exchange Act of 1934, as amended as adopted pursuant to Section
      302 of the Sarbanes-Oxley Act of 200232.1
                  
                  Certification
      of the Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of
  200232.2
                  
                  Certification
      of the Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of
  2002




103




Exhibit
                  No.
                
                Description




*
            Denotes
      compensatory plans or arrangement or management contracts required to be
      filed as exhibits to this Annual Report on Form
  10-K.




(1)
            Incorporated
      by reference from the registrant’s Amendment No. 4 to Registration
      Statement on Form S-11 filed with the Securities and Exchange Commission
      on March 8, 2004 (File No.
333-110644).




(2)
            Incorporated
      by reference from the registrant’s Current Report on Form 8-K filed with
      the Securities and Exchange Commission on July 31,
  2007.




(3)
            Incorporated
      by reference from the registrant’s registration Statement on Form 8-A
      filed with the Securities and Exchange Commission on October 17,
      2005.




(4)
            Incorporated
      by reference from the registrant’s Current Report on Form 8-K filed with
      the Securities and Exchange Commission on December 19,
    2005.




(5)
            Incorporated
      by reference from the registrant’s Form 8-K filed with the Securities and
      Exchange Commission on March 17,
2010.




(6)
            Incorporated
      by reference from the registrant’s Form 8-K filed with the Securities and
      Exchange Commission on March 31,
2010.




(7)
            Incorporated
      by reference from the registrant’s Current Report on Form 8-K filed with
      the Securities and Exchange Commission on October 9,
  2007.




(8)
            Incorporated
      by reference from the registrant’s registration Statement on Form S-3
      filed with the Securities and Exchange Commission on January 14, 2008
      (File No. 333-148649).




(9)
            Incorporated
      by reference from the registrant’s Current Report on Form 8-K filed with
      the Securities and Exchange Commission on November 3,
  2004.




(10)
            Incorporated
      by reference from the registrant’s Current Report on Form 8-K/A filed with
      the Securities and Exchange Commission on December 15,
    2004.




(11)
            Incorporated
      by reference from the registrant’s Definitive Proxy Statement filed with
      the Securities and Exchange Commission on April 17,
  2009.




(12)
            Incorporated
      by reference from the registrant’s Current Report on Form 8-K/A filed with
      the Securities and Exchange Commission on March 3,
  2005.




(13)
            Incorporated
      by reference from the registrant’s Annual Report on Form 10-K filed with
      the Securities and Exchange Commission on March 30,
  2005.




(14)
            Incorporated
      by reference from the registrant’s Quarterly Report on Form 10-Q filed
      with the Securities and Exchange Commission on May 16,
    2005.




(15)
            Incorporated
      by reference from the registrant’s Quarterly Report on Form 10-Q filed
      with the Securities and Exchange Commission on November 14,
      2005.




(16)
            Incorporated
      by reference from the registrant’s Annual Report on Form 10-K filed with
      the Securities and Exchange Commission on March 16,
  2006.




(17)
            Incorporated
      by reference from the registrant’s Current Report on Form 8-K filed with
      the Securities and Exchange Commission on February 20,
    2007.




(18)
            Incorporated
      by reference from the registrant’s Current Report on Form 8-K filed with
      the Securities and Exchange Commission on December 20,
    2007.




(19)
            Incorporated
      by reference from the registrant’s Annual Report on Form 10-K filed with
      the Securities and Exchange Commission on March 4,
  2008.




(20)
            Incorporated
      by reference from the registrant’s Current Report on Form 8-K filed
      with the Securities and Exchange Commission on June 16,
      2009.




(21)
            Incorporated
      by reference from the registrant’s Current Report on Form 8-K filed
      with the Securities and Exchange Commission on October 9,
      2009.




(22)
            Incorporated
      by reference from the registrant’s Current Report on Form 8-K filed with
      the Securities and Exchange Commission on July 19,
  2010.




(23)
            Incorporated
      by reference from the registrant’s Current Report on Form 8-K filed with
      the Securities and Exchange Commission on December 8,
  2010.


104


PART
V.




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.




CAPLEASE,
      INC.RegistrantDate:  February
      18, 2011
              
              /s/   Paul H.
      McDowellPaul
      H. McDowell
                Chairman
      of the Board and Chief Executive
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:




Signature
                
                Title
                
                Date/s/   Paul H. McDowell
                
                Chairman
      of the Board and Chief Executive
                
                February
      18, 2011Paul H. McDowell
                
                Officer
                  (Principal
      Executive Officer)/s/   William R. Pollert
                
                President
      and Director
                
                February
      18, 2011William R. Pollert/s/   Shawn P. Seale
                
                Senior
      Vice President, Chief Financial
                
                February
      18, 2011Shawn P. Seale
                
                Officer
      and Treasurer
                  (Principal
      Financial Officer)/s/   John E. Warch
                
                Senior
      Vice President and
                
                February
      18, 2011John E. Warch
                
                Chief
      Accounting Officer
                  (Principal
      Accounting Officer)/s/   Michael E. Gagliardi
                
                Director
                
                February
      18, 2011Michael E. Gagliardi/s/   Stanley Kreitman
                
                Director
                
                February
      18, 2011Stanley Kreitman/s/   Jeffrey F. Rogatz
                
                Director
                
                February
      18, 2011Jeffrey F. Rogatz/s/   Howard A. Silver
                
                Director
                
                February
      18, 2011Howard A. Silver




105