**Table            of Contents**

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**UNITED      STATES**

**SECURITIES      AND EXCHANGE COMMISSION**

**Washington,      D.C. 20549**

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**FORM      10-K**

**(Mark      One)**

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

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

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**CAPITAL      LEASE FUNDING, INC.**

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| **Maryland**(State                or Other Jurisdiction ofIncorporation                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**

**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 Exchange |
|----------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------|
| 8.125%                Series A Cumulative Redeemable Preferred Stock, $0.01 par                value |   | New                York Stock Exchange                                                             |
|                                                                                                                |   |                                                                                               |

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**Securities      registered pursuant to Section 12(g) of the Act: None**

**DOCUMENTS      INCORPORATED BY REFERENCE**

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**Table            of Contents**

**TABLE        OF CONTENTS**

| PART                I.   |                                                                                                                                              | 1      |
|--------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| Item                1.   | Business.                                                                                                                                         | 1      |
| Item                1A.  | Risk                Factors.                                                                                                                      | 17     |
| Item                1B.  | Unresolved                Staff Comments.                                                                                                         | 29     |
| Item                2.   | Properties.                                                                                                                                       | 29     |
| Item                3.   | Legal                Proceedings.                                                                                                                 | 29     |
| Item                4.   | Submission                of Matters to a Vote of Security                Holders.                                                                | 30     |
| PART                II.  |                                                                                                                                              | 31     |
| Item                5.   | Market                for Registrant’s Common Equity, Related Stockholder                Matters and Issuer Purchases of Equity Securities. | 31     |
| Item                6.   | Selected                Financial Data.                                                                                                           | 33     |
| Item                7.   | Management’s                Discussion and Analysis of Financial Condition                and Results of Operations.                        | 35     |
| Item                7A.  | Quantitative                and Qualitative Disclosures about Market                Risk.                                                         | 46     |
| Item                8.   | Financial                Statements and Supplementary                Data.                                                                        | 50     |
| Item                9.   | Changes                in and Disagreements With Accountants on Accounting                and Financial Disclosure.                               | 90     |
| Item                9A.  | Controls                and Procedures.                                                                                                           | 90     |
| Item                9B.  | Other                Information.                                                                                                                 | 90     |
| PART                III. |                                                                                                                                              | 91     |
| Item                10.  | Directors,                Executive Officers and Corporate                Governance.                                                             | 91     |
| Item                11.  | Executive                Compensation.                                                                                                            | 91     |
| Item                12.  | Security                Ownership of Certain Beneficial Owners and                Management and Related Stockholder Matters.                     | 91     |
| Item                13.  | Certain                Relationships and Related Transactions, and                Director Independence.                                          | 91     |
| Item                14.  | Principal                Accounting Fees and Services.                                                                                            | 91     |
| PART                IV.  |                                                                                                                                              | 92     |
| Item                15.  | Exhibits                and Financial Statement                Schedules.                                                                         | 92     |
| PART                V.   |                                                                                                                                              | 95     |
|                          |                                                                                                                                              |   |

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**Table            of Contents**

**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**

**Overview**

|                                                                       |   |   | Carry                Value    |   |   |       |   |
|----------------------------------------------------------------------------|--------|--------|-------------------------------|--------|--------|------------|--------|
|                                                                       |   |   | (in                thousands) |   |   | Percentage |
| Owned                properties                                            |   | $      | 1,115,001                     |   |   | 70.8       | %      |
| Debt                investments                                            |   |   |                          |   |   |       |   |
| Loans                                                                      |   |   |                          |   |   |       |   |
| Long-term                mortgage loans                                    |   |   | 231,094                       |   |   | 14.7       | %      |
| Corporate                credit notes                                      |   |   | 33,480                        |   |   | 2.1        | %      |
| Mezzanine                and other investments                             |   |   | 9,511                         |   |   | 0.6        | %      |
| Commercial                mortgage-backed and other real estate securities |   |   | 183,066                       |   |   | 11.6       | %      |
| Other                                                                      |   |   | 3,253                         |   |   | 0.2        | %      |
| Total                                                                      |   | $      | 1,575,405                     |   |   | 100.0      | %      |

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**Table            of Contents**

**Investment      Strategy**

|  | · | *Investing                in High Quality Cash Flows*.                We invest primarily in owned real properties and real estate loans                where                the underlying tenant is of high credit quality. As of December 31,                2006,                our top ten credit exposures had a weighted average credit rating                of                A.                As of December 31, 2006, our portfolio had the following credit                characteristics: |
|--|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| Credit                  Rating (1)                        |   | Total (in                  thousands) |      | Percentage |   |
|----------------------------------------------------------------|--------|--------------------------------------------|-----------|------------|--------|
| Investment                  grade rating of A- or A3 and above |   | $                                          | 607,373   |       |   | 38.6 | % |
| Investment                  grade rating of below A- or A3     |   |                                       | 512,037   |       |   | 32.5 | % |
| Implied                  investment grade rating               |   |                                       | 231,982   |       |   | 14.7 | % |
| Non-investment                  grade rating                   |   |                                       | 214,502   |       |   | 13.6 | % |
| Unrated                  (2)                                   |   |                                       | 9,511     |       |   | 0.6 | % |
|                                                           |   | $                                          | 1,575,405 |       |   | 100.00 | % |

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| (1) | Four                of                our owned real properties with an aggregate carry value of $253,655                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. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (2)  | Includes                our mezzanine and other investments as described under “Our Portfolio—Loan                Investments.” While the tenants on the underlying properties generally may                be rated by S&P and/or Moody’s, we classify these investments as                unrated because of the subordinated nature of our investment. |
|-----------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | · | *Long-Term                Assets Held for Investment*.                We invest in commercial real estate assets subject to long-term leases.                The weighted average remaining lease term on the leases on our owned                properties is approximately 12                years and on the leases underlying our loan investments is approximately                19                years. 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. On a limited and opportunistic basis, we also continue                to                acquire and promptly resell assets through our taxable REIT                subsidiary. |
|--|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | · | *Flexible                Investment Approach*.                We invest at all levels of the capital structure of net lease or                other                single tenant properties but remain flexible within that structure,                investing where we see the greatest market opportunity to earn attractive                returns. During 2005 and 2006, we saw the greatest opportunity on                the                equity side of the business (owned real properties). As of December                31,                2006, owned real properties comprised approximately 71%                of                our portfolio, and we expect this percentage to continue to increase                in                2007. |
|--|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | · | *Stringent                Underwriting Process.*                We                maintain a comprehensive underwriting and due diligence process that                is                overseen by our investment committee, which consists of six 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 transaction prior to funding.                We also                have an investment oversight committee of the Board of Directors                that                approves investments in excess of $50                million. |
|--|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | · | *Finance                with Long-Term Fixed Rate Debt*.                We seek to borrow against, or leverage, our assets with long-term                fixed                rate debt, effectively locking in the spread we expect to generate                on our                assets. Our financing strategy allows us to invest in a greater number                of                assets and enhance our asset returns. We expect our leverage to average                70% to 85% of our assets in portfolio. We believe this leverage level                is                conservative given the high credit quality of the underlying tenants                and                the length and quality of the related                leases. |
|--|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**Our      Competitive Strengths**

|  | · | *Established                Origination and Investment Capabilities.*                We                have an experienced in-house team of investment originators and                underwriters that originate, structure, underwrite and close our                transactions. In addition, we have developed an extensive national                network                of property owners, investment sale brokers, tenants, borrowers,                mortgage                brokers, lenders, institutional investors and other market participants                that helps us to identify and originate a variety of net lease or                other                single tenant financing and investment opportunities. During 2006,                we                originated approximately $538.6                million of new investments (including approximately $78.0                million of investments sold in the ordinary course of                business). |
|--|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | · | *Experienced                Senior Management Team*.                Our senior management team has worked together for more than 10 years.                During this period, we built a nationwide origination network and                underwriting platform, initially focused on net lease mortgage lending.                Since our initial public offering in 2004, we have expanded our strategy                to include the |
|--|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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**Table            of Contents**

|  | · | *Financing                Expertise.*                We                have substantial experience in financing and securitizing net lease                assets. During 2005, we completed what we believe was the first ever                100%                fixed rate real estate primarily whole loan CDO. We financed an                approximately $300 million pool of net lease mortgage loans and                securities, with 85% of the obligations rated AAA/Aaa by S&P/Moody’s,                and 95% of the obligations rated investment grade by S&P/Moody’s. We                expect our next CDO issuance to occur in the second quarter of 2007.                Prior                to our initial public offering in 2004, we structured four “gain-on-sale”                securitizations aggregating $1.5 billion. |
|--|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | · | *Market                Expertise.*                We                have recognized expertise in the net lease marketplace. In February                2005,                we received a U.S. patent for our 10-year credit tenant loan product.                In                addition to serving as one of our loan products, we use this product                to                create additional leverage on many of our owned property investments.                We                have worked extensively with S&P and Moody’s to develop ratings                criteria for net lease financing, and continue to provide ongoing                advice                and assistance to these rating agencies on net lease financing issues.                We                also developed the specialized lease enhancement mechanisms that                are now                market standard for net lease lending                transactions. |
|--|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**Our      Portfolio**

*Owned      Properties*

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

|  | · | 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. |
|--|--------|---------------------------------------------|

|  | · | approximately                6.0                million rentable square feet with 99.8%                occupancy; |
|--|--------|-------------------------------------------------------------------------------------------------------------------|

|  | · | 36                properties in 21                states leased to 26                different tenants; |
|--|--------|---------------------------------------------------------------------------------------------------------|

|  | · | 94%                investment grade or implied investment grade                tenants; |
|--|--------|-----------------------------------------------------------------------------------------|

|  | · | weighted                average tenant credit rating of A; |
|--|--------|------------------------------------------------------------|

|  | · | weighted                average remaining lease term of approximately 12                years; and |
|--|--------|----------------------------------------------------------------------------------------------------|

|  | · | well                diversified portfolio by property type, geography and credit                rating. |
|--|--------|---------------------------------------------------------------------------------------------------------|

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**Table            of Contents**

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

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| (1) | Reflects                scheduled rent payments under all of our leases with all of our tenants.                Does not reflect straight-line rent adjustments required under Statement                of Financial Accounting Standards (“SFAS”) No. 13. Also does not include                expense recoveries or above or below market rent amortization adjustments                required by SFAS No. 141. Assumes no additions to the portfolio and                no lease renewals at expiration of the primary lease term. Actual                results                may differ materially from those projected. Please see “Risk Factors”                section. |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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**Table            of Contents**

|                                                      |   |         |                                                                       |                               |   |                            |   |                               |      |                                |   | **(in                  thousands)**                 |   |
|-----------------------------------------------------------|--------|--------------|----------------------------------------------------------------------------|------------------------------------|--------|---------------------------------|--------|------------------------------------|-----------|-------------------------------------|--------|-----------------------------------------------------|--------|
| **Tenant                  or Guarantor**                  |   | **Location** |                                                                       | **Property                  Type** |   | **Square****Feet**              |   | **Purchase                  Date** |      | **Lease                  Maturity** |   | **2007                  Estimated Annual Rent (1)** |   | **Purchase****Price** |   | **Carry****Value                  (2)** |   |
| Abbott                  Laboratories                      |   |         | 6480                  Busch Blvd, Columbus, OH                             |                               |   | Office                          |   |                               | 111,776   |                                |   | 11/2004                                             |   |   | 10/2016 |   | $ | 893 |   | $ | 12,025 |   | $ | 11,347 |   |
| Abbott                  Laboratories                      |   |         | 1850                  Norman Drive North, Waukegan, IL                     |                               |   | Office                          |   |                               | 131,341   |                                |   | 8/2005                                              |   |   | 8/2017 |   |   | 1,338 |   |   | 20,325 |   |   | 19,543 |   |
| Aetna                  Life Insurance Company             |   |         | 1333                  - 1385 East Shaw Avenue, Fresno, CA                  |                               |   | Office                          |   |                               | 122,605   |                                |   | 10/2006                                             |   |   | 11/2016 |   |   | 1,622 |   |   | 24,255 |   |   | 24,721 |   |
| Allstate                  Insurance Company               |   |         | 401                  McCullough Drive, Charlotte, NC                       |                               |   | Office                          |   |                               | 191,681   |                                |   | 12/2005                                             |   |   | 12/2015 |   |   | 1,916 |   |   | 27,172 |   |   | 26,293 |   |
| Allstate                  Insurance Company               |   |         | 1819                  Electric Road (aka State hwy. 419), Roanoke, VA      |                               |   | Office                          |   |                               | 165,808   |                                |   | 12/2005                                             |   |   | 12/2015 |   |   | 2,039 |   |   | 28,928 |   |   | 27,905 |   |
| AmeriCredit                  Corp.                        |   |         | 4001                  Embarcadero Drive, Arlington, TX                     |                               |   | Office                          |   |                               | 246,060   |                                |   | 12/2006                                             |   |   | 8/2017 |   |   | 2,965 |   |   | 43,000 |   |   | 43,359 |   |
| AMVESCAP                  PLC                             |   |         | 4340,                  4346 & 4350 South Monaco St., Denver, CO        |                               |   | Office                          |   |                               | 263,770   |                                |   | 3/2006                                              |   |   | 10/2016 |   |   | 4,934 |   |   | 69,300 |   |   | 67,838 |   |
| Aon                  Corporation (3)                      |   |         | 1000                  Milwaukee Ave, Glenview, IL                          |                               |   | Office                          |   |                               | 412,409   |                                |   | 8/2004                                              |   |   | 4/2017 |   |   | 6,517 |   |   | 85,750 |   |   | 81,401 |   |
| Baxter                  International, Inc.               |   |         | 555                  North Daniels Way, Bloomington, IN                    |                               |   | Warehouse                       |   |                               | 125,500   |                                |   | 10/2004                                             |   |   | 9/2016 |   |   | 790 |   |   | 10,500 |   |   | 10,196 |   |
| Cadbury                  Schweppes Holdings (US)          |   |         | 945                  Route 10, Whippany, NJ                                |                               |   | Office                          |   |                               | 149,475   |                                |   | 1/2005                                              |   |   | 3/2021 |   |   | 3,400 |   |   | 48,000 |   |   | 48,356 |   |
| Capital                  One Financial Corporation        |   |         | 3905                  N. Dallas Parkway, Plano, TX                         |                               |   | Office                          |   |                               | 159,000   |                                |   | 6/2005                                              |   |   | 2/2015 |   |   | 1,823 |   |   | 27,900 |   |   | 29,565 |   |
| Choice                  Hotels International, Inc. (4)    |   |         | 10720,                  10750 & 10770 Columbia Pike, Silver Spring, MD |                               |   | Office                          |   |                               | 223,912   |                                |   | 11/2004                                             |   |   | 5/2013 |   |   | 4,908 |   |   | 43,500 |   |   | 42,914 |   |
| Cott                  Corporation                         |   |         | 1090                  and 1091 Spring Street, Reading, PA                  |                               |   | Mfg/Dist                        |   |                               | 120,000   |                                |   | 7/2006                                              |   |   | 6/2017 |   |   | 362 |   |   | 5,350 |   |   | 5,397 |   |
| Crozer-Keystone                  Health System (5)        |   |         | 8                  Morton Avenue, Ridley, PA                               |                               |   | Medical                  Office |   |                               | 22,708    |                                |   | 8/2004                                              |   |   | 4/2019 |   |   | 404 |   |   | 4,477 |   |   | 5,553 |   |
| CVS                  Corporation                          |   |         | 100                  Mazzeo Drive, Randolph, MA                            |                               |   | Retail                  Drug    |   |                               | 88,420    |                                |   | 9/2004                                              |   |   | 1/2014 |   |   | 744 |   |   | 10,450 |   |   | 13,661 |   |
| Farmers                  New World Life Insurance Company |   |         | 3003                  77th Avenue Southeast, Mercer Island, WA             |                               |   | Office                          |   |                               | 155,200   |                                |   | 12/2005                                             |   |   | 12/2020 |   |   | 2,392 |   |   | 39,550 |   |   | 38,974 |   |
| ITT                  Industries, Inc.                     |   |         | 12975                  Worldgate Drive, Herndon, VA                        |                               |   | Office                          |   |                               | 167,285   |                                |   | 5/2005                                              |   |   | 3/2019 |   |   | 4,888 |   |   | 46,081 |   |   | 54,871 |   |
| Johnson                  Controls, Inc.                   |   |         | 6750                  Bryan Dairy Road, Largo, FL                          |                               |   | Office                          |   |                               | 307,275   |                                |   | 12/2006                                             |   |   | 8/2016 |   |   | 1,862 |   |   | 27,000 |   |   | 27,219 |   |
| Koninklijke                  Ahold, N.V.                  |   |         | 4001                  New Falls Road, Levittown, PA                        |                               |   | Retail                          |   |                               | 70,020    |                                |   | 6/2006                                              |   |   | 4/2026 |   |   | 1,439 |   |   | 18,575 |   |   | 20,851 |   |
| Lowes                  Companies, Inc. (6)                |   |         | 26501                  Aliso Creek Rd., Aliso Viejo, CA                    |                               |   | Retail                          |   |                               | 181,160   |                                |   | 5/2005                                              |   |   | 8/2024 |   |   | 3,450 |   |   | 52,860 |   |   | 51,534 |   |
| Omnicom                  Group, Inc.                      |   |         | 1660                  North Westridge Circle, Irving, TX                   |                               |   | Office                          |   |                               | 101,120   |                                |   | 6/2005                                              |   |   | 5/2013 |   |   | 1,278 |   |   | 18,100 |   |   | 16,984 |   |
| Pearson                  Plc.                             |   |         | 3833                  Greenway and 2201 Noria Road, Lawrence, KS           |                               |   | Office                          |   |                               | 194,665   |                                |   | 4/2006                                              |   |   | 4/2021 |   |   | 1,351 |   |   | 20,750 |   |   | 20,389 |   |
| T-Mobile                  USA, Inc.                       |   |         | 695                  Grassmere Park, Nashville, TN                         |                               |   | Office                          |   |                               | 69,287    |                                |   | 11/2006                                             |   |   | 1/2017 |   |   | 1,298 |   |   | 16,195 |   |   | 16,187 |   |
| Tiffany                  & Co.                        |   |         | 15                  Sylvan Way, Parsippany, NJ                             |                               |   | Office/Warehouse                |   |                               | 367,740   |                                |   | 9/2005                                              |   |   | 9/2025 |   |   | 4,613 |   |   | 75,000 |   |   | 75,179 |   |
| Time                  Warner Entertainment Company, L.P.  |   |         | 1320                  N. Dr. Martin Luther King Jr. Dr., Milwaukee, WI     |                               |   | Office                          |   |                               | 154,849   |                                |   | 11/2006                                             |   |   | 12/2016 |   |   | 1,865 |   |   | 28,530 |   |   | 29,074 |   |
| TJX                  Companies, Inc.                      |   |         | 2760                  Red Lion Road, Philadelphia, PA                      |                               |   | Warehouse                       |   |                               | 1,015,500 |                                |   | 3/2006                                              |   |   | 6/2021 |   |   | 5,915 |   |   | 90,125 |   |   | 91,025 |   |
| United                  States Government (DEA)           |   |         | 1003                  17th Street North, Birmingham, AL                    |                               |   | Office                          |   |                               | 35,616    |                                |   | 8/2005                                              |   |   | 12/2020 |   |   | 1,229 |   |   | 14,100 |   |   | 13,754 |   |
| United                  States Government (EPA)           |   |         | 300                  Minnesota Avenue, Kansas City, KS                     |                               |   | Office                          |   |                               | 71,979    |                                |   | 8/2005                                              |   |   | 3/2023 |   |   | 2,452 |   |   | 29,250 |   |   | 32,012 |   |
| United                  States Government (FBI)           |   |         | 200                  McCarty Avenue, Albany, NY                            |                               |   | Office                          |   |                               | 74,300    |                                |   | 10/2006                                             |   |   | 9/2018 |   |   | 1,312 |   |   | 16,350 |   |   | 16,964 |   |
| United                  States Government (FBI)           |   |         | 1100                  18th Street, North, Birmingham, AL                   |                               |   | Office                          |   |                               | 86,199    |                                |   | 8/2005                                              |   |   | 4/2020 |   |   | 2,202 |   |   | 23,500 |   |   | 23,323 |   |
| United                  States Government (NIH) (7)       |   |         | 6116                  Executive Bvd, N. Bethesda, MD                       |                               |   | Office                          |   |                               | 207,055   |                                |   | 9/2005                                              |   |   | 5/2012 |   |   | 8,151 |   |   | 81,500 |   |   | 77,806 |   |
| United                  States Government (OSHA)          |   |         | 8660                  South Sandy Parkway, Sandy, UT                       |                               |   | Office                          |   |                               | 75,000    |                                |   | 8/2005                                              |   |   | 1/2024 |   |   | 1,883 |   |   | 23,750 |   |   | 23,969 |   |
| United                  States Government (SSA)           |   |         | 1029                  Camino La Costa, Austin, TX                          |                               |   | Office                          |   |                               | 23,311    |                                |   | 8/2005                                              |   |   | 12/2015 |   |   | 710 |   |   | 6,900 |   |   | 6,756 |   |
| United                  States Government (VA)            |   |         | Lot                  37, Santiago De los Caballeros Avenue, Ponce, PR      |                               |   | Medical                  Office |   |                               | 56,500    |                                |   | 11/2004                                             |   |   | 2/2015 |   |   | 1,300 |   |   | 13,600 |   |   | 12,853 |   |
| Walgreen                  Co.                             |   |         | 4601                  Westfield Avenue, Pennsauken, NJ                     |                               |   | Retail                  Drug    |   |                               | 18,500    |                                |   | 11/2004                                             |   |   | 10/2016 |   |   | 297 |   |   | 3,089 |   |   | 3,081 |   |
| Walgreen                  Co.                             |   |         | 700                  Frederick Blvd, Portsmouth, VA                        |                               |   | Retail                  Drug    |   |                               | 13,905    |                                |   | 11/2004                                             |   |   | 7/2018 |   |   | 357 |   |   | 4,165 |   |   | 4,147 |   |
|                                                      |   |         |                                                                            |                               |   |                                 |   |                               |           |                                |   |                                                     |   |   |  |   |   |  |   |   |  |   |   |  |   |
| Total                                                     |   |         |                                                                            |                               |   |                                 |   |                               | 5,980,931 |                                |   |                                                     |   |   |  |   | $ | 84,899 |   | $ | 1,109,902 |   | $ | 1,115,001 |   |

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| (1) | Reflects                scheduled rent due for 2007 under our lease with the tenant or tenants.                Does not reflect straight-line rent adjustments required under SFAS                No.                13. Also does not include expense recoveries or above or below market                rent                amortization adjustments required by SFAS                No. 141. |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (2) | Includes                carry value of any related intangible assets under SFAS No.                141. |
|-----|---------------------------------------------------------------------------------------------------------|

| (3) | As                of December 31, 2006, approximately 2% of the property was leased                to one                other tenant. |
|-----|----------------------------------------------------------------------------------------------------------------------------------------|

| (4) | As                of December 31, 2006, approximately 28% of the property was leased                to six                other tenants. |
|-----|------------------------------------------------------------------------------------------------------------------------------------------|

| (5) | We                own a leasehold interest in the land, or a ground lease, where an                affiliate of our tenant owns the underlying land and improvements                and has                leased them to us through 2032 with an option to extend through 2046.                Our                ground rent is prepaid through 2032. At the end of the ground lease,                unless extended, the land and improvements revert to the                landowner. |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (6) | As                of December 31, 2006, approximately 18% of the property was leased                to two                other tenants. |
|-----|------------------------------------------------------------------------------------------------------------------------------------------|

| (7) | As                of December 31, 2006, approximately 11% of the property was leased                to five                other tenants. |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------|

*Loan      Investments*

*Long-Term      Mortgage Loans*

*Corporate      Credit Notes*

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**Table          of Contents**

*Mezzanine      and Other Investments*

|  | · | weighted                average remaining lease term on the underlying leases of approximately                19                years; |
|--|--------|----------------------------------------------------------------------------------------------------------------------------------------|

|  | · | 78%                investment grade or implied investment grade underlying tenants; |
|--|--------|-------------------------------------------------------------------------------------|

|  | · | loan                investments on 65                properties in 26                states with 24                different underlying tenant obligors;                and |
|--|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | · | weighted                average underlying tenant credit rating of BBB+. |
|--|--------|--------------------------------------------------------------------------|

----

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

----

**Table          of Contents**

| (1) | Reflects                scheduled payments of interest and principal on our long-term mortgage                loans. Actual results may differ materially from those projected.                Please                see “Risk Factors” section. |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

**Table          of Contents**

|                                                     |   |         |                                      |                               |   |                            |   |       |    |           |   |         |   | *(in                  thousands)*       |    |              |   |
|----------------------------------------------------------|--------|--------------|-------------------------------------------|------------------------------------|--------|---------------------------------|--------|------------|---------|----------------|--------|--------------|--------|-----------------------------------------|---------|-------------------|--------|
|                                                     |   |         |                                      |                               |   | **Square**                      |   |       |    | **Lease**      |   | **Loan**     |   | **Original                  Principal** |    | **Principal**     |   | **Carry** |   | **Loan                  to Realty** |   |
| **Tenant                  or Guarantor**                 |   | **Location** |                                      | **Property                  Type** |   | ** Feet**                  |   | **Coupon** |    | **Expiration** |   | **Maturity** |   | **Balance**                             |    | ** Balance** |   | **Value** |   | **Value                  (1)** |   |
| **Long-Term                  Mortgage Loans**            |   |         |                                      |                               |   |                            |   |       |    |           |   |         |   |                                    |    |              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Autozone,                  Inc.                          |   |         | Douglas                  and Valdosta, GA |                               |   | Retail                          |   |       | 13,383  |           |   | 6.50         | %      |                                    | 4/2024  |              |   | 11/2022 |   | $ | 2,108 |   | $ | 1,971 |   | $ | 1,971 |   |   | 73 | % |
| Bank                  of America, N.A.                   |   |         | Mt.                  Airy, MD             |                               |   | Bank                  Branch    |   |       | 4,500   |           |   | 6.42         | %      |                                    | 12/2026 |              |   | 12/2026 |   |   | 3,469 |   |   | 3,469 |   |   | 3,469 |   |   | 78 | % |
| Best                  Buy Co., Inc.                      |   |         | Chicago,                  IL              |                               |   | Retail                          |   |       | 45,720  |           |   | 6.40         | %      |                                    | 3/2025  |              |   | 3/2025 |   |   | 18,522 |   |   | 18,038 |   |   | 18,038 |   |   | 93 | % |
| City                  of Jasper, Texas                   |   |         | Jasper,                  TX               |                               |   | Office                          |   |       | 12,750  |           |   | 7.00         | %      |                                    | 12/2024 |              |   | 11/2024 |   |   | 1,736 |   |   | 1,673 |   |   | 1,624 |   |   | 84 | % |
| CVS                  Corporation                         |   |         | Asheville,                  NC            |                               |   | Retail                  Drug    |   |       | 10,880  |           |   | 6.53         | %      |                                    | 1/2026  |              |   | 1/2026 |   |   | 2,360 |   |   | 2,255 |   |   | 2,317 |   |   | 88 | % |
| CVS                  Corporation                         |   |         | Athol,                  MA                |                               |   | Retail                  Drug    |   |       | 13,013  |           |   | 6.46         | %      |                                    | 1/2025  |              |   | 1/2025 |   |   | 1,502 |   |   | 1,423 |   |   | 1,424 |   |   | 75 | % |
| CVS                  Corporation                         |   |         | Bangor,                  PA               |                               |   | Retail                  Drug    |   |       | 13,013  |           |   | 6.28         | %      |                                    | 1/2026  |              |   | 1/2026 |   |   | 2,521 |   |   | 2,353 |   |   | 2,312 |   |   | 84 | % |
| CVS                  Corporation                         |   |         | Bluefield,                  WV            |                               |   | Retail                  Drug    |   |       | 10,125  |           |   | 8.00         | %      |                                    | 1/2021  |              |   | 1/2021 |   |   | 1,439 |   |   | 1,284 |   |   | 1,402 |   |   | 76 | % |
| CVS                  Corporation                         |   |         | Greensboro,                  GA           |                               |   | Retail                  Drug    |   |       | 11,970  |           |   | 6.52         | %      |                                    | 1/2030  |              |   | 1/2030 |   |   | 1,395 |   |   | 1,355 |   |   | 1,355 |   |   | 80 | % |
| CVS                  Corporation                         |   |         | Oak                  Ridge, NC            |                               |   | Retail                  Drug    |   |       | 10,880  |           |   | 6.99         | %      |                                    | 1/2025  |              |   | 8/2024 |   |   | 3,243 |   |   | 3,097 |   |   | 3,097 |   |   | 80 | % |
| CVS                  Corporation                         |   |         | Shelby                  Twp., MI          |                               |   | Retail                  Drug    |   |       | 11,970  |           |   | 5.98         | %      |                                    | 1/2031  |              |   | 1/2031 |   |   | 2,540 |   |   | 2,521 |   |   | 2,521 |   |   | 88 | % |
| CVS                  Corporation                         |   |         | Southington,                  CT          |                               |   | Retail                  Drug    |   |       | 10,125  |           |   | 8.26         | %      |                                    | 1/2020  |              |   | 1/2020 |   |   | 1,768 |   |   | 1,703 |   |   | 1,899 |   |   | 83 | % |
| CVS                  Corporation                         |   |         | Stow,                  OH                 |                               |   | Retail                  Drug    |   |       | 10,125  |           |   | 8.26         | %      |                                    | 1/2020  |              |   | 1/2020 |   |   | 2,407 |   |   | 2,301 |   |   | 2,565 |   |   | 81 | % |
| CVS                  Corporation                         |   |         | Sunbury,                  PA              |                               |   | Retail                  Drug    |   |       | 10,125  |           |   | 7.50         | %      |                                    | 1/2021  |              |   | 1/2021 |   |   | 1,829 |   |   | 1,603 |   |   | 1,564 |   |   | 76 | % |
| CVS                  Corporation                         |   |         | Washington,                  DC           |                               |   | Retail                  Drug    |   |       | 7,920   |           |   | 8.10         | %      |                                    | 1/2023  |              |   | 1/2023 |   |   | 2,781 |   |   | 2,434 |   |   | 2,600 |   |   | 74 | % |
| CVS                  Corporation                         |   |         | Willimantic,                  CT          |                               |   | Retail                  Drug    |   |       | 10,125  |           |   | 8.26         | %      |                                    | 1/2023  |              |   | 1/2023 |   |   | 2,028 |   |   | 1,961 |   |   | 2,194 |   |   | 80 | % |
| Harris                  Bankcorp, Inc.                   |   |         | Chicago,                  IL              |                               |   | Bank                  Branch    |   |       | 4,750   |           |   | 6.81         | %      |                                    | 8/2025  |              |   | 8/2025 |   |   | 4,467 |   |   | 4,388 |   |   | 4,388 |   |   | 72 | % |
| Home                  Depot USA, Inc.                    |   |         | Chelsea,                  MA              |                               |   | Retail                          |   |       | 117,034 |           |   | 5.36         | %      |                                    | 1/2036  |              |   | 1/2031 |   |   | 8,501 |   |   | 8,384 |   |   | 8,384 |   |   | 91 | % |
| Home                  Depot USA, Inc.                    |   |         | Tullytown,                  PA            |                               |   | Retail                          |   |       | 116,016 |           |   | 6.62         | %      |                                    | 1/2033  |              |   | 1/2033 |   |   | 8,447 |   |   | 8,419 |   |   | 8,419 |   |   | 98 | % |
| Kohls                  Corporation                       |   |         | Chicago,                  IL              |                               |   | Retail                          |   |       | 133,000 |           |   | 6.69         | %      |                                    | 5/2030  |              |   | 5/2030 |   |   | 48,270 |   |   | 47,517 |   |   | 47,517 |   |   | 92 | % |
| Koninklijke                  Ahold, N.V.                 |   |         | Bensalem,                  PA             |                               |   | Retail                          |   |       | 67,000  |           |   | 7.24         | %      |                                    | 5/2020  |              |   | 5/2020 |   |   | 3,153 |   |   | 3,005 |   |   | 3,063 |   |   | 22 | % |
| Koninklijke                  Ahold, N.V.                 |   |         | North                  Kingstown, RI      |                               |   | Retail                          |   |       | 125,772 |           |   | 7.50         | %      |                                    | 11/2025 |              |   | 11/2025 |   |   | 6,794 |   |   | 6,549 |   |   | 6,529 |   |   | 72 | % |
| Koninklijke                  Ahold, N.V.                 |   |         | Tewksbury,                  MA            |                               |   | Retail                          |   |       | 58,450  |           |   | 7.50         | %      |                                    | 1/2027  |              |   | 1/2027 |   |   | 6,625 |   |   | 6,444 |   |   | 6,439 |   |   | 73 | % |
| Koninklijke                  Ahold, N.V.                 |   |         | Upper                  Darby Township, PA |                               |   | Retail                          |   |       | 54,800  |           |   | 7.29         | %      |                                    | 4/2024  |              |   | 4/2024 |   |   | 6,867 |   |   | 6,503 |   |   | 6,215 |   |   | 89 | % |
| Lowes                  Companies, Inc.                   |   |         | Framingham,                  MA           |                               |   | Retail                          |   |       | 156,543 |           |   | 5.87         | %      |                                    | 10/2031 |              |   | 9/2031 |   |   | 27,864 |   |   | 27,829 |   |   | 27,829 |   |   | 85 | % |
| Lowes                  Companies, Inc.                   |   |         | Matamoras,                  PA            |                               |   | Retail                          |   |       | 162,070 |           |   | 6.61         | %      |                                    | 5/2030  |              |   | 5/2030 |   |   | 7,208 |   |   | 7,119 |   |   | 7,119 |   |   | 95 | % |
| National                  City Bank                      |   |         | Chicago,                  IL              |                               |   | Bank                  Branch    |   |       | 5,274   |           |   | 5.89         | %      |                                    | 12/2024 |              |   | 12/2024 |   |   | 3,114 |   |   | 3,005 |   |   | 3,084 |   |   | 76 | % |
| Natural                  Gas Pipeline Company of America |   |         | Lombard,                  IL              |                               |   | Office                          |   |       | 201,189 |           |   | 5.97         | %      |                                    | 5/2008  |              |   | 6/2007 |   |   | 15,244 |   |   | 4,202 |   |   | 4,202 |   |   | 17 | % |
| Neiman                  Marcus Group, Inc.               |   |         | Las                  Vegas, NV            |                               |   | Retail                          |   |       | 167,000 |           |   | 6.06         | %      |                                    | 11/2022 |              |   | 11/2021 |   |   | 8,267 |   |   | 6,830 |   |   | 7,426 |   |   | 72 | % |
| United                  States Postal Service            |   |         | Scammon                  Bay, AK          |                               |   | Post                  Office    |   |       | 2,080   |           |   | 7.05         | %      |                                    | 10/2021 |              |   | 10/2021 |   |   | 1,015 |   |   | 921 |   |   | 940 |   |   | 71 | % |
| University                  of Connecticut Health Center |   |         | Farmington,                  CT           |                               |   | Medical                  Office |   |       | 100,000 |           |   | 6.34         | %      |                                    | 11/2029 |              |   | 11/2024 |   |   | 22,800 |   |   | 21,537 |   |   | 22,333 |   |   | 86 | % |
| Walgreen                  Co.                            |   |         | Dallas,                  TX               |                               |   | Retail                  Drug    |   |       | 14,550  |           |   | 6.46         | %      |                                    | 12/2029 |              |   | 12/2029 |   |   | 3,534 |   |   | 3,419 |   |   | 3,419 |   |   | 80 | % |
| Walgreen                  Co.                            |   |         | Montebello,                  CA           |                               |   | Retail                  Drug    |   |       | 14,414  |           |   | 6.10         | %      |                                    | 3/2030  |              |   | 2/2030 |   |   | 4,680 |   |   | 4,548 |   |   | 4,548 |   |   | 67 | % |
| Walgreen                  Co.                            |   |         | Nacogdoches,                  TX          |                               |   | Retail                  Drug    |   |       | 14,820  |           |   | 6.80         | %      |                                    | 9/2030  |              |   | 9/2030 |   |   | 3,649 |   |   | 3,629 |   |   | 3,629 |   |   | 71 | % |
| Walgreen                  Co.                            |   |         | Rosemead,                  CA             |                               |   | Retail                  Drug    |   |       | 12,004  |           |   | 6.26         | %      |                                    | 12/2029 |              |   | 12/2029 |   |   | 5,333 |   |   | 5,259 |   |   | 5,259 |   |   | 74 | % |
|                                                     |   |         |                                      |                               |   |                            |   |       |    |           |   |         |   |                                    |    |              |   |   |   |   | 247,480 |   |   | 228,948 |   |   | 231,094 |   |   |   |   |
|                                                     |   |         |                                      |                               |   |                            |   |       |    |           |   |         |   |                                    |    |              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Corporate                  Credit Notes**              |   |         |                                      |                               |   |                            |   |       |    |           |   |         |   |                                    |    |              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Albertsons,                  LLC                         |   |         | Los                  Angeles, CA          |                               |   | Retail                  Drug    |   |       | 16,475  |           |   | 6.50         | %      |                                    | 7/2028  |              |   | 9/2013 |   |   | 437 |   |   | 327 |   |   | 297 |   |   | 82 | % |
| Albertsons,                  LLC                         |   |         | Norwalk,                  CA              |                               |   | Retail                  Drug    |   |       | 14,696  |           |   | 6.33         | %      |                                    | 11/2028 |              |   | 12/2013 |   |   | 470 |   |   | 359 |   |   | 355 |   |   | 74 | % |
| Best                  Buy Co., Inc.                      |   |         | Olathe,                  KS               |                               |   | Retail                          |   |       | 48,744  |           |   | 5.40         | %      |                                    | 1/2018  |              |   | 6/2013 |   |   | 1,779 |   |   | 1,323 |   |   | 1,270 |   |   | 80 | % |
| Best                  Buy Co., Inc.                      |   |         | Wichita                  Falls, TX        |                               |   | Retail                          |   |       | 30,038  |           |   | 6.15         | %      |                                    | 1/2017  |              |   | 11/2012 |   |   | 743 |   |   | 509 |   |   | 485 |   |   | 76 | % |
| CVS                  Corporation                         |   |         | Clemmons,                  NC             |                               |   | Retail                  Drug    |   |       | 10,880  |           |   | 5.54         | %      |                                    | 1/2022  |              |   | 1/2015 |   |   | 285 |   |   | 242 |   |   | 232 |   |   | 63 | % |
| CVS                  Corporation                         |   |         | Commerce,                  MI             |                               |   | Retail                  Drug    |   |       | 10,880  |           |   | 5.85         | %      |                                    | 4/2025  |              |   | 5/2013 |   |   | 501 |   |   | 374 |   |   | 361 |   |   | 84 | % |
| CVS                  Corporation                         |   |         | Garwood,                  NJ              |                               |   | Retail                  Drug    |   |       | 11,970  |           |   | 6.12         | %      |                                    | 6/2025  |              |   | 8/2013 |   |   | 879 |   |   | 644 |   |   | 627 |   |   | 83 | % |
| CVS                  Corporation                         |   |         | Kennett                  Square, PA       |                               |   | Retail                  Drug    |   |       | 12,150  |           |   | 6.40         | %      |                                    | 1/2025  |              |   | 10/2012 |   |   | 857 |   |   | 566 |   |   | 547 |   |   | 85 | % |
| CVS                  Corporation                         |   |         | Knox,                  IN                 |                               |   | Retail                  Drug    |   |       | 10,125  |           |   | 7.60         | %      |                                    | 1/2024  |              |   | 12/2011 |   |   | 322 |   |   | 192 |   |   | 191 |   |   | 71 | % |
| CVS                  Corporation                         |   |         | Rockingham,                  NC           |                               |   | Retail                  Drug    |   |       | 10,125  |           |   | 6.12         | %      |                                    | 1/2025  |              |   | 10/2013 |   |   | 435 |   |   | 325 |   |   | 318 |   |   | 77 | % |
| CVS                  Corporation                         |   |         | Rutherford                  College, NC   |                               |   | Retail                  Drug    |   |       | 10,125  |           |   | 6.12         | %      |                                    | 1/2025  |              |   | 10/2013 |   |   | 346 |   |   | 274 |   |   | 268 |   |   | 78 | % |
| Federal                  Express Corporation             |   |         | Bellingham,                  WA           |                               |   | Warehouse                       |   |       | 30,313  |           |   | 5.78         | %      |                                    | 10/2018 |              |   | 3/2015 |   |   | 362 |   |   | 317 |   |   | 310 |   |   | 71 | % |
| FedEx                  Ground Package System, Inc.       |   |         | McCook,                  IL               |                               |   | Warehouse                       |   |       | 159,699 |           |   | 5.89         | %      |                                    | 1/2019  |              |   | 2/2015 |   |   | 2,737 |   |   | 2,350 |   |   | 2,323 |   |   | 82 | % |
| FedEx                  Ground Package System, Inc.       |   |         | Reno,                  NV                 |                               |   | Warehouse                       |   |       | 106,396 |           |   | 5.90         | %      |                                    | 9/2018  |              |   | 10/2014 |   |   | 1,374 |   |   | 1,143 |   |   | 1,132 |   |   | 77 | % |
| Hercules                  Incorporated                   |   |         | Wilmington,                  DE           |                               |   | Office                          |   |       | 518,409 |           |   | 9.32         | %      |                                    | 5/2013  |              |   | 5/2013 |   |   | 20,000 |   |   | 19,964 |   |   | 19,964 |   |   | 82 | % |

----

| Lowes                  Companies, Inc.                 |   |   | N.                  Windham, ME     |   |   | Retail                       |   |   | 138,134 |   |   | 5.28   | %      |   | 1/2026  |   |   | 9/2015  |   |   | 1,140   |   |   | 1,070   |   |   | 1,048   |   |   | 85     | %      |
|--------------------------------------------------------|--------|--------|-------------------------------------|--------|--------|------------------------------|--------|--------|---------|--------|--------|--------|--------|--------|---------|--------|--------|---------|--------|--------|---------|--------|--------|---------|--------|--------|---------|--------|--------|--------|--------|
| PerkinElmer,                  Inc.                     |   |   | Beltsville,                  MD     |   |   | Office/Industrial            |   |   | 65,862  |   |   | 7.35   | %      |   | 11/2021 |   |   | 12/2011 |   |   | 707     |   |   | 419     |   |   | 416     |   |   | 80     | %      |
| PerkinElmer,                  Inc.                     |   |   | Daytona                  Beach, FL  |   |   | Office/Industrial            |   |   | 34,196  |   |   | 7.35   | %      |   | 11/2021 |   |   | 12/2011 |   |   | 321     |   |   | 190     |   |   | 188     |   |   | 76     | %      |
| PerkinElmer,                  Inc.                     |   |   | Phelps,                  NY         |   |   | Office/Industrial            |   |   | 32,700  |   |   | 7.35   | %      |   | 11/2021 |   |   | 12/2011 |   |   | 299     |   |   | 177     |   |   | 174     |   |   | 83     | %      |
| PerkinElmer,                  Inc.                     |   |   | Warwick,                  RI        |   |   | Industrial                   |   |   | 95,720  |   |   | 7.68   | %      |   | 12/2021 |   |   | 1/2012  |   |   | 939     |   |   | 567     |   |   | 555     |   |   | 81     | %      |
| Staples,                  Inc.                         |   |   | Odessa,                  TX         |   |   | Retail                       |   |   | 23,942  |   |   | 6.41   | %      |   | 6/2015  |   |   | 9/2012  |   |   | 408     |   |   | 275     |   |   | 262     |   |   | 77     | %      |
| Walgreen                  Co.                          |   |   | Delray                  Beach, FL   |   |   | Retail                  Drug |   |   | 15,120  |   |   | 6.20   | %      |   | 1/2021  |   |   | 1/2013  |   |   | 595     |   |   | 405     |   |   | 403     |   |   | 74     | %      |
| Walgreen                  Co.                          |   |   | Jefferson                  City, TN |   |   | Retail                  Drug |   |   | 14,266  |   |   | 5.49   | %      |   | 3/2030  |   |   | 5/2015  |   |   | 786     |   |   | 689     |   |   | 689     |   |   | 89     | %      |
| Walgreen                  Co.                          |   |   | Riverside,                  CA      |   |   | Retail                  Drug |   |   | 12,804  |   |   | 6.10   | %      |   | 10/2028 |   |   | 12/2013 |   |   | 571     |   |   | 435     |   |   | 426     |   |   | 74     | %      |
| Walgreen                  Co.                          |   |   | Waterford,                  MI      |   |   | Retail                  Drug |   |   | 14,490  |   |   | 5.50   | %      |   | 1/2023  |   |   | 6/2013  |   |   | 953     |   |   | 676     |   |   | 639     |   |   | 81     | %      |
|                                                   |   |   |                                |   |   |                         |   |   |    |   |   |   |   |   |    |   |   |    |   |   | 38,246  |   |   | 33,812  |   |   | 33,480  |   |   |   |   |
|                                                   |   |   |                                |   |   |                         |   |   |    |   |   |   |   |   |    |   |   |    |   |   |    |   |   |    |   |   |    |   |   |   |   |
| **Mezzanine                  and Other Investments**   |   |   |                                |   |   |                         |   |   |    |   |   |   |   |   |    |   |   |    |   |   |    |   |   |    |   |   |    |   |   |   |   |
| 84th                  Avenue Development, LLC          |   |   | Tinley                  Park, IL    |   |   | Retail                  Drug |   |   | N/A     |   |   | 10.00  | %      |   | N/A     |   |   | 3/2007  |   |   | 498     |   |   | 498     |   |   | 498     |   |   | N/A    |   |
| Eden                  Hylan Seaview LLC                |   |   | Staten                  Island, NY  |   |   | Retail                  Drug |   |   | N/A     |   |   | 10.00  | %      |   | N/A     |   |   | 7/2007  |   |   | 650     |   |   | 650     |   |   | 650     |   |   | N/A    |   |
| Wemo                  Franchise Funding LLC            |   |   | Various                             |   |   | Other                        |   |   | N/A     |   |   | 10.00  | %      |   | N/A     |   |   | 2/2007  |   |   | 6,648   |   |   | 2,648   |   |   | 2,648   |   |   | N/A    |   |
| West                  End Mortgage Finance Fund I L.P. |   |   | Various                             |   |   | Other                        |   |   | N/A     |   |   | 10.00  | %      |   | N/A     |   |   | 9/2009  |   |   | 5,715   |   |   | 5,715   |   |   | 5,715   |   |   | N/A    |   |
|                                                   |   |   |                                |   |   |                         |   |   |    |   |   |   |   |   |    |   |   |    |   |   | 13,511  |   |   | 9,511   |   |   | 9,511   |   |   |   |   |
|                                                   |   |   |                                |   |   |                         |   |   |    |   |   |   |   |   |    |   |   |    |   |   |    |   |   |    |   |   |    |   |   |   |   |
| Total                                                  |   |   |                                |   |   |                         |   |   |    |   |   |   |   |   |    |   |   |    |   | $      | 299,237 |   | $      | 272,271 |   | $      | 274,085 |   |   |   |   |

----

| (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, 2006 to the appraised value of the real estate that                secures                the loan at the time of the loan. 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. |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

**Table          of Contents**

*Commercial      Mortgage-Backed and Other Real Estate Securities*

----

| (1) | Reflects                actual ratings on our CMBS securities and underlying tenant ratings                on our                other real estate securities. |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| (1) | Reflects                scheduled payments of interest and principal on all of our securities.                Actual results may differ materially from those projected. Please                see                “Risk Factors” section. |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

**Table            of Contents**

|                                                                         | ** ** | ** **                     | ** ** | **(in                  thousands)**     | ** ** | ** **                       | ** ** | ** ** | ** ** | ** **                     | ** ** |
|------------------------------------------------------------------------------|------------|--------------------------------|------------|-----------------------------------------|------------|----------------------------------|------------|------------|------------|--------------------------------|------------|
| **Security                  Description**                                    | ** ** | **CUSIP                  No.** | ** ** | **Face****Amount                  (1)** | ** ** | **Carry                  Value** | ** ** | **Coupon** | ** ** | **Yield                  (2)** | ** ** | **Maturity                  Date** |   |
| **Investments                  in Commercial Mortgage Loan Securitizations** | ** ** | ** **                     | ** ** | ** **                              | ** ** | ** **                       | ** ** | ** ** | ** ** | ** **                     | ** ** | ** ** | ** ** |
| BACM                  2006-4, Class H                                        |       |                           | 05950WAT5  |                                    | $          | 8,000                            |       | $          | 8,219      |                           |       | 6.01 | % |   | 5.78 | % |   | Aug                  2016 |   |
| BSCMS                  1999 CLF1, Class E                                    |       |                           | 07383FCC0  |                                    |       | 3,076                            |       |       | 1,710      |                           |       | 7.11 | % |   | 15.74 | % |   | Nov                  2023 |   |
| CALFS                  1997-CTL1, Class D                                    |       |                           | 140281AF3  |                                    |       | 6,000                            |       |       | 5,977      |                           |       | 6.16 | % |   | 6.28 | % |   | Nov                  2018 |   |
| CMLBC                  2001-CMLB-1, Class E                                  |       |                           | 201736AJ4  |                                    |       | 9,526                            |       |       | 11,213     |                           |       | 7.86 | % |   | 6.21 | % |   | Jul                  2022 |   |
| CMLBC                  2001-CMLB-1, Class G                                  |       |                           | 201736AL9  |                                    |       | 9,526                            |       |       | 10,393     |                           |       | 7.86 | % |   | 7.06 | % |   | Feb                  2023 |   |
| CMLBC                  2001-CMLB-1, Class H                                  |       |                           | 201736AM7  |                                    |       | 11,907                           |       |       | 8,127      |                           |       | 6.25 | % |   | 10.36 | % |   | Mar                  2024 |   |
| CMLBC                  2001-CMLB-1, Class J                                  |       |                           | 201736AN5  |                                    |       | 6,383                            |       |       | 2,205      |                           |       | 6.25 | % |   | 20.00 | % |   | Oct                  2025 |   |
| NLFC                  1999-LTL-1, Class E                                    |       |                           | 63859CCL5  |                                    |       | 11,081                           |       |       | 7,208      |                           |       | 5.00 | % |   | 9.60 | % |   | Feb                  2022 |   |
| NLFC                  1999-LTL-1, Class X (IO)                               |       |                           | 63859CCG6  |                                    |       | 7,597                            |       |       | 8,127      |                           |       | 0.49 | % |   | 8.82 | % |   | Jan                  2024 |   |
| WBCMT                  2004-C15 180D                                         |       |                           | 929766YG2  |                                    |       | 15,000                           |       |       | 14,349     |                           |       | 5.58 | % |   | 7.17 | % |   | Nov                  2009 |   |
| WBCMT                  2004-C15 180E                                         |       |                           | 929766YH0  |                                    |       | 8,000                            |       |       | 7,633      |                           |       | 5.58 | % |   | 7.27 | % |   | Nov                  2009 |   |
| WBCMT                  2006-C27, Class C                                     |       |                           | 92977QAK4  |                                    |       | 11,000                           |       |       | 11,289     |                           |       | 5.89 | % |   | 5.57 | % |   | Aug                  2016 |   |
| BACMS                  2002-2, Class V-1 (7-Eleven, Inc.)                    |       |                           | 05947UJE9  |                                    |       | 428                              |       |       | 305        |                           |       | 8.72 | % |   | 12.30 | % |   | Sep                  2019 |   |
| BACMS                  2002-2, Class V-2 (Sterling Jewelers)                 |       |                           | 05947UJF6  |                                    |       | 655                              |       |       | 455        |                           |       | 8.68 | % |   | 12.30 | % |   | Jan                  2021 |   |
|                                                                         |       |                           |       |                                    |       | 108,179                          |       |       | 97,210     | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                   | ** ** | ** **                     | ** ** | ** **                              | ** ** | ** **                       | ** ** | ** ** | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Investments                  in Certificated Loan Transactions**           | ** ** | ** **                     | ** ** | ** **                              | ** ** |                             |       |       |       |                           |       |   |   |   |   |   |   |   |   |
| CVS                  Corporation                                             |       |                           | 126650BB5  |                                    |       | 19,603                           |       |       | 19,248     |                           |       | 5.88 | % |   | 6.18 | % |   | Jan                  2028 |   |
| Koninklijke                  Ahold, N.V. 7.82% Jan 2020                      |       |                           | 008686AA5  |                                    |       | 8,980                            |       |       | 9,350      |                           |       | 7.82 | % |   | 7.15 | % |   | Jan                  2020 |   |
| Koninklijke                  Ahold, N.V. 7.9% May 2026                       |       |                           | 52467@AL9  |                                    |       | 23,395                           |       |       | 24,976     |                           |       | 7.90 | % |   | 7.15 | % |   | May                  2026 |   |
| Yahoo,                  Inc.                                                 |       |                           | 984332AC0  |                                    |       | 31,955                           |       |       | 32,282     |                           |       | 6.65 | % |   | 6.62 | % |   | Aug                  2026 |   |
|                                                                         |       |                           |       |                                    |       | 83,933                           |       |       | 85,856     |                           |       |   |   |   |   |   |   |   |   |
|                                                                         |       |                           |       |                                    |       |                             |       |       |       |                           |       |   |   |   |   |   |   |   |   |
| Total                                                                        |       |                           |       |                                    | $          | 192,112                          |       | $          | 183,066    |                           |       |   |   |   |   |   |   |   |   |

----

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

| (2) | Represents                the yield to maturity, computed using the effective interest method,                based                on our carry value.  |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------|

**Co-Investment      Programs**

**Portfolio      Financing**

----

**Table            of Contents**

|  | · | leverage                of approximately 79.8%                (short-term and long-term secured debt divided by assets in                portfolio); |
|--|--------|------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | · | $794.8                million                of total mortgage debt at a weighted average coupon of 5.46%                and a weighted average effective financing rate of 5.58%;                and |
|--|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | · | $268.2                million of CDO debt at an effective blended financing rate of                approximately 5.67%. |
|--|--------|-------------------------------------------------------------------------------------------------------------------------|

**Hedging      Strategy**

**Revenue      Concentrations in 2006**

**Asset      Pipeline**

*Owned      Property Pipeline.*

----

**Table            of Contents**

*Loan      Pipeline.*

**Origination      Network**

*Property      Acquisitions.*

*Loan      Origination.*

**Underwriting      Process**

|  | · | 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; |
|--|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

**Table            of Contents**

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

|  | · | a                real estate fundamentals review and analysis. |
|--|--------|----------------------------------------------------------------|

|  | · | 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. |
|--|--------|-----------------------------------------------------------------------------------------|

----

**Table            of Contents**

**Asset      Management **

|  | · | meeting                periodically with our tenants; |
|--|--------|-------------------------------------------------------|

|  | · | monitoring                lease expirations and tenant space requirements; |
|--|--------|----------------------------------------------------------------------------|

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

|  | · | 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**

|  | · | track                the status of our assets and asset                opportunities; |
|--|--------|---------------------------------------------------------------------------------------|

|  | · | link                into a management program that includes the underlying asset origination                or acquisition documents; |
|--|--------|---------------------------------------------------------------------------------------------------------------------------------------|

|  | · | load                expected asset cash flows from our underwriting files into the                system; |
|--|--------|-----------------------------------------------------------------------------------------------------------|

|  | · | import                data from the system into our financial accounting                system; |
|--|--------|-------------------------------------------------------------------------------------------------|

|  | · | monitor                actual cash flows on each asset through servicer                reports; |
|--|--------|-------------------------------------------------------------------------------------------------|

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

|  | · | track                credit ratings of underlying tenants;                and |
|--|--------|-------------------------------------------------------------------------------|

|  | · | compute                coverage and compliance tests for our CDO                transactions. |
|--|--------|-----------------------------------------------------------------------------------------------|

**Closing      Process**

----

**Table            of Contents**

**Competition**

**Environmental      Matters**

**Employees**

**Available      Information**

----

**Table            of Contents**

| **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***

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

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

|  | · | Wachovia                Bank, N.A. and its affiliates provide us with short-term financing                through                a repurchase agreement and a real property acquisition                facility. |
|--|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | · | Many                of our real property acquisitions have been and we expect will continue                to                be financed on a long-term basis through traditional mortgage debt                obtained from Wachovia Bank. |
|--|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | · | Affiliates                of Wachovia Bank, N.A. have performed investment banking services                for us,                including in connection with our initial public offering, our initial                CDO                transaction and our Series A preferred stock and first follow-on                common                stock offering. |
|--|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | · | Wachovia                Bank, N.A. acts as loan servicer of our loan investments financed                under                our repurchase facility. |
|--|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | · | We                enter into derivative transactions from time to time with Wachovia                Bank,                N.A. |
|--|--------|-------------------------------------------------------------------------------------------------------------------------------|

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

***Risks      Related to Portfolio Assets***

**Single      tenant leases involve significant risks of tenant default.**

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

|  | · | 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. |
|--|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

**Table            of Contents**

|  | · | The                value of our investments is substantially driven by the credit quality                of                the underlying tenant or tenants, 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                charge to our income statement. |
|--|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | · | An                adverse change in the financial condition of one or more tenants                underlying our investments or a decline in the credit rating of one                or                more tenants underlying our investments could result in a margin                call if                the related asset is being financed on our short-term borrowing                facilities, 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. If the underlying                tenant on any asset financed in our CDO fails to make rental payments,                we                may fail to satisfy coverage tests under the CDO, which could result                in                our cash flows from the assets in the CDO being redirected to senior                class                owners. |
|--|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

|  | · | approximately                $207.4 million, or 13.2%, of our assets in portfolio involve properties                leased to the United States                Government; |
|--|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | · | approximately                $91.0 million, or 5.8%, of our assets in portfolio involve properties                leased to, or leases guaranteed by, TJX Companies,                Inc.; |
|--|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | · | approximately                $87.5 million, or 5.6%, of our assets in portfolio involve properties                leased to, or leases guaranteed by, Lowe’s Companies Inc.;                and |
|--|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | · | approximately                $81.4 million, or 5.2%, of our assets in portfolio involve properties                leased to, or leases guaranteed by, Aon Corporation.  |
|--|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

|  | · | approximately                $199.3 million, or 12.7%, of our assets in portfolio involve 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); |
|--|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | · | approximately                $138.5 million, or 8.8%, of our assets in portfolio involve properties                leased to, or leases guaranteed by, companies in the retail department                stores industry (e.g., TJX Companies, Inc., Kohl’s                Corporation); |
|--|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | · | approximately                $104.3 million, or 6.6%, of our assets in portfolio involve properties                leased to, or leases guaranteed by, companies in the retail home                improvements industry (e.g., Lowe’s Companies, Inc., Home Depot USA,                Inc.); |
|--|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | · | approximately                $89.3 million, or 5.7%, of our assets in portfolio involve properties                leased to, or leases guaranteed by, companies in the retail drug                industry                (e.g., CVS Corporation, Walgreen Co.);                and |
|--|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | · | approximately                $83.9 million, or 5.3%, of our assets in portfolio involve properties                leased to, or leases guaranteed by, companies in the banking industry                (e.g., AmeriCredit Corp., Capital One Financial Corporation, Harris                Bankcorp, Inc., Bank of America, N.A., National City                Bank). |
|--|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

|  | · | approximately                $181.0 million, or 11.5%, of our assets in portfolio are investments                in                properties located in the Chicago, Illinois metropolitan area; |
|--|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

**Table            of Contents**

|  | · | approximately                $178.6 million, or 11.3%, of our assets in portfolio are investments                in                properties located in the Washington, D.C. metropolitan area; |
|--|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | · | approximately                $146.1 million, or 9.3%, of our assets in portfolio are investments                in                properties located in the New York City and Northern New Jersey area; |
|--|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | · | approximately                $135.2 million, or 8.6%, of our assets in portfolio are investments                in                properties located in the Philadelphia, Pennsylvania metropolitan                area;                and |
|--|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | · | approximately                $93.3 million, or 5.9%, of our assets in portfolio are investments                in                properties located in the Dallas, Texas metropolitan area. |
|--|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

**Our      investments in assets where we obtain “private” credit ratings expose us to      certain risks.**

***Risks      Related to Ownership of Real Estate***

**Bankruptcy      laws will limit our remedies if a tenant becomes bankrupt and rejects our      lease.**

**The      success of our owned properties business will depend on our ability to obtain      third-party management for the real properties we      purchase.**

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

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

----

**Table            of Contents**

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

**It      may be difficult for us to buy and sell real estate      quickly.**

**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.      **

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

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

|  | · | 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. |
|--|--------|--------------------------------------------------------|

----

**Table          of Contents**

***Risks      Related to Debt Assets***

**Our      investments in commercial mortgage-backed securities may be      subordinated.**

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

**We      may experience losses on our mortgage loans.**

**Our      collateral rights under our 10-year credit tenant loan program are      limited.**

**Our      mezzanine investments have a greater risk of loss than mortgage      loans.**

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

----

**Table            of Contents**

|  | · | Because                our investments ultimately fund franchise loans, our ability to collect                interest on and principal at maturity of our loans will be dependent                upon                the financial health of the underlying franchisees’ business. We have very                limited experience evaluating franchise loans and we do not re-underwrite                the underlying franchise loans, but rely primarily on the underwriting                efforts performed by or on behalf of our borrower. |
|--|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | · | Our                loans are typically interest only with a balloon payment due at maturity. |
|--|--------|----------------------------------------------------------------------------------------------|

|  | · | Adverse                events with respect to one or more of the YUM! Brands franchises,                such as                the recent E. coli outbreak associated with Taco Bell Stores, could                adversely impact the underlying franchisee borrowers and hence our                investment. |
|--|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | · | A                third party lender has a first priority lien in the underlying franchise                loans, and therefore, our collateral is limited in the event of a                default                by our borrower as a result of non-payment by a                franchisee. |
|--|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**Development      loans involve greater risk of loss than loans secured by income producing      properties.**

**Fluctuating      interest rates may adversely affect the quantity of loan assets we can      originate. **

**Unscheduled      principal payments on our loans could adversely affect our financial condition      and operating results.**

**We      may be required to repurchase assets that we have sold or to indemnify holders      of our CDOs. **

**The      success of our loan business will depend upon our ability to service      effectively, or to obtain effective third-party servicing for, the loans we      invest in.**

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

----

**Table            of Contents**

***Risks      Related to Borrowings***

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

|  | · | 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 short-term                borrowing facilities, our debt service requirements will increase                as                short-term interest rates rise. Therefore, 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                short-term borrowing facilities are fully recourse lending arrangements.                Therefore, if we default on these obligations, our lenders will have                general recourse to our company’s assets, rather than limited recourse to                just the assets financed. |
|--|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**Increases      in our cost of financing may cause our expected spreads on new assets to erode.      **

|  | · | a                decline in the credit rating of the underlying                tenant; |
|--|--------|----------------------------------------------------------------------------------------|

|  | · | increases                in long-term interest rates; |
|--|--------|-------------------------------------------------------|

|  | · | market                dislocations caused by the failure or financial difficulties of a                large                financial institution or                institutions; |
|--|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | · | ineffectiveness                  of our hedging strategies; |
|--|--------|-------------------------------------------------------------|

|  | · | weakening                economic conditions; and |
|--|--------|---------------------------------------------------|

|  | · | United                States military activity and terrorist                activities. |
|--|--------|-----------------------------------------------------------------------------------------|

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

|  | · | 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. |
|--|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

**Table          of Contents**

|  | · | 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      use of debt financing could have a material adverse effect on our financial      condition.**

|                                                  |       | **Expected                  Maturity Dates**                                                                          | ** ** |
|-------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                            | ** ** | **2007**                                                                                                              | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **2011** | ** ** | **Thereafter** |   |
|                                                  |       | (in                  thousands, notional amounts where appropriate, otherwise                  carrying amounts) |       |
| Mortgages                  on real estate investments |       | $                                                                                                                     | 5,207      |   | $ | 7,565 |   | $ | 9,296 |   | $ | 11,289 |   | $ | 13,852 |   | $ | 747,564 |   |
| Collateralized                  debt obligations      |       |                                                                                                                  | (36        | ) |   | (38 | ) |   | (41 | ) |   | 22,792 |   |   | 10,861 |   |   | 234,652 |   |
| Other                  long-term debt                 |       |                                                                                                                  | -          |   |   | - |   |   | - |   |   | - |   |   | - |   |   | 30,930 |   |

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

|  | · | 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. |
|--|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | · | There                will be many market risks against which we may not be able to hedge                effectively, including changes in the spreads of corporate bonds,                CMBS or                CDOs over the underlying U.S. Treasury                rates. |
|--|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | · | We                may or may not hedge any risks with respect to certain of our asset                investments. |
|--|--------|-------------------------------------------------------------------------------------------------------------------|

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

|  | · | Because                we intend to structure our hedging transactions in a manner that                does not                jeopardize our status as a REIT, we will be 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. |
|--|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**We      may fail to qualify for hedge accounting treatment.**

*Accounting      for*
*Derivative      Instruments and Hedging Activities*

----

**Table            of Contents**

**Our      existing short-term borrowing facilities may be unavailable to      us.**

**Our      short-term financings may expose us to interest rate risks and margin      calls.**

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

***Risks      Related to Lease Enhancements***

**Our      lease enhancement mechanisms may fail.**

|  | · | casualty                and condemnation insurance policies that protect us 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 |
|--|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | · | borrower                reserve funds that protect us 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. |
|--|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

----

**Table            of Contents**

|  | · | a                deterioration in our relationship with one or both of our carriers; |
|--|--------|--------------------------------------------------------------------------------------|

|  | · | a                bankruptcy or other material adverse financial development with respect                to                one or both of our carriers; and |
|--|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | · | a                dispute as to policy coverage with one or both of our                carriers. |
|--|--------|-------------------------------------------------------------------------------------------------|

**We      may fail to analyze leases adequately or apply appropriate lease enhancement      mechanisms. **

***Risks      Related to Business Strategy and Policies***

**We      face significant competition that could harm our business.**

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

**Our      joint venture**
**      investments will expose us to certain risks.**

|  | · | For                joint venture properties, we will not exercise sole decision-making                authority regarding the property and, thus, we may not be able to                take                actions that we believe are in our company’s best interests. For example,                we expect that in most cases we will need our partner’s approval before                selling or refinancing the subject property or entering into or amending                any space lease of the property. |
|--|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | · | 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 properties may be adversely affected if                the                properties 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.**

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**Table            of Contents**

**Future      offerings of debt and equity may adversely affect the market price of our common      stock.**

**We      may not be able to maintain our rapid growth rate. **

**We      may fail to manage our anticipated growth.**

**Temporary      investment in short-term investments may adversely affect our      results.**

**The      concentration of our company’s common stock could have an adverse impact on the      value of your investment. **

|  | · | 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 adversely affect our stock                price. |
|--|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | · | 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.**

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**Table            of Contents**

**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.**

**Our      ownership limitations may restrict or prevent you from engaging in certain      transfers of our stock.**

**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.*

*Our      board of directors may issue additional stock without stockholder      approval.*

*Other      provisions of our charter and bylaws may delay or prevent a transaction or      change of control. *

**Increased      market interest rates may reduce the value of our stock.**

----

**Table            of Contents**

**The      market price of our stock may vary substantially.**

|  | · | actual                or anticipated variations in our quarterly results of                operations; |
|--|--------|--------------------------------------------------------------------------------------------------------|

|  | · | the                extent of institutional investor interest in our                company; |
|--|--------|---------------------------------------------------------------------------------------------|

|  | · | 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.**

| **Item              1B.** | **Unresolved                Staff Comments.** |
|---------------------------|-----------------------------------------------|

| **Item              2.** | **Properties.** |
|--------------------------|-----------------|

| **Item              3.** | **Legal                Proceedings.** |
|--------------------------|---------------------------------------|

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**Table            of Contents**

| **Item              4.** | **Submission                of Matters to a Vote of Security                Holders.** |
|--------------------------|----------------------------------------------------------------------------------------|

----

**Table          of Contents**

**PART      II.**

| **Item              5.** | **Market                for Registrant’s Common Equity, Related Stockholder Matters and Issuer                Purchases of Equity                Securities.** |
|--------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**Market      Information and Holders of Record**

| **Fiscal                Year** |   | **Low** |   | **High** |   |
|--------------------------------|--------|---------|--------|----------|--------|
| **2005**                       |   |    |   |     |   |
| First                Quarter   |   | $       | 10.60  |     | $      | 12.62 |   |
| Second                Quarter  |   |    | 10.07  |     |   | 11.43 |   |
| Third                Quarter   |   |    | 9.95   |     |   | 11.30 |   |
| Fourth                Quarter  |   |    | 9.38   |     |   | 11.05 |   |
|                           |   |    |   |     |   |   |   |
| **2006**                       |   |    |   |     |   |   |   |
| First                Quarter   |   | $       | 10.33  |     | $      | 11.73 |   |
| Second                Quarter  |   |    | 9.90   |     |   | 12.13 |   |
| Third                Quarter   |   |    | 10.25  |     |   | 11.58 |   |
| Fourth                Quarter  |   |    | 10.71  |     |   | 12.21 |   |

**Dividends**

| **Quarter                Ended**  |   | **Dividend****Payment                Date** |                            | **Dividend****per                Share** |   |
|-----------------------------------|--------|---------------------------------------------|---------------------------------|------------------------------------------|--------|
| **2005**                          |   |                                        |                            |                                     |   |
| March                31, 2005     |   |                                        | April                15, 2005   |                                     | $      | 0.18 |   |
| June                30, 2005      |   |                                        | July                15, 2005    |                                     |   | 0.18 |   |
| September                30, 2005 |   |                                        | October                17, 2005 |                                     |   | 0.18 |   |
| December                31, 2005  |   |                                        | January                17, 2006 |                                     |   | 0.20 |   |
|                              |   |                                        |                            |                                     |   |   |   |
| **2006**                          |   |                                        |                            |                                     |   |   |   |
| March                31, 2006     |   |                                        | April                17, 2006   |                                     | $      | 0.20 |   |
| June                30, 2006      |   |                                        | July                17, 2006    |                                     |   | 0.20 |   |
| September                30, 2006 |   |                                        | October                16, 2006 |                                     |   | 0.20 |   |
| December                31, 2006  |   |                                        | January                16, 2007 |                                     |   | 0.20 |   |

----

**Table            of Contents**

**Stock      Price Performance Graph**

|                                       |   | Base    |   |    |   |     |   |    |   |     |   |    |   |
|--------------------------------------------|--------|---------|--------|---------|--------|----------|--------|---------|--------|----------|--------|---------|--------|
|                                       |   | Period  |   |    |   |     |   |    |   |     |   |    |   |   |   |
| Company                / Index             |   | 3/19/04 |   | 6/30/04 |   | 12/31/04 |   | 6/30/05 |   | 12/31/05 |   | 6/30/06 |   | 12/31/06 |   |
| Capital                Lease Funding, Inc. |   |    | 100    |    |   | 99.05    |   |    | 121.57 |     |   | 109.02  |   |   | 109.69 |   |   | 123.12 |   |   | 129.62 |   |
| S&P                500 Index           |   |    | 100    |    |   | 103.23   |   |    | 110.65 |     |   | 109.75  |   |   | 116.09 |   |   | 119.23 |   |   | 134.42 |   |
| S&P                REIT Index          |   |    | 100    |    |   | 95.96    |   |    | 118.30 |     |   | 126.78  |   |   | 133.16 |   |   | 152.26 |   |   | 188.76 |   |

**Tax      Characteristics of 2006 Dividends**

| Total                  common dividend per share (tax basis) |   | $      | 0.80     |   |
|--------------------------------------------------------------|--------|--------|----------|--------|
| Capital                  gain                                |   |   | 2.6898   | %      |
| Ordinary                  income                             |   |   | 0.0694   | %      |
| Return                  of capital                           |   |   | 97.2408  | %      |
|                                                         |   |   | 100.0000 | %      |

----

**Table          of Contents**

| **Item              6.** | **Selected                Financial Data.** |
|--------------------------|---------------------------------------------|

|                                                                                                   |   | **Year                ended December 31,**                |     |
|--------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------|----------|
|                                                                                                   |   | **2006**                                                  |     | **2005** |   | **2004** |   | **2003** |   | **2002** |   |
|                                                                                                   |   | *(in                thousands, except per share amounts)* |     |
| ***Income                Statement data***                                                             |   |                                                      |     |   |   |   |   |   |   |   |   |
| Revenues:                                                                                              |   |                                                      |     |   |   |   |   |   |   |   |   |
| Rental                revenue                                                                          |   | $                                                         | 78,656   |   | $ | 37,956 |   | $ | 4,287 |   | $ | — |   | $ | — |   |
| Interest                income from mortgage and other real estate loans and                securities |   |                                                      | 32,470   |   |   | 27,898 |   |   | 13,589 |   |   | 7,317 |   |   | 8,092 |   |
| Property                expense recoveries                                                             |   |                                                      | 8,828    |   |   | 6,272 |   |   | 1,608 |   |   | — |   |   | — |   |
| Gains                on sale of mortgage loans and securities                                          |   |                                                      | 2,923    |   |   | 447 |   |   | 794 |   |   | 11,652 |   |   | 10,051 |   |
| Other                revenue                                                                           |   |                                                      | 1,903    |   |   | 479 |   |   | 726 |   |   | 151 |   |   | 343 |   |
| Total                revenues                                                                          |   |                                                      | 124,780  |   |   | 73,052 |   |   | 21,004 |   |   | 19,120 |   |   | 18,486 |   |
| Expenses:                                                                                              |   |                                                      |     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest                expense                                                                        |   |                                                      | 63,212   |   |   | 31,398 |   |   | 2,768 |   |   | 1,220 |   |   | 2,142 |   |
| Interest                expense to affiliates                                                          |   |                                                      | —  |   |   | — |   |   | — |   |   | 838 |   |   | 659 |   |
| Property                expenses                                                                       |   |                                                      | 15,891   |   |   | 10,441 |   |   | 1,761 |   |   | — |   |   | — |   |
| (Gain)                loss on derivatives                                                              |   |                                                      | (413     | ) |   | (159 | ) |   | 724 |   |   | 3,129 |   |   | 7,729 |   |
| Loss                on securities                                                                      |   |                                                      | 907      |   |   | 2,372 |   |   | 247 |   |   | — |   |   | — |   |
| General                and administrative expenses                                                     |   |                                                      | 9,772    |   |   | 10,140 |   |   | 8,833 |   |   | 7,186 |   |   | 6,966 |   |
| General                and administrative expenses - stock based compensation                          |   |                                                      | 2,621    |   |   | 2,235 |   |   | 3,825 |   |   | — |   |   | — |   |
| Depreciation                and amortization expense on real property                                  |   |                                                      | 25,451   |   |   | 11,273 |   |   | 1,281 |   |   | — |   |   | — |   |
| Loan                processing expenses                                                                |   |                                                      | 268      |   |   | 283 |   |   | 196 |   |   | 114 |   |   | 158 |   |
| Total                expenses                                                                          |   |                                                      | 117,709  |   |   | 67,983 |   |   | 19,635 |   |   | 12,487 |   |   | 17,654 |   |
| Income                before minority interest and taxes                                               |   |                                                      | 7,071    |   |   | 5,069 |   |   | 1,369 |   |   | 6,633 |   |   | 832 |   |
| Minority                interest in consolidated entities                                              |   |                                                      | (17      | ) |   | 55 |   |   | — |   |   | — |   |   | — |   |
| Provision                for income taxes                                                              |   |                                                      | —  |   |   | — |   |   | 9 |   |   | — |   |   | — |   |
| Income                from continuing operations                                                       |   |                                                      | 7,054    |   |   | 5,124 |   |   | 1,360 |   |   | 6,633 |   |   | 832 |   |
| Income                from discontinued operations                                                     |   |                                                      | 195      |   |   | 6 |   |   | — |   |   | — |   |   | — |   |
| Net                income                                                                              |   |                                                      | 7,249    |   |   | 5,130 |   |   | 1,360 |   |   | 6,633 |   |   | 832 |   |
| Dividends                allocable to preferred shares                                                 |   |                                                      | (2,844   | ) |   | (561 | ) |   | — |   |   | — |   |   | — |   |
| Net                income allocable to common stockholders                                             |   | $                                                         | 4,405    |   | $ | 4,569 |   | $ | 1,360 |   | $ | 6,633 |   | $ | 832 |   |
|                                                                                                   |   |                                                      |     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Earnings                per share (pro forma for years 2003 and 2002):                                 |   |                                                      |     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net                income per common share, basic and diluted                                          |   | $                                                         | 0.14     |   | $ | 0.16 |   | $ | 0.06 |   | $ | 1.61 |   | $ | 0.20 |   |
| Weighted                average number of common shares outstanding, basic                             |   |                                                      | 31,939   |   |   | 27,784 |   |   | 22,125 |   |   | 4,108 |   |   | 4,108 |   |
| Weighted                average number of common shares outstanding, diluted                           |   |                                                      | 31,941   |   |   | 27,784 |   |   | 22,125 |   |   | 4,108 |   |   | 4,108 |   |
| Dividends                declared per common share                                                     |   | $                                                         | 0.80     |   | $ | 0.74 |   | $ | 0.25 |   | $ | — |   | $ | — |   |
| Dividends                declared per preferred share                                                  |   | $                                                         | 2.03125  |   | $ | 0.48524 |   | $ | — |   | $ | — |   | $ | — |   |
|                                                                                                   |   |                                                      |     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| ***Other                data***                                                                        |   |                                                      |     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cash                flows from operating activities                                                    |   | $                                                         | 27,443   |   | $ | (17,111 | ) | $ | 10,973 |   | $ | (10,743 | ) | $ | 3,774 |   |
| Cash                flows from investing activities                                                    |   |                                                      | (361,854 | ) |   | (675,408 | ) |   | (349,576 | ) |   | (69 | ) |   | 846 |   |
| Cash                flows from financing activities                                                    |   |                                                      | 319,520  |   |   | 681,114 |   |   | 362,802 |   |   | 11,948 |   |   | (10,773 | ) |
|                                                                                                   |   |                                                      |     |   |   |   |   |   |   |   |   |   |   |   |   |   |

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**Table            of Contents**

|                                                                            |   | **As                of December 31,** |      |
|---------------------------------------------------------------------------------|--------|---------------------------------------|-----------|
|                                                                            |   | **2006**                              |      | **2005** |   | **2004** |   | **2003** |   | **2002** |   |
|                                                                            |   | *(in                thousands)*       |      |
| ***Balance                sheet data***                                         |   |                                  |      |   |   |   |   |   |   |   |   |
| Real                estate investments, net                                     |   | $                                     | 1,115,001 |   | $ | 764,930 |   | $ | 194,541 |   | $ | — |   | $ | — |   |
| Real                estate investments consolidated under                FIN 46 |   |                                  | —   |   |   | — |   |   | 48,000 |   |   | — |   |   | — |   |
| Mortgage                and other real estate loans held for investment         |   |                                  | 273,170   |   |   | 297,551 |   |   | 207,347 |   |   | — |   |   | — |   |
| Mortgage                loans held for sale                                     |   |                                  | —   |   |   | — |   |   | — |   |   | 71,757 |   |   | 77,716 |   |
| Securities                available for sale                                    |   |                                  | 183,066   |   |   | 137,409 |   |   | 87,756 |   |   | 40,054 |   |   | 20,348 |   |
| Cash                and cash equivalents                                        |   |                                  | 4,425     |   |   | 19,316 |   |   | 30,721 |   |   | 6,522 |   |   | 5,386 |   |
| Structuring                fees receivable                                      |   |                                  | 3,253     |   |   | 3,862 |   |   | 4,426 |   |   | 5,223 |   |   | 4,794 |   |
| Total                assets                                                     |   |                                  | 1,644,300 |   |   | 1,286,488 |   |   | 581,702 |   |   | 125,773 |   |   | 112,276 |   |
| Repurchase                agreement and other short-term financing obligations  |   |                                  | 195,485   |   |   | 129,965 |   |   | 133,831 |   |   | 88,087 |   |   | 76,116 |   |
| Mortgages                on real estate investments                             |   |                                  | 794,773   |   |   | 551,844 |   |   | 111,539 |   |   | — |   |   | — |   |
| Collateralized                debt obligations                                  |   |                                  | 268,190   |   |   | 268,156 |   |   | — |   |   | — |   |   | — |   |
| Other                long-term debt                                             |   |                                  | 30,930    |   |   | 30,930 |   |   | — |   |   | — |   |   | — |   |
| Stockholders’                equity/members’ capital                |   |                                  | 307,656   |   |   | 270,031 |   |   | 253,264 |   |   | 34,045 |   |   | 27,775 |   |

----

**Table            of Contents**

| **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. Where appropriate, the following discussion includes      analysis of our predecessor entity.*

**Overview**

| Month/Year                               |   | Securities                  Issued                                                                            |   | Price           |   | Net                  Proceeds    |
|------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------|--------|-----------------|--------|----------------------------------|
| March                  2004              |   | 23.0                  million shares of common stock                                                          |   | $10.50          |   | $                  221.8 million |
| October                  2005            |   | 1.4                  million shares of 8.125% Series A cumulative redeemable preferred                  stock |   | $25.00          |   | $                  33.7 million  |
| December                  2005           |   | $30.9                  million of junior subordinated notes                                                   |   | N/A             |   | $                  29.9 million  |
| May                  2006                |   | 5.747                  million shares of common stock                                                         |   | $10.55          |   | $                  57.3 million  |
| November/                  December 2006 |   | 160,900                  shares of common stock                                                               |   | $11.91(average) |   | $                  1.9 million   |

**Summary      of Investment Activity in 2006**

|  | · | We                originated assets of approximately $538.6                million, including the acquisition of 11                real properties for an aggregate purchase price of approximately                $359.4                million and the origination of $123                million of loan investments |
|--|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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**Table            of Contents**

|  | · | We                financed our real property acquisitions with $245.7                million of fixed rate mortgage debt (including $28.6                million of debt assumed at its fair market value). Our next CDO issuance                is scheduled for the second quarter of                2007. |
|--|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**Business      Environment**

**Application      of Critical Accounting Policies**

*Mortgage      and Other Real Estate Loans Held for Investment.*

*Purchase      Accounting for Acquisition of Real Estate.*

|   | · | 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. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

**Table            of Contents**

*Securities      Available for Sale.*

*Accounting      for Certain Investments in Debt and Equity Securities*

*Impairment      on Owned Real Properties. *

*Derivative      Instruments and Other Risk Management Transactions.*

*Accounting      for Derivative Instruments and Hedging Activities*

*Revenue      Recognition.*

----

**Table            of Contents**

*Stock      Based Compensation*

*Share-Based      Payment*

**Property      Acquisitions**

| Month                  Acquired |   | Tenant                  or Guarantor |                                                     | Location |   | Purchase                  Price                                        |   | Lease                  Expires |    | Net                  Rentable Square Feet |   |
|---------------------------------|--------|--------------------------------------|----------------------------------------------------------|----------|--------|------------------------------------------------------------------------|--------|--------------------------------|---------|-------------------------------------------|--------|
| October                         |   |                                 | Aetna                  Life Insurance Company            |     |   | 1333                  - 1385 East Shaw Avenue, Fresno, CA              |   | $                              | 24,255  |                                      |   | November                  2016 |   |   | 122,605 |   |
| October                         |   |                                 | United                  States Government                |     |   | 200                  McCarty Avenue, Albany, NY                        |   |                           | 16,350  |                                      |   | September                  2018 |   |   | 74,300 |   |
| November                        |   |                                 | T-Mobile                  USA, Inc.                      |     |   | 695                  Grassmere Park, Nashville, TN                     |   |                           | 16,195  |                                      |   | January                  2017 |   |   | 69,287 |   |
| November                        |   |                                 | Time                  Warner Entertainment Company, L.P. |     |   | 1320                  N. Dr. Martin Luther King Jr. Dr., Milwaukee, WI |   |                           | 28,530  |                                      |   | December                  2016 |   |   | 154,849 |   |
| December                        |   |                                 | Johnson                  Controls, Inc.                  |     |   | 6750                  Bryan Dairy Road, Largo, FL                      |   |                           | 27,000  |                                      |   | August                  2016 |   |   | 307,275 |   |
| December                        |   |                                 | AmeriCredit                  Corp.                       |     |   | 4001                  Embarcadero Drive, Arlington, TX                 |   |                           | 43,000  |                                      |   | August                  2017 |   |   | 246,060 |   |
|                            |   |                                 |                                                     |     |   |                                                                   |   | $                              | 155,330 |                                      |   |   |   |   |   |   |

**Business      Segments**

|  | · | operating                real estate (including our investments in owned real properties);                and |
|--|--------|---------------------------------------------------------------------------------------------------------------|

|  | · | lending                investments (including our loan investments as well as our investments                in                securities). |
|--|--------|---------------------------------------------------------------------------------------------------------------------------------------------|

|                                                      |   | Corporate                  / Unallocated |    | Operating                  Real                  Estate |   | Lending                  Investments |   | Total  |    |
|-----------------------------------------------------------|--------|------------------------------------------|---------|---------------------------------------------------------|--------|--------------------------------------|--------|--------|---------|
| Total                  revenues                           |   | $                                        | 811     |                                                    | $      | 88,002                               |   | $      | 35,966  |   | $ | 124,780 |   |
| Total                  expenses and minority interest     |   |                                     | 14,901  |                                                    |   | 82,754                               |   |   | 20,070  |   |   | 117,726 |   |
| Income                  (loss) from continuing operations |   |                                     | (14,090 | )                                                       |   | 5,248                                |   |   | 15,896  |   |   | 7,054 |   |
| Total                  assets                             |   |                                     | 30,219  |                                                    |   | 1,152,348                            |   |   | 461,732 |   |   | 1,644,300 |   |

|                                                      |   | Corporate                  / Unallocated |    | Operating                  Real                  Estate |   | Lending                  Investments |   | Total  |    |
|-----------------------------------------------------------|--------|------------------------------------------|---------|---------------------------------------------------------|--------|--------------------------------------|--------|--------|---------|
| Total                  revenues                           |   | $                                        | 1,090   |                                                    | $      | 44,352                               |   | $      | 27,609  |   | $ | 73,052 |   |
| Total                  expenses and minority interest     |   |                                     | 12,493  |                                                    |   | 39,254                               |   |   | 16,181  |   |   | 67,928 |   |
| Income                  (loss) from continuing operations |   |                                     | (11,402 | )                                                       |   | 5,098                                |   |   | 11,428  |   |   | 5,124 |   |
| Total                  assets                             |   |                                     | 48,007  |                                                    |   | 797,945                              |   |   | 440,536 |   |   | 1,286,488 |   |

|                                                      |   | Corporate                  / Unallocated |    | Operating                  Real                  Estate |   | Lending                  Investments |   | Total  |    |
|-----------------------------------------------------------|--------|------------------------------------------|---------|---------------------------------------------------------|--------|--------------------------------------|--------|--------|---------|
| Total                  revenues                           |   | $                                        | 603     |                                                    | $      | 6,356                                |   | $      | 14,045  |   | $ | 21,004 |   |
| Total                  expenses and minority interest     |   |                                     | 11,869  |                                                    |   | 4,206                                |   |   | 3,569   |   |   | 19,644 |   |
| Income                  (loss) from continuing operations |   |                                     | (11,266 | )                                                       |   | 2,150                                |   |   | 10,476  |   |   | 1,360 |   |
| Total                  assets                             |   |                                     | 31,454  |                                                    |   | 247,325                              |   |   | 302,923 |   |   | 581,702 |   |

----

**Table          of Contents**

**Results      of Operations**

**Comparison      of Year Ended December 31, 2006 to the Year Ended December 31,      2005**

*Revenue.*

*Expenses.*

** **

----

**Table            of Contents**

*Net      income.*

**Comparison      of Year Ended December 31, 2005 to the Year Ended December 31, 2004**

*Revenue.*

*Expenses.*

----

**Table            of Contents**

** **

*Minority      interest.*

*Net      income.*

**Funds      from Operations**

----

**Table            of Contents**

|                                                                                                         |   | Year                  ended December 31, |    |
|--------------------------------------------------------------------------------------------------------------|--------|------------------------------------------|---------|
| (in                  thousands, except per share amounts)                                                    |   | 2006                                     |    | 2005 |   | 2004 |   |
| Net                  income allocable to common stockholders                                                 |   | $                                        | 4,405   |   | $ | 4,569 |   | $ | 1,360 |   |
| Adjustments:                                                                                                 |   |                                     |    |   |   |   |   |   |   |   |
| Add:                  Minority interest–OP units                                                       |   |                                     | 17      |   |   | – |   |   | – |   |
| Add:                  Depreciation and amortization expense on real property                                 |   |                                     | 25,451  |   |   | 11,273 |   |   | 1,281 |   |
| Funds                  from operations                                                                       |   | $                                        | 29,873  |   | $ | 15,842 |   | $ | 2,641 |   |
|                                                                                                         |   |                                     |    |   |   |   |   |   |   |   |
| Weighted                  average number of common shares outstanding, diluted                               |   |                                     | 31,941  |   |   | 27,784 |   |   | 22,125 |   |
| Weighted                  average number of OP units outstanding                                             |   |                                     | 145     |   |   | – |   |   | – |   |
| Weighted                  average number of common shares and OP units outstanding,                  diluted |   |                                     | 32,086  |   |   | 27,784 |   |   | 22,125 |   |
|                                                                                                         |   |                                     |    |   |   |   |   |   |   |   |
| Net                  income per common share, basic and diluted                                              |   | $                                        | 0.14    |   | $ | 0.16 |   | $ | 0.06 |   |
| Funds                  from operations per share                                                             |   | $                                        | 0.93    |   | $ | 0.57 |   | $ | 0.12 |   |
|                                                                                                         |   |                                     |    |   |   |   |   |   |   |   |
| Gain                  on sale of mortgage loans and securities                                               |   | $                                        | 2,923   |   | $ | 447 |   | $ | 794 |   |
| Depreciation                  on real estate investments consolidated under FIN46                            |   | $                                        | – |   | $ | 935 |   | $ | – |   |

**Liquidity      and Capital Resources**

*Short-Term      Liquidity and Financing.*

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**Table            of Contents**

*Long-Term      Liquidity and Financing.*

*Long-Term      Mortgage Financings.*

*CDO      Financing.*

----

**Table            of Contents**

**Statement      of Cash Flows**

**Derivative      and Other Risk Management Transactions**

----

**Table            of Contents**

**Contractual      Obligations**

|                                                  |   | **Total** | ** ** | **Less                  than 1 year** | ** ** | **2-3                  years** | ** ** | **4-5                  years** | ** ** | **After                  5 years** |   |
|-------------------------------------------------------|--------|-----------|------------|---------------------------------------|------------|--------------------------------|------------|--------------------------------|------------|------------------------------------|--------|
| Mortgages                  on real estate investments |   | $         | 794,773    |                                  | $          | 5,207                          |       | $                              | 16,861     |                               | $      | 25,141 |   | $ | 747,564 |   |
| Collateralized                  debt obligations      |   |      | 268,190    |                                  |       | (36                            | )          |                           | (79        | )                                  |   | 33,653 |   |   | 234,652 |   |
| Other                  long-term debt                 |   |      | 30,930     |                                  |       | -                              |       |                           | -          |                               |   | - |   |   | 30,930 |   |
| Operating                  leases                     |   |      | 5,010      |                                  |       | 738                            |       |                           | 1,470      |                               |   | 1,485 |   |   | 1,317 |   |
| Repurchase                  agreement obligations     |   |      | 195,485    |                                  |       | 195,485                        |       |                           | -          |                               |   | - |   |   | - |   |
| Total                                                 |   | $         | 1,294,388  |                                  | $          | 201,394                        |       | $                              | 18,252     |                               | $      | 60,279 |   | $ | 1,014,463 |   |

**Off-Balance      Sheet Arrangements**

----

**Table            of Contents**

| **Item              7A.** | **Quantitative                and Qualitative Disclosures about Market                Risk.** |
|---------------------------|-----------------------------------------------------------------------------------------------|

*Interest      Rate Exposure*

*Credit      Spread Curve Exposure*

*Tenant      Credit Rating Exposure*

*Equity      Price Risk Exposure*

----

**Table            of Contents**

*Fair      Value*

|                                                                                                  |   | Carrying                  Amount |    | Notional                  Amount |   | Weighted                  Average Effective Interest Rate |   | Maturity                  Date |    | Fair                  Value |   |
|-------------------------------------------------------------------------------------------------------|--------|----------------------------------|---------|----------------------------------|--------|-----------------------------------------------------------|--------|--------------------------------|---------|-----------------------------|--------|
|                                                                                                  |   | 12/31/2006                       |    | 12/31/2005                       |   | 12/31/2006                                                |   | 12/31/2005                     |    | 12/31/2006                  |   | 12/31/2006 |   | 12/31/2006 |   | 12/31/2005 |   |
|                                                                                                  |   |                             |    |                             |   |                                                      |   |                           |    |                        |   |   |   |   |   |   |   |
| Assets:                                                                                               |   |                             |    |                             |   |                                                      |   |                           |    |                        |   |   |   |   |   |   |   |
| Mortgage                  and other real estate loans held                  for investment (1)        |   | $                                | 274,085 |                             | $      | 298,377                                                   |   | $                              | 272,271 |                        | $      | 296,479 |   |   | 6.85 | % |   | Various |   | $ | 277,014 |   | $ | 307,829 |   |
| Securities                  available for sale (2)                                                    |   |                             | 183,066 |                             |   | 137,409                                                   |   |                           | 192,111 |                        |   | 149,662 |   |   | 7.61 | % |   | 2009-2028 |   |   | 183,066 |   |   | 137,409 |   |
| Structuring                  fees receivable                                                          |   |                             | 3,253   |                             |   | 3,862                                                     |   |                           | N/A     |                        |   | N/A |   |   | 7.99 | % |   | 2010-2020 |   |   | 3,253 |   |   | 3,862 |   |
| Derivative                  assets (3)                                                                |   |                             | 2,333   |                             |   | 1,082                                                     |   |                           | 127,529 |                        |   | 82,852 |   |   | N/A |   |   | N/A |   |   | 2,333 |   |   | 1,082 |   |
|                                                                                                  |   |                             |    |                             |   |                                                      |   |                           |    |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Liabilities                                                                                           |   |                             |    |                             |   |                                                      |   |                           |    |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Repurchase                  agreement and other short-term financing                  obligations (4) |   |                             | 195,485 |                             |   | 129,965                                                   |   |                           | 195,485 |                        |   | 129,965 |   |   | 6.25 | % |   | Short-term |   |   | 195,485 |   |   | 129,965 |   |
| Mortgages                  on real estate investments (5)                                             |   |                             | 794,773 |                             |   | 551,844                                                   |   |                           | 789,971 |                        |   | 546,284 |   |   | 5.58 | % |   | 2013-2024 |   |   | 784,802 |   |   | 545,289 |   |
| Collateralized                  debt obligations (5)                                                  |   |                             | 268,190 |                             |   | 268,156                                                   |   |                           | 268,500 |                        |   | 268,500 |   |   | 5.67 | % |   | 2015 |   |   | 258,557 |   |   | 262,955 |   |
| Other                  long-term debt (6)                                                             |   |                             | 30,930  |                             |   | 30,930                                                    |   |                           | 30,930  |                        |   | 30,930 |   |   | 8.30 | % |   | 2016 |   |   | 31,958 |   |   | 30,849 |   |
| Derivative                  liabilities (3)                                                           |   |                             | 2,405   |                             |   | 298                                                       |   |                           | 104,190 |                        |   | 43,029 |   |   | N/A |   |   | N/A |   |   | 2,405 |   |   | 298 |   |

----

| (1) | This                  portfolio of loans bears interest at fixed rates. We have estimated                  the                  fair value of this portfolio of loans based on sales of loans with                  similar                  credit and structural characteristics where available, and management’s                  estimate of fair values where comparable sales information is not                  available. The maturity dates for the loans range from 2007                  through 2033. |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (2) | Securities                  available for sale represent subordinate interests in securitizations                  (CMBS), as well as pass-through certificates representing our pro                  rata                  investments in a pool of mortgage loans. 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. Fair value for the CMBS is based                  on                  third-party quotations, where obtainable, or our estimate of fair                  value,                  based on yields of comparably rated securities in the CMBS market.                  Fair                  value for the structuring fees receivable is shown at our amortized                  cost                  for these items. For the securities available for sale, we expect                  to                  receive monthly interest coupon payments, and contractual principal                  payments as scheduled. |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (3) | These                  instruments represent hedging and risk management transactions                  involving                  interest rate swaps. They have been valued by reference to market                  quotations. |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (4) | Our                  repurchase agreement and other short-term financing obligations                  bear                  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. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (5) | We                  estimate the fair value of mortgage notes on real estate investments                  and                  collateralized debt obligations 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 reflects our expected maturity date in January 2015                  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. |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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**Table            of Contents**

|                                                                             |       | **Expected                  Maturity Dates**                                                                          | ** ** |
|----------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                                       | ** ** | **2007**                                                                                                              |       | **2008** |   | **2009** |   | **2010** |   | **2011** |   | **Thereafter** |   |
|                                                                             |       | (in                  thousands, notional amounts where appropriate, otherwise                  carrying amounts) |       |
| Mortgage                  and other real estate loans                            |       | $                                                                                                                     | 13,587     |   | $ | 5,972 |   | $ | 14,846 |   | $ | 11,393 |   | $ | 12,493 |   | $ | 213,980 |   |
| Securities                  available for sale - CMBS                            |       |                                                                                                                  | 1,553      |   |   | 2,203 |   |   | 25,129 |   |   | 2,366 |   |   | 2,914 |   |   | 157,946 |   |
| Structuring                  fees receivable                                     |       |                                                                                                                  | 659        |   |   | 713 |   |   | 772 |   |   | 768 |   |   | 73 |   |   | 268 |   |
| Derivative                  assets                                               |       |                                                                                                                  | 2,333      |   |   | - |   |   | - |   |   | - |   |   | - |   |   | - |   |
| Mortgages                  on real estate investments                            |       |                                                                                                                  | 5,207      |   |   | 7,565 |   |   | 9,296 |   |   | 11,289 |   |   | 13,852 |   |   | 747,564 |   |
| Repurchase                  agreement and other short-term financing obligations |       |                                                                                                                  | 195,485    |   |   | - |   |   | - |   |   | - |   |   | - |   |   | - |   |
| Collateralized                  debt obligations                                 |       |                                                                                                                  | (36        | ) |   | (38 | ) |   | (41 | ) |   | 22,792 |   |   | 10,861 |   |   | 234,652 |   |
| Other                  long-term debt                                            |       |                                                                                                                  | -          |   |   | - |   |   | - |   |   | - |   |   | - |   |   | 30,930 |   |
| Derivative                  liabilities                                          |       |                                                                                                                  | 2,405      |   |   | - |   |   | - |   |   | - |   |   | - |   |   | - |   |

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**Table            of Contents**

**MANAGEMENT’S      ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING**

|   | · | 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. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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**Table          of Contents**

| **Item              8.** | **Financial                Statements and Supplementary                Data.** |
|--------------------------|--------------------------------------------------------------------------------|

**Index        to Financial Statements**

**and        Financial Statement Schedules**

|                                                                                                                                          | Page      |
|-----------------------------------------------------------------------------------------------------------------------------------------------|-----------|
|                                                                                                                                          | Reference |
| Reports                  of Independent Registered Public Accounting Firms                                                                    | 51        |
| Consolidated                  Balance Sheets as of December 31, 2006 and 2005                                                                 | 53        |
| Consolidated                  Income Statements for the years ended December 31, 2006, 2005 and                  2004                         | 54        |
| Consolidated                  Statements of Changes in Stockholders’ Equity/Members’ Capital for the                  years       |      |
| ended                  December 31, 2006, 2005 and 2004                                                                                       | 55        |
| Consolidated                  Statements of Cash Flows for the years ended December 31, 2006,                  2005 and                  2004 | 56        |
| Notes                  to Consolidated Financial Statements                                                                                   | 58        |
| Schedule                  III - Schedule of Real Estate and Accumulated Depreciation at December                  31,                  2006   | 84        |
| Schedule                  IV - Schedule of Mortgage and Other Real Estate Loans at December                  31,                  2006        | 86        |

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**Table            of Contents**

----

**Table            of Contents**

**Report        of Independent Registered Public Accounting Firm**

----

**Table            of Contents**

|                                                                                                                                                                                                                                                                                       |   | December                    31, |      |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------|-----------|
| (Amounts                    in thousands, except share and per share amounts)                                                                                                                                                                                                              |   | 2006                            |      | 2005 |   |
| **Assets**                                                                                                                                                                                                                                                                                 |   |                            |      |   |   |
| Real                    estate investments, net                                                                                                                                                                                                                                            |   | $                               | 1,115,001 |   | $ | 764,930 |   |
| Mortgage                    and other real estate loans held for investment                                                                                                                                                                                                                |   |                            | 273,170   |   |   | 297,551 |   |
| Securities                    available for sale                                                                                                                                                                                                                                           |   |                            | 183,066   |   |   | 137,409 |   |
| Cash                    and cash equivalents                                                                                                                                                                                                                                               |   |                            | 4,425     |   |   | 19,316 |   |
| Asset                    held for sale                                                                                                                                                                                                                                                     |   |                            | 2,942     |   |   | 2,942 |   |
| Structuring                    fees receivable                                                                                                                                                                                                                                             |   |                            | 3,253     |   |   | 3,862 |   |
| Other                    assets                                                                                                                                                                                                                                                            |   |                            | 62,443    |   |   | 60,478 |   |
| **Total                    Assets**                                                                                                                                                                                                                                                        |   | $                               | 1,644,300 |   | $ | 1,286,488 |   |
| **Liabilities                    and Stockholders' Equity**                                                                                                                                                                                                                                |   |                            |      |   |   |   |   |
| Accounts                    payable, accrued expenses and other liabilities                                                                                                                                                                                                                |   | $                               | 17,132    |   | $ | 14,890 |   |
| Repurchase                    agreement and other short-term financing obligations                                                                                                                                                                                                         |   |                            | 195,485   |   |   | 129,965 |   |
| Mortgages                    on real estate investments                                                                                                                                                                                                                                    |   |                            | 794,773   |   |   | 551,844 |   |
| Collateralized                    debt obligations                                                                                                                                                                                                                                         |   |                            | 268,190   |   |   | 268,156 |   |
| Other                    long-term debt                                                                                                                                                                                                                                                    |   |                            | 30,930    |   |   | 30,930 |   |
| Intangible                    liabilities on real estate investments                                                                                                                                                                                                                       |   |                            | 19,693    |   |   | 14,419 |   |
| Dividends                    payable                                                                                                                                                                                                                                                       |   |                            | 7,582     |   |   | 6,253 |   |
| **Total                    liabilities**                                                                                                                                                                                                                                                   |   |                            | 1,333,785 |   |   | 1,016,457 |   |
| Minority                    interest                                                                                                                                                                                                                                                       |   |                            | 2,859     |   |   | – |   |
| Commitments                    and contingencies                                                                                                                                                                                                                                           |   |                            |      |   |   |   |   |
| Stockholders'                    equity:                                                                                                                                                                                                                                                   |   |                            |      |   |   |   |   |
| Preferred                    stock, $0.01 par value, 100,000,000 shares authorized, Series                    A cumulative                    redeemable preferred, liquidation preference $25.00 per share,                    1,400,000                    shares issued and outstanding |   |                            | 33,657    |   |   | 33,657 |   |
| Common                    stock, $0.01 par value, 500,000,000 shares authorized, 34,091,829                    and                    27,868,480 shares issued and outstanding, respectively                                                                                               |   |                            | 341       |   |   | 279 |   |
| Additional                    paid in capital                                                                                                                                                                                                                                              |   |                            | 277,918   |   |   | 237,843 |   |
| Accumulated                    other comprehensive loss                                                                                                                                                                                                                                    |   |                            | (4,260    | ) |   | (1,748 | ) |
| **Total                    Stockholders' Equity**                                                                                                                                                                                                                                          |   |                            | 307,656   |   |   | 270,031 |   |
| **Total                    Liabilities and Stockholders' Equity**                                                                                                                                                                                                                          |   | $                               | 1,644,300 |   | $ | 1,286,488 |   |
|                                                                                                                                                                                                                                                                                       |   |                            |      |   |   |   |   |
|                                                                                                                                                                                                                                                                                            |   |                            |      |   |   |   |   |

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**Table              of Contents**

|                                                                                                           |   | Year                    ended December 31, |
|----------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------|
| (Amounts                    in thousands, except per share amounts)                                            |   | 2006                                       |   | 2005 |   | 2004 |   |
| **Revenues:**                                                                                                  |   |                                       |   |   |   |   |   |
| Rental                    revenue                                                                              |   | $                                          | 78,656 |   | $ | 37,956 |   | $ | 4,287 |   |
| Interest                    income from mortgage and other real estate loans and                    securities |   |                                       | 32,470 |   |   | 27,898 |   |   | 13,589 |   |
| Property                    expense recoveries                                                                 |   |                                       | 8,828 |   |   | 6,272 |   |   | 1,608 |   |
| Gains                    on sale of mortgage loans and securities                                              |   |                                       | 2,923 |   |   | 447 |   |   | 794 |   |
| Other                    revenue                                                                               |   |                                       | 1,903 |   |   | 479 |   |   | 726 |   |
| **Total                    revenues**                                                                          |   |                                       | 124,780 |   |   | 73,052 |   |   | 21,004 |   |
| **Expenses:**                                                                                                  |   |                                       |   |   |   |   |   |   |   |   |
| Interest                    expense                                                                            |   |                                       | 63,212 |   |   | 31,398 |   |   | 2,768 |   |
| Property                    expenses                                                                           |   |                                       | 15,891 |   |   | 10,441 |   |   | 1,761 |   |
| (Gain)                    loss on derivatives                                                                  |   |                                       | (413 | ) |   | (159 | ) |   | 724 |   |
| Loss                    on securities                                                                          |   |                                       | 907 |   |   | 2,372 |   |   | 247 |   |
| General                    and administrative expenses                                                         |   |                                       | 9,772 |   |   | 10,140 |   |   | 8,833 |   |
| General                    and administrative expenses-stock based compensation                                |   |                                       | 2,621 |   |   | 2,235 |   |   | 3,825 |   |
| Depreciation                    and amortization expense on real property                                      |   |                                       | 25,451 |   |   | 11,273 |   |   | 1,281 |   |
| Loan                    processing expenses                                                                    |   |                                       | 268 |   |   | 283 |   |   | 196 |   |
| **Total                    expenses**                                                                          |   |                                       | 117,709 |   |   | 67,983 |   |   | 19,635 |   |
| Income                    before minority interest and taxes                                                   |   |                                       | 7,071 |   |   | 5,069 |   |   | 1,369 |   |
| Minority                    interest in consolidated entities                                                  |   |                                       | (17 | ) |   | 55 |   |   | – |   |
| Provision                    for income taxes                                                                  |   |                                       | – |   |   | – |   |   | (9 | ) |
| Income                    from continuing operations                                                           |   |                                       | 7,054 |   |   | 5,124 |   |   | 1,360 |   |
| Income                    from discontinued operations                                                         |   |                                       | 195 |   |   | 6 |   |   | – |   |
| Net                    income                                                                                  |   |                                       | 7,249 |   |   | 5,130 |   |   | 1,360 |   |
| Dividends                    allocable to preferred shares                                                     |   |                                       | (2,844 | ) |   | (561 | ) |   | – |   |
| **Net                    income allocable to common stockholders**                                             |   | $                                          | 4,405 |   | $ | 4,569 |   | $ | 1,360 |   |
|                                                                                                           |   |                                       |   |   |   |   |   |   |   |   |
| Earnings                    per share:                                                                         |   |                                       |   |   |   |   |   |   |   |   |
| Net                    income per common share, basic and diluted                                              |   | $                                          | 0.14 |   | $ | 0.16 |   | $ | 0.06 |   |
| Weighted                    average number of common shares outstanding, basic                                 |   |                                       | 31,939 |   |   | 27,784 |   |   | 22,125 |   |
| Weighted                    average number of common shares outstanding, diluted                               |   |                                       | 31,941 |   |   | 27,784 |   |   | 22,125 |   |
| Dividends                    declared per common share                                                         |   | $                                          | 0.80 |   | $ | 0.74 |   | $ | 0.25 |   |
| Dividends                    declared per preferred share                                                      |   | $                                          | 2.03125 |   | $ | 0.48524 |   | $ | – |   |
|                                                                                                           |   |                                       |   |   |   |   |   |   |   |   |

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**Table            of Contents**

|                                                                                                               |   | Capital                        Lease Funding, LLC |    | Capital                        Lease Funding, Inc.                   |   |                                   |   |
|--------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------|---------|----------------------------------------------------------------------|--------|----------------------------------------|--------|
| *(Amounts                        in thousands)*                                                                    |   | Members'                        Capital           |    | Accumulated                        Other Comprehensive Income (Loss) |   | Preferred                        Stock |   | Common                        Stock at Par |   | Additional                        Paid-In Capital |   | Accumulated                        Other Comprehensive Income (Loss) |   | Retained                        Earnings |   | Total |   | Comprehensive                        Income |   |
| Balance                        at December 31, 2003                                                                |   | $                                                 | 31,957  |                                                                 | $      | 2,088                                  |   | $ | - |   | $ | 1 |   | $ | 13 |   | $ | - |   | $ | - |   | $ | 34,059 |   |   |   |   |
| Acquisition                        of Caplease LP                                                                  |   |                                              | (31,957 | )                                                                    |   | (2,088                                 | )      |   | - |   |   | 40 |   |   | 31,917 |   |   | 2,088 |   |   | - |   |   | - |   |   |   |   |
| Issuance                        of common stock-initial public offering                                            |   |                                              | -       |                                                                 |   | -                                      |   |   | - |   |   | 230 |   |   | 241,270 |   |   | - |   |   | - |   |   | 241,500 |   |   |   |   |
| Initial                        public offering costs                                                               |   |                                              | -       |                                                                 |   | -                                      |   |   | - |   |   | - |   |   | (19,723 | ) |   | - |   |   | - |   |   | (19,723 | ) |   |   |   |
| Issuance                        of stock-incentive stock plan at offering date                                     |   |                                              | -       |                                                                 |   | -                                      |   |   | - |   |   | 4 |   |   | 1,357 |   |   | - |   |   | - |   |   | 1,361 |   |   |   |   |
| Adjust                        initial management share purchase to market value                                    |   |                                              | -       |                                                                 |   | -                                      |   |   | - |   |   | - |   |   | 1,447 |   |   | - |   |   | - |   |   | 1,447 |   |   |   |   |
| Incentive                        stock plan compensation expense-March 25-December                        31, 2004 |   |                                              | -       |                                                                 |   | -                                      |   |   | - |   |   | - |   |   | 1,018 |   |   | - |   |   | - |   |   | 1,018 |   |   |   |   |
| Net                        income                                                                                  |   |                                              | -       |                                                                 |   | -                                      |   |   | - |   |   | - |   |   | - |   |   | - |   |   | 1,360 |   |   | 1,360 |   | $ | 1,360 |   |
| Dividends                        declared                                                                          |   |                                              | -       |                                                                 |   | -                                      |   |   | - |   |   | - |   |   | (5,513 | ) |   | - |   |   | (1,360 | ) |   | (6,873 | ) |   |   |   |
| Unrealized                        change in value on securities available for sale                                 |   |                                              | -       |                                                                 |   | -                                      |   |   | - |   |   | - |   |   | - |   |   | 8,121 |   |   | - |   |   | 8,121 |   |   | 8,121 |   |
| Unrealized                        loss on derivatives                                                              |   |                                              | -       |                                                                 |   | -                                      |   |   | - |   |   | - |   |   | - |   |   | (7,312 | ) |   | - |   |   | (7,312 | ) |   | (7,312 | ) |
| Net                        realized loss on cash flow hedges                                                       |   |                                              | -       |                                                                 |   | -                                      |   |   | - |   |   | - |   |   | - |   |   | (1,694 | ) |   | - |   |   | (1,694 | ) |   | (1,694 | ) |
| Balance                        at December 31, 2004                                                                |   |                                              | -       |                                                                 |   | -                                      |   |   | - |   |   | 275 |   |   | 251,786 |   |   | 1,203 |   |   | - |   |   | 253,264 |   | $ | 475 |   |
| Issuance                        of preferred stock                                                                 |   |                                              | -       |                                                                 |   | -                                      |   |   | 33,657 |   |   | - |   |   | - |   |   | - |   |   | - |   |   | 33,657 |   |   |   |   |
| Incentive                        stock plan compensation expense                                                   |   |                                              | -       |                                                                 |   | -                                      |   |   | - |   |   | - |   |   | 2,235 |   |   | - |   |   | - |   |   | 2,235 |   |   |   |   |
| Incentive                        stock plan grants issued and forfeited                                            |   |                                              | -       |                                                                 |   | -                                      |   |   | - |   |   | 4 |   |   | (4 | ) |   | - |   |   | - |   |   | - |   |   |   |   |
| Net                        income                                                                                  |   |                                              | -       |                                                                 |   | -                                      |   |   | - |   |   | - |   |   | - |   |   | - |   |   | 5,130 |   |   | 5,130 |   | $ | 5,130 |   |
| Issuance                        of common stock                                                                    |   |                                              | -       |                                                                 |   | -                                      |   |   | - |   |   | - |   |   | - |   |   | - |   |   | - |   |   | - |   |   |   |   |
| Dividends                        declared-preferred                                                                |   |                                              | -       |                                                                 |   | -                                      |   |   | - |   |   | - |   |   | - |   |   | - |   |   | (680 | ) |   | (680 | ) |   |   |   |
| Dividends                        declared-common                                                                   |   |                                              | -       |                                                                 |   | -                                      |   |   | - |   |   | - |   |   | (16,174 | ) |   | - |   |   | (4,450 | ) |   | (20,624 | ) |   |   |   |
| Unrealized                        change in value of securities available for sale                                 |   |                                              | -       |                                                                 |   | -                                      |   |   | - |   |   | - |   |   | - |   |   | (561 | ) |   | - |   |   | (561 | ) |   | (561 | ) |
| Unrealized                        change in value of derivatives                                                   |   |                                              | -       |                                                                 |   | -                                      |   |   | - |   |   | - |   |   | - |   |   | 8,098 |   |   | - |   |   | 8,098 |   |   | 8,098 |   |
| Realized                        losses on derivatives, net of amortization of $877                                 |   |                                              | -       |                                                                 |   | -                                      |   |   | - |   |   | - |   |   | - |   |   | (10,488 | ) |   | - |   |   | (10,488 | ) |   | (10,488 | ) |
| Balance                        at December 31, 2005                                                                |   |                                              | -       |                                                                 |   | -                                      |   |   | 33,657 |   |   | 279 |   |   | 237,843 |   |   | (1,748 | ) |   | - |   |   | 270,031 |   | $ | 2,179 |   |
| Incentive                        stock plan compensation expense                                                   |   |                                              | -       |                                                                 |   | -                                      |   |   | - |   |   | - |   |   | 2,621 |   |   | - |   |   | - |   |   | 2,621 |   |   |   |   |
| Incentive                        stock plan grants issued and forfeited                                            |   |                                              | -       |                                                                 |   | -                                      |   |   | - |   |   | 3 |   |   | (3 | ) |   | - |   |   | - |   |   | - |   |   |   |   |
| Net                        income                                                                                  |   |                                              | -       |                                                                 |   | -                                      |   |   | - |   |   | - |   |   | - |   |   | - |   |   | 7,249 |   |   | 7,249 |   | $ | 7,249 |   |
| Issuance                        of common stock                                                                    |   |                                              | -       |                                                                 |   | -                                      |   |   | - |   |   | 59 |   |   | 59,074 |   |   | - |   |   | - |   |   | 59,133 |   |   |   |   |
| Dividends                        declared-preferred                                                                |   |                                              | -       |                                                                 |   | -                                      |   |   | - |   |   | - |   |   | - |   |   | - |   |   | (2,844 | ) |   | (2,844 | ) |   |   |   |
| Dividends                        declared-common                                                                   |   |                                              | -       |                                                                 |   | -                                      |   |   | - |   |   | - |   |   | (21,617 | ) |   | - |   |   | (4,405 | ) |   | (26,022 | ) |   |   |   |
| Unrealized                        change in value of securities available for sale                                 |   |                                              | -       |                                                                 |   | -                                      |   |   | - |   |   | - |   |   | - |   |   | (2,956 | ) |   | - |   |   | (2,956 | ) |   | (2,956 | ) |
| Unrealized                        change in value of derivatives                                                   |   |                                              | -       |                                                                 |   | -                                      |   |   | - |   |   | - |   |   | - |   |   | (737 | ) |   | - |   |   | (737 | ) |   | (737 | ) |
| Realized                        gains on derivatives, net of amortization of $1,173                                |   |                                              | -       |                                                                 |   | -                                      |   |   | - |   |   | - |   |   | - |   |   | 1,181 |   |   | - |   |   | 1,181 |   |   | 1,181 |   |
| Balance                        at December 31, 2006                                                                |   | $                                                 | -       |                                                                 | $      | -                                      |   | $ | 33,657 |   | $ | 341 |   | $ | 277,918 |   | $ | (4,260 | ) | $ | - |   | $ | 307,656 |   | $ | 4,737 |   |

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**Table            of Contents**

|                                                                                                                          |   | Year                    ended December 31, |
|-------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------|
| (Amounts                    in thousands)                                                                                     |   | 2006                                       |   | 2005 |   | 2004 |   |
| **Operating                    activities**                                                                                   |   |                                       |   |   |   |   |   |
| Net                    income                                                                                                 |   | $                                          | 7,249 |   | $ | 5,130 |   | $ | 1,360 |   |
| Adjustments                    to reconcile net income to cash provided by (used in) operating                    activities: |   |                                       |   |   |   |   |   |   |   |   |
| Depreciation                    and amortization                                                                              |   |                                       | 25,717 |   |   | 10,469 |   |   | 1,386 |   |
| Stock                    based compensation                                                                                   |   |                                       | 2,621 |   |   | 2,235 |   |   | 3,825 |   |
| Amortization                    of above and below market leases                                                              |   |                                       | (686 | ) |   | (583 | ) |   | (80 | ) |
| Minority                    interest in consolidated entities                                                                 |   |                                       | 17 |   |   | – |   |   | – |   |
| Gain                    on sale of mortgage loans and securities                                                              |   |                                       | (2,923 | ) |   | (447 | ) |   | (794 | ) |
| Loss                    on securities available for sale                                                                      |   |                                       | 907 |   |   | 2,372 |   |   | 247 |   |
| (Gain)                    loss on derivatives                                                                                 |   |                                       | (413 | ) |   | (159 | ) |   | 724 |   |
| Straight-lining                    of rents                                                                                   |   |                                       | (8,822 | ) |   | (5,581 | ) |   | (507 | ) |
| Amortization                    of discounts/premiums, and origination fees/costs                                             |   |                                       | (526 | ) |   | (514 | ) |   | (247 | ) |
| Amortization                    of debt issuance costs and FMV of debt assumed                                                |   |                                       | 1,593 |   |   | 1,139 |   |   | 18 |   |
| Changes                    in operating assets and liabilities:                                                               |   |                                       |   |   |   |   |   |   |   |   |
| Funds                    used in hedging and risk management activities                                                       |   |                                       | – |   |   | – |   |   | (4,485 | ) |
| Structuring                    fees receivable                                                                                |   |                                       | 609 |   |   | 563 |   |   | 797 |   |
| Other                    assets                                                                                               |   |                                       | 1,510 |   |   | (27,146 | ) |   | (6,676 | ) |
| Accounts                    payable, accrued expenses and other liabilities                                                   |   |                                       | 2,275 |   |   | 8,271 |   |   | 843 |   |
| Deposits                    and escrows                                                                                       |   |                                       | (1,867 | ) |   | (8,501 | ) |   | 10,550 |   |
| Amounts                    due to servicer                                                                                    |   |                                       | 182 |   |   | (4,359 | ) |   | 4,012 |   |
| Net                    cash provided by (used in) operating activities                                                        |   |                                       | 27,443 |   |   | (17,111 | ) |   | 10,973 |   |
| **Investing                    activities**                                                                                   |   |                                       |   |   |   |   |   |   |   |   |
| Proceeds                    from sale of mortgage and other real estate loans                                                 |   |                                       | 78,645 |   |   | 12,131 |   |   | 25,422 |   |
| Additions                    to mortgage and other real estate loans                                                          |   |                                       | (122,988 | ) |   | (115,852 | ) |   | (167,009 | ) |
| Principal                    received from borrowers                                                                          |   |                                       | 69,196 |   |   | 20,372 |   |   | 8,520 |   |
| Origination                    costs on lending investments                                                                   |   |                                       | 201 |   |   | 362 |   |   | 331 |   |
| Purchase                    of securities available for sale                                                                  |   |                                       | (56,201 | ) |   | (66,168 | ) |   | (95,867 | ) |
| Proceeds                    from sale of securities available for sale                                                        |   |                                       | 7,939 |   |   | 5,787 |   |   | 55,868 |   |
| Principal                    amortization on securities available for sale                                                    |   |                                       | 1,518 |   |   | 1,541 |   |   | 418 |   |
| Purchases                    of real estate investments                                                                       |   |                                       | (329,751 | ) |   | (530,593 | ) |   | (174,351 | ) |
| Real                    estate improvements, additions and construction in                    progress                        |   |                                       | (8,188 | ) |   | (3,825 | ) |   | (174 | ) |
| Deposits                    on potential equity investments                                                                   |   |                                       | (16,445 | ) |   | (14,700 | ) |   | (2,500 | ) |
| Return                    of deposits on equity investments                                                                   |   |                                       | 16,045 |   |   | 16,600 |   |   | – |   |
| Purchase                    of other investments                                                                              |   |                                       | – |   |   | (930 | ) |   | – |   |
| Purchases                    of furniture, fixtures, equipment and leasehold                    improvements                  |   |                                       | (1,825 | ) |   | (133 | ) |   | (234 | ) |
| Net                    cash used in investing activities                                                                      |   |                                       | (361,854 | ) |   | (675,408 | ) |   | (349,576 | ) |
| **Financing                    activities**                                                                                   |   |                                       |   |   |   |   |   |   |   |   |
| Borrowing                    under repurchase agreement and other short-term financing                    obligations         |   |                                       | 189,521 |   |   | 232,024 |   |   | 135,411 |   |
| Repayment                    of repurchase agreement and other short-term financing                    obligations            |   |                                       | (124,001 | ) |   | (235,890 | ) |   | (30,344 | ) |
| Repayments                    under repurchase agreements to affiliates                                                       |   |                                       | – |   |   | – |   |   | (59,322 | ) |
| Borrowings                    from mortgages on real estate investments                                                       |   |                                       | 217,050 |   |   | 400,552 |   |   | 97,547 |   |
| Repayments                    of mortgages on real estate investments                                                         |   |                                       | (2,368 | ) |   | (1,341 | ) |   | (191 | ) |
| Borrowings                    from collateralized debt obligations                                                            |   |                                       | – |   |   | 268,130 |   |   | – |   |
| Borrowings                    from other long-term debt obligations                                                           |   |                                       | – |   |   | 30,930 |   |   | – |   |
| Debt                    issuance costs                                                                                        |   |                                       | (1,327 | ) |   | (7,050 | ) |   | (344 | ) |
| Escrows                    held with mortgage lender                                                                          |   |                                       | 8,695 |   |   | (9,507 | ) |   | – |   |
| Funds                    provided by (used in) hedging and risk management                    activities                      |   |                                       | 421 |   |   | (11,206 | ) |   | – |   |
| Common                    stock issued, net of offering costs                                                                 |   |                                       | 59,133 |   |   | – |   |   | 222,818 |   |
| Preferred                    stock issued, net of offering costs                                                              |   |                                       | – |   |   | 33,657 |   |   | – |   |
| Cash                    distributions to minority limited partners                                                            |   |                                       | (105 | ) |   | – |   |   | – |   |
| Dividends                    paid on common and preferred stock                                                               |   |                                       | (27,591 | ) |   | (19,174 | ) |   | (2,749 | ) |
| Reverse                    merger                                                                                             |   |                                       | – |   |   | – |   |   | 14 |   |
| Changes                    in amounts due from affiliates                                                                     |   |                                       | 92 |   |   | (11 | ) |   | (38 | ) |
| Net                    cash provided by financing activities                                                                  |   |                                       | 319,520 |   |   | 681,114 |   |   | 362,802 |   |
| Net                    (decrease) increase in cash and cash equivalents                                                       |   |                                       | (14,891 | ) |   | (11,405 | ) |   | 24,199 |   |
| Cash                    and cash equivalents at beginning of period                                                           |   |                                       | 19,316 |   |   | 30,721 |   |   | 6,522 |   |
| **Cash                    and cash equivalents at end of period**                                                             |   | $                                          | 4,425 |   | $ | 19,316 |   | $ | 30,721 |   |
|                                                                                                                          |   |                                       |   |   |   |   |   |   |   |   |
|                                                                                                                          |   |                                       |   |   |   |   |   |   |   |   |

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**Table            of Contents**

|                                                                                                                        |   | Year                    ended December 31, |
|-----------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------|
| (Amounts                    in thousands)                                                                                   |   | 2006                                       |   | 2005 |   | 2004 |   |
| **Supplemental                    disclosure of cash flow information**                                                     |   |                                       |   |   |   |   |   |
| Cash                    paid during the year for interest expense (excluding capitalized                    interest)       |   | $                                          | 59,965 |   | $ | 24,165 |   | $ | 2,647 |   |
| Cash                    paid for capitalized interest                                                                       |   |                                       | – |   |   | 1,589 |   |   | – |   |
| Cash                    paid during the year for income taxes                                                               |   |                                       | – |   |   | 9 |   |   | – |   |
| Distributions                    declared but not paid                                                                      |   |                                       | 53 |   |   | – |   |   | – |   |
| Dividends                    declared but not paid                                                                          |   |                                       | 7,529 |   |   | 6,253 |   |   | 4,124 |   |
| **Supplemental                    disclosure of noncash operating, investing and financing                    information** |   |                                       |   |   |   |   |   |   |   |   |
| Prepaid                    expenses and other assets reclassified to public offering                    costs               |   | $                                          | – |   | $ | – |   | $ | 1,040 |   |
| Unrealized                    (loss) gain on cash flow hedges                                                               |   |                                       | (737 | ) |   | 8,098 |   |   | (7,312 | ) |
| Unrealized                    (loss) gain on available-for-sale securities                                                  |   |                                       | (2,956 | ) |   | (561 | ) |   | 8,121 |   |
| Value                    of in-place leases and above-market leases acquired                                                |   |                                       | 39,619 |   |   | 69,344 |   |   | 13,518 |   |
| Value                    of below-market leases acquired                                                                    |   |                                       | 6,465 |   |   | 8,102 |   |   | 7,108 |   |
| Securities                    reclassified to mortgage loans held for investment                                            |   |                                       | – |   |   | 6,932 |   |   | – |   |
| Mortgage                    notes payable assumed on properties acquired                                                    |   |                                       | 28,623 |   |   | 41,276 |   |   | 14,190 |   |
| Operating                    partnership units issued in connection with an investment                                      |   |                                       | 3,000 |   |   | – |   |   | – |   |
| Real                    estate investments consolidated under FIN46                                                         |   |                                       | – |   |   | 81,500 |   |   | 48,000 |   |
| Real                    estate investments no longer consolidated under FIN46                                               |   |                                       | – |   |   | 129,500 |   |   | – |   |
| Mortgage                    on real estate investments consolidated under FIN46                                             |   |                                       | – |   |   | 50,887 |   |   | 4,815 |   |
| Mortgage                    on real estate investments no longer consolidated under                    FIN46                |   |                                       | – |   |   | 55,702 |   |   | – |   |
| Depreciation                    on real estate investments consolidated under FIN46                                         |   |                                       | – |   |   | 935 |   |   | – |   |
|                                                                                                                        |   |                                       |   |   |   |   |   |   |   |   |
|                                                                                                                        |   |                                       |   |   |   |   |   |   |   |   |

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**Table            of Contents**

**1.         **
**Organization**

**2.         **
**Summary        of Significant Accounting Policies**

*Basis        of Presentation and Principles of Consolidation*

*Use        of Estimates*

*Risks        and Uncertainties*

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**Table              of Contents**

*Investments        in Mortgage and Other Real Estate Loans*

*Purchase        Accounting for Acquisition of Real Estate*

|  | · | 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. |
|--|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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**Table              of Contents**

*Capitalization        of Interest Cost*
*Accounting        for Costs and Initial Rental Operations of Real Estate        Projects.*

*Securities        Available for Sale*

*Accounting        for Certain Investments in Debt and Equity Securities,*

*Structuring        Fees Receivable*

*Deferred        Origination Fees and Costs*

*Accounting        for Nonrefundable Fees and Costs Associated with Originating or Acquiring        Loans        and Initial Direct Costs of Leases*

*Sale        of Commercial Mortgage Loans*

*Accounting        for Transfers and Servicing of Financial Assets and Extinguishments of        Liabilities.*

*Derivative        and Other Risk Management Transactions*

*Accounting        for Derivative Instruments and Hedging Activities*

----

**Table              of Contents**

*Revenue        Recognition*

*Accounting        for Leases*

*Lease        Enhancement Mechanisms*

|  | · | 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. |
|--|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

*Impairment        of Long-Lived Assets*

*Accounting        for the Impairment or Disposal of Long-Lived Assets,*

*Marketing        and Advertising Costs*

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**Table              of Contents**

*Income        Taxes*

*Other        Comprehensive Income*

*Reporting        Comprehensive Income*

*Earnings        per Share*

*Earnings        per Share*

|                                                                                                                    |   | December                    31, |   |
|-------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------|--------|
|                                                                                                                    |   | 2006                            |   | 2005 |   | 2004 |   |
| Net                    income allocable to common stockholders                                                          |   | $                               | 4,405  |   | $ | 4,569 |   | $ | 1,360 |   |
| Weighted                    average number of common shares outstanding,                    basic                       |   |                            | 31,939 |   |   | 27,784 |   |   | 22,125 |   |
| Weighted                    average number of common shares outstanding,                    diluted                     |   |                            | 31,941 |   |   | 27,784 |   |   | 22,125 |   |
| Earnings                    per share, basic and diluted                                                                |   | $                               | 0.14   |   | $ | 0.16 |   | $ | 0.06 |   |
| Non-vested                    shares included in weighted average number                    of shares outstanding above |   |                            | 588    |   |   | 496 |   |   | 254 |   |

*Recently        Issued Accounting Pronouncements*

*Share-Based        Payment*

*Accounting        Changes and Error Corrections — A Replacement of APB Opinion No. 20 and SFAS No.        3 (“SFAS No. 154”)*

----

**Table              of Contents**

*Accounting        for Uncertainty in Income Taxes, an Interpretation of FASB Statement No.        109*

*Fair        Value Measurements *
* *

*Reclassifications*

**3.         **
**Cash        and Cash Equivalents**

**4.         **
**Mortgage        and Other Real Estate Loans Held for Investment**

|                                              |   | December                    31, |    |
|---------------------------------------------------|--------|---------------------------------|---------|
|                                              |   | 2006                            |    | 2005 |   |
| Principal                                         |   | $                               | 272,271 |   | $ | 296,479 |   |
| Premium                                           |   |                            | 1,814   |   |   | 1,898 |   |
| Carrying                    amount of loans       |   |                            | 274,085 |   |   | 298,377 |   |
| Deferred                    origination fees, net |   |                            | (915    | ) |   | (826 | ) |
| Total                                             |   | $                               | 273,170 |   | $ | 297,551 |   |

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**Table              of Contents**

**5.         **
**Real        Estate Investments**

|                                                                            |   | December                    31, |      |
|---------------------------------------------------------------------------------|--------|---------------------------------|-----------|
|                                                                            |   | 2006                            |      | 2005 |   |
| Real                    estate investments, at cost:                            |   |                            |      |   |   |
| Land                                                                            |   | $                               | 177,726   |   | $ | 136,566 |   |
| Building                    and improvements                                    |   |                            | 852,495   |   |   | 557,248 |   |
| Intangible                    assets under SFAS 141                             |   |                            | 122,481   |   |   | 82,862 |   |
| Less:                    Accumulated depreciation and amortization              |   |                            | (37,701   | ) |   | (11,746 | ) |
| Real                    estate investments, net                            |   | $                               | 1,115,001 |   | $ | 764,930 |   |
| Intangible                    liabilities on real estate investments:           |   |                            |      |   |   |   |   |
| Intangible                    liabilities under SFAS 141                        |   | $                               | 21,674    |   | $ | 15,210 |   |
| Less:                    Accumulated amortization                               |   |                            | (1,981    | ) |   | (791 | ) |
| Intangible                    liabilities on real estate investments, net  |   | $                               | 19,693    |   | $ | 14,419 |   |

|                                      |   | December                    31, |   |
|-------------------------------------------|--------|---------------------------------|--------|
|                                      |   | 2006                            |   | 2005 |   |
| Accrued                    Rental Income  |   | $                               | 15,069 |   | $ | 6,708 |   |
| Deferred                    Rental Income |   |                            | 160    |   |   | 620 |   |

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**Table              of Contents**

|                                                                                                                      |   | December                    31, |   |   |   |
|---------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------|--------|--------|--------|
|                                                                                                                      |   | 2006                            |   | 2005   |   | 2004 |   |
| Amortization                    of in-place leases (included in depreciation                    and amortization expense) |   | $                               | 7,969  |   | $      | 2,925 |   | $ | 295 |   |
| Amortization                    of above-market leases (included as                    a reduction of rental revenue)     |   |                            | 504    |   |   | 128 |   |   | – |   |
| Amortization                    of below-market leases (included as                    a component of rental revenue)     |   |                            | 1,190  |   |   | 711 |   |   | 80 |   |

|       |   | Intangible                    Assets |    | Intangible                    Liabilities |   |
|------------|--------|--------------------------------------|---------|-------------------------------------------|--------|
| 2007       |   | $                                    | 10,688  |                                      | $      | 1,423 |   |
| 2008       |   |                                 | 10,688  |                                      |   | 1,423 |   |
| 2009       |   |                                 | 10,688  |                                      |   | 1,423 |   |
| 2010       |   |                                 | 10,688  |                                      |   | 1,423 |   |
| 2011       |   |                                 | 10,688  |                                      |   | 1,423 |   |
| Thereafter |   |                                 | 57,221  |                                      |   | 12,578 |   |
|       |   | $                                    | 110,661 |                                      | $      | 19,693 |   |

| Month                    Acquired |   | Tenant                    or Guarantor |                                                       | Location |   | Purchase                    Price                                        |   | Lease                    Expires |    | Net                    Rentable Square Feet |   |
|-----------------------------------|--------|----------------------------------------|------------------------------------------------------------|----------|--------|--------------------------------------------------------------------------|--------|----------------------------------|---------|---------------------------------------------|--------|
| October                           |   |                                   | Aetna                    Life Insurance Company            |     |   | 1333                    - 1385 East Shaw Avenue, Fresno, CA              |   | $                                | 24,255  |                                        |   | November                    2016 |   |   | 122,605 |   |
| October                           |   |                                   | United                    States Government                |     |   | 200                    McCarty Avenue, Albany, NY                        |   |                             | 16,350  |                                        |   | September                    2018 |   |   | 74,300 |   |
| November                          |   |                                   | T-Mobile                    USA, Inc.                      |     |   | 695                    Grassmere Park, Nashville, TN                     |   |                             | 16,195  |                                        |   | January                    2017 |   |   | 69,287 |   |
| November                          |   |                                   | Time                    Warner Entertainment Company, L.P. |     |   | 1320                    N. Dr. Martin Luther King Jr. Dr., Milwaukee, WI |   |                             | 28,530  |                                        |   | December                    2016 |   |   | 154,849 |   |
| December                          |   |                                   | Johnson                    Controls, Inc.                  |     |   | 6750                    Bryan Dairy Road, Largo, FL                      |   |                             | 27,000  |                                        |   | August                    2016 |   |   | 307,275 |   |
| December                          |   |                                   | AmeriCredit                    Corp.                       |     |   | 4001                    Embarcadero Drive, Arlington, TX                 |   |                             | 43,000  |                                        |   | August                    2017 |   |   | 246,060 |   |
|                              |   |                                   |                                                       |     |   |                                                                     |   | $                                | 155,330 |                                        |   |   |   |   |   |   |

**6.         **
**Asset        Held for Sale**

----

**Table              of Contents**

**7.         **
**Securities        Available for Sale and Structuring Fees Receivable**

|                                                                                                       |   | Scheduled                    Maturity |                        | December                    31, |   |
|------------------------------------------------------------------------------------------------------------|--------|---------------------------------------|-----------------------------|---------------------------------|--------|
|                                                                                                       |   | Date                                  |                        | 2006                            |   | 2005 |   |
| BACM                    2006-4, Class H (rated BBB+) Face Amount                                           |   |                                  | Aug                    2016 |                            | $      | 8,000 |   | $ | – |   |
| BSCMS                    1999 CLF1, Class E (rated D) Face Amount                                          |   |                                  | Nov                    2023 |                            |   | 3,076 |   |   | 3,326 |   |
| BSCMS                    1999 CLF1, Class F (rated NR) Face Amount                                         |   |                                  | N/A                         |                            |   | – |   |   | 2,494 |   |
| CALFS                    1997-CTL1, Class D (rated BB+) Face Amount                                        |   |                                  | Nov                    2018 |                            |   | 6,000 |   |   | 6,000 |   |
| CMLBC                    2001-CMLB-1, Class E (rated BBB+) Face Amount                                     |   |                                  | Jul                    2022 |                            |   | 9,526 |   |   | 9,526 |   |
| CMLBC                    2001-CMLB-1, Class G (rated BB+) Face Amount                                      |   |                                  | Feb                    2023 |                            |   | 9,526 |   |   | 9,526 |   |
| CMLBC                    2001-CMLB-1, Class H (rated B+) Face Amount                                       |   |                                  | Mar                    2024 |                            |   | 11,907 |   |   | 11,907 |   |
| CMLBC                    2001-CMLB-1, Class J (rated D) Face Amount                                        |   |                                  | Oct                    2025 |                            |   | 6,383 |   |   | 6,383 |   |
| NLFC                    1999-LTL-1, Class D (rated BBB) Face Amount                                        |   |                                  | Oct                    2020 |                            |   | – |   |   | 5,000 |   |
| NLFC                    1999-LTL-1, Class E (rated BB) Face Amount                                         |   |                                  | Feb                    2022 |                            |   | 11,081 |   |   | 11,081 |   |
| NLFC                    1999-LTL-1, Class X (IO) (rated AAA) Cost Basis                                    |   |                                  | Jan                    2024 |                            |   | 7,597 |   |   | 8,434 |   |
| WBCMT                    2004-C15 180D (rated B+) Face Amount                                              |   |                                  | Nov                    2009 |                            |   | 15,000 |   |   | 15,000 |   |
| WBCMT                    2004-C15 180E (rated B) Face Amount                                               |   |                                  | Nov                    2009 |                            |   | 8,000 |   |   | 8,000 |   |
| WBCMT                    2006-C27, Class C (rated AA-) Face Amount                                         |   |                                  | Aug                    2016 |                            |   | 11,000 |   |   | – |   |
| BACMS                    2002-2, Class V-1 (7-Eleven, Inc.) (rated BBB) Face Amount                        |   |                                  | Sep                    2019 |                            |   | 428 |   |   | 393 |   |
| BACMS                    2002-2, Class V-2 (Sterling Jewelers) (rated BBB-) Face                    Amount |   |                                  | Jan                    2021 |                            |   | 655 |   |   | 602 |   |
| CVS                    Corporation (rated BBB+) Face Amount                                                |   |                                  | Jan                    2028 |                            |   | 19,603 |   |   | 20,000 |   |
| Koninklijke                    Ahold, N.V. 7.82% Jan 2020 (rated BB+) Face Amount                          |   |                                  | Jan                    2020 |                            |   | 8,980 |   |   | – |   |
| Koninklijke                    Ahold, N.V. 7.9% May 2026 (rated BB+) Face Amount                           |   |                                  | May                    2026 |                            |   | 23,395 |   |   | – |   |
| Yahoo,                    Inc. (rated BBB-) Face Amount                                                    |   |                                  | Aug                    2026 |                            |   | 31,953 |   |   | 31,990 |   |
| Unearned                    Discount                                                                       |   |                                  |                        |                            |   | (15,736 | ) |   | (21,901 | ) |
| Cost                    Basis                                                                              |   |                                  |                        |                            |   | 176,374 |   |   | 127,761 |   |
| Net                    unrealized appreciation on securities held for sale                                 |   |                                  |                        |                            |   | 6,692 |   |   | 9,648 |   |
| Total                                                                                                      |   |                                  |                        |                            | $      | 183,066 |   | $ | 137,409 |   |

|   | · | The                  defaulted Winn-Dixie loan in the BSCMS trust was liquidated during                  the                  fourth quarter 2006, resulting in a loss to the trust of approximately                  $3,100, before the impact of expected recoveries in the Winn-Dixie                  bankruptcy. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | The                  trust’s claim for lost rents in the Winn-Dixie bankruptcy was awarded,                  with the trust entitled to receive a total of 35,727 shares of                  Winn-Dixie                  common stock with a fair market value of approximately $482 as                  of December                  31, 2006. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

**Table              of Contents**

|                                                                  |   | December                    31, |   |
|-----------------------------------------------------------------------|--------|---------------------------------|--------|
|                                                                  |   | 2006                            |   | 2005 |   |
| Unrealized                    gains on securities available for sale  |   | $                               | 7,582  |   | $ | 10,002 |   |
| Unrealized                    losses on securities available for sale |   |                            | (890   | ) |   | (354 | ) |

|                                                               |   | Aggregate                    Fair                    Value |   | Aggregate                    Unrealized                    Loss |   | Number                    of Securities |   |
|--------------------------------------------------------------------|--------|------------------------------------------------------------|--------|-----------------------------------------------------------------|--------|-----------------------------------------|--------|
| In                    unrealized loss position less than 12 months |   | $                                                          | 44,224 |                                                            | $      | 492                                     |   |   | 2 |   |
| In                    unrealized loss position 12 or more months   |   |                                                       | 22,286 |                                                            |   | 398                                     |   |   | 3 |   |

|                                  |   | 2006   |   | 2005   |   | 2004  |   |
|---------------------------------------|--------|--------|--------|--------|--------|-------|--------|
| Proceeds                    from sale |   | $      | 7,939  |   | $      | 5,787 |   | $ | 55,868 |   |
| Gain                    on sale       |   |   | 2,278  |   |   | 174   |   |   | – |   |

----

**Table              of Contents**

**8.         **
**Joint        Venture Investments**

**9.         **
**Fair        Value of Financial Instruments**

*Disclosure        about Fair Value of Financial Instruments, *

|                                                                                |   | Carrying                    Amount |    | Notional                    Amount |   | Estimated                    Fair Value |   |
|-------------------------------------------------------------------------------------|--------|------------------------------------|---------|------------------------------------|--------|-----------------------------------------|--------|
|                                                                                |   | 12/31/2006                         |    | 12/31/2005                         |   | 12/31/2006                              |   | 12/31/2005 |   | 12/31/2006 |   | 12/31/2005 |   |
| Assets:                                                                             |   |                               |    |                               |   |                                    |   |   |   |   |   |   |   |
| Mortgage                    and other real estate loans held for investment         |   | $                                  | 274,085 |                               | $      | 298,377                                 |   | $ | 272,271 |   | $ | 296,479 |   | $ | 277,014 |   | $ | 307,829 |   |
| Securities                    available for sale                                    |   |                               | 183,066 |                               |   | 137,409                                 |   |   | 192,111 |   |   | 149,662 |   |   | 183,066 |   |   | 137,409 |   |
| Structuring                    fees receivable                                      |   |                               | 3,253   |                               |   | 3,862                                   |   |   | N/A |   |   | N/A |   |   | 3,253 |   |   | 3,862 |   |
| Derivative                    assets                                                |   |                               | 2,333   |                               |   | 1,082                                   |   |   | 127,529 |   |   | 82,852 |   |   | 2,333 |   |   | 1,082 |   |
| Liabilities:                                                                        |   |                               |    |                               |   |                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Repurchase                    agreements and other short-term financing obligations |   |                               | 195,485 |                               |   | 129,965                                 |   |   | 195,485 |   |   | 129,965 |   |   | 195,485 |   |   | 129,965 |   |
| Mortgages                    on real estate investments                             |   |                               | 794,773 |                               |   | 551,844                                 |   |   | 789,971 |   |   | 546,284 |   |   | 784,802 |   |   | 545,289 |   |
| Collateralized                    debt obligations                                  |   |                               | 268,190 |                               |   | 268,156                                 |   |   | 268,500 |   |   | 268,500 |   |   | 258,557 |   |   | 262,955 |   |
| Other                    long-term debt                                             |   |                               | 30,930  |                               |   | 30,930                                  |   |   | 30,930 |   |   | 30,930 |   |   | 31,958 |   |   | 30,849 |   |
| Derivative                    liabilities                                           |   |                               | 2,405   |                               |   | 298                                     |   |   | 104,190 |   |   | 43,029 |   |   | 2,405 |   |   | 298 |   |

*Mortgage        and other real estate loans held for investment*

*Securities        available for sale*

----

**Table              of Contents**

*Structuring        fees receivable*

*Repurchase        agreements and other short-term financing obligations*

*Mortgages        on real estate investments and collateralized debt obligations*

*Other        long-term debt*

*Derivative        assets and liabilities*

**10.         **
**Other        Assets**

|                                                                           |   | December                    31, |   |
|--------------------------------------------------------------------------------|--------|---------------------------------|--------|
|                                                                           |   | 2006                            |   | 2005 |   |
| Receivables                    and accrued interest                            |   | $                               | 8,681  |   | $ | 6,515 |   |
| Prepaid                    expenses and deposits                               |   |                            | 2,561  |   |   | 2,077 |   |
| Reserve                    accounts                                            |   |                            | 10,652 |   |   | 8,131 |   |
| Escrow                    held with mortgage lender                            |   |                            | 812    |   |   | 9,507 |   |
| Funds                    with CDO trustee pending distribution or reinvestment |   |                            | 9,734  |   |   | 16,638 |   |
| Amounts                    held by servicer                                    |   |                            | 2,107  |   |   | 1,483 |   |
| Derivative                    assets                                           |   |                            | 2,333  |   |   | 1,082 |   |
| Accrued                    rental income                                       |   |                            | 15,069 |   |   | 6,708 |   |
| Debt                    issuance costs, net                                    |   |                            | 7,541  |   |   | 6,975 |   |
| Other                                                                          |   |                            | 2,953  |   |   | 1,362 |   |
| Total                                                                          |   | $                               | 62,443 |   | $ | 60,478 |   |

**11.         **
**Repurchase        and Other Short-Term Financing Agreements**

----

**Table              of Contents**

|                                        |   | Dec                      31, 2006 |    | Dec                      31, 2005 |   |
|---------------------------------------------|--------|-----------------------------------|---------|-----------------------------------|--------|
| Collateral                      carry value |   |                              |    |                              |   |   |   |
| Loans                                       |   | $                                 | 171,804 |                              | $      | 116,881 |   |
| Securities                                  |   |                              | 82,037  |                              |   | 43,785 |   |
| Total                                       |   | $                                 | 253,841 |                              | $      | 160,666 |   |
|                                        |   |                              |    |                              |   |   |   |
| Borrowings                                  |   |                              |    |                              |   |   |   |
| Loans                                       |   | $                                 | 133,076 |                              | $      | 94,341 |   |
| Securities                                  |   |                              | 62,409  |                              |   | 35,624 |   |
| Total                                       |   | $                                 | 195,485 |                              | $      | 129,965 |   |

|                                                            |   | Dec                    31, 2006 |   | Dec                    31, 2005 |   |
|-----------------------------------------------------------------|--------|---------------------------------|--------|---------------------------------|--------|
| Wachovia-mortgage                    loan repurchase agreements |   |                            | 6.03   | %                               |   | 4.13 | % |
| Wachovia-CMBS                    repurchase agreements          |   |                            | 5.79   | %                               |   | 4.12 | % |

**12.         **
**Risk        Management Transactions**

|                                   |   | December                    31, 2006 |    | December                    31, 2005 |   |
|----------------------------------------|--------|--------------------------------------|---------|--------------------------------------|--------|
| Description                            |   | Notional                    Amount   |    | Fair                    value        |   | Notional                    Amount |   | Fair                    value |   |
| Interest                    rate swaps |   | $                                    | 231,719 |                                 | $      | (72 | ) | $ | 125,881 |   | $ | 784 |   |

----

**Table              of Contents**

|                                                      |   | December                      31, |    |
|-----------------------------------------------------------|--------|-----------------------------------|---------|
|                                                      |   | 2006                              |    | 2005 |   |
| Future                      borrowings (principal amount) |   | $                                 | 231,719 |   | $ | 125,881 |   |

**13.         **
**Long-Term        Debt**

|  | · | mortgage                  notes on real estate investments; |
|--|--------|-------------------------------------------------------------|

|  | · | collateralized                  debt obligations; and |
|--|--------|-------------------------------------------------------|

|  | · | debt                  related to trust preferred                  securities. |
|--|--------|-------------------------------------------------------------------------------|

*Mortgages        Notes on Real Estate Investments*

----

**Table            of Contents**

|                                                                               |   | Dec                        31, 2006 |    | Dec                        31, 2005 |   |                               |   |        |    |   |   |
|------------------------------------------------------------------------------------|--------|-------------------------------------|---------|-------------------------------------|--------|------------------------------------|--------|--------|---------|--------|--------|
| Property                        Level Debt - Fixed Rate                            |   |                                | Face    |                                |   | Carry                        Value |   |   | Face    |   |   | Carry                        Value |   |   | Coupon |   |   | EffectiveRate                          (1) |   |   | Maturity |   |
|                                                                               |   |                                |    |                                |   |                               |   |   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Choice                        Hotels International, Inc., Silver Spring, MD        |   | $                                   | 31,653  |                                | $      | 31,653                             |   | $      | 32,199  |   | $      | 32,199 |   |   | 5.30 | % |   | 5.34 | % |   | May                        2013 |   |
| Omnicom                        Group, Inc., Irving, TX                             |   |                                | 13,575  |                                |   | 13,575                             |   |   | 13,575  |   |   | 13,575 |   |   | 5.24 | % |   | 5.30 | % |   | May                        2013 |   |
| Capital                        One Financial Corporation, Plano, TX                |   |                                | 20,925  |                                |   | 20,925                             |   |   | 20,925  |   |   | 20,925 |   |   | 5.24 | % |   | 5.29 | % |   | May                        2013 |   |
| Aon                        Corporation, Glenview, IL                               |   |                                | 64,800  |                                |   | 64,800                             |   |   | 64,800  |   |   | 64,800 |   |   | 5.23 | % |   | 5.75 | % |   | Nov                        2014 |   |
| Cadbury                        Schweppes Holdings (US), Whippany, NJ               |   |                                | 35,614  |                                |   | 35,614                             |   |   | 36,000  |   |   | 36,000 |   |   | 5.26 | % |   | 5.34 | % |   | Mar                        2015 |   |
| ITT                        Industries, Inc., Herndon, VA                           |   |                                | 41,700  |                                |   | 41,700                             |   |   | 41,700  |   |   | 41,700 |   |   | 5.33 | % |   | 5.40 | % |   | Jun                        2015 |   |
| Lowes                        Companies, Inc., Aliso Viejo, CA                      |   |                                | 42,125  |                                |   | 42,125                             |   |   | 42,125  |   |   | 42,125 |   |   | 5.10 | % |   | 5.37 | % |   | Jul                        2015 |   |
| Abbott                        Laboratories, Waukegan, IL                           |   |                                | 15,244  |                                |   | 15,244                             |   |   | 15,244  |   |   | 15,244 |   |   | 5.11 | % |   | 5.16 | % |   | Aug                        2015 |   |
| United                        States Government (SSA), Austin, TX                  |   |                                | 5,391   |                                |   | 5,391                              |   |   | 5,391   |   |   | 5,391 |   |   | 5.23 | % |   | 5.46 | % |   | Sep                        2015 |   |
| United                        States Government (DEA), Birmingham, AL              |   |                                | 11,280  |                                |   | 11,280                             |   |   | 11,280  |   |   | 11,280 |   |   | 5.23 | % |   | 5.42 | % |   | Sep                        2015 |   |
| United                        States Government (FBI), Birmingham, AL              |   |                                | 18,800  |                                |   | 18,800                             |   |   | 18,800  |   |   | 18,800 |   |   | 5.23 | % |   | 5.31 | % |   | Sep                        2015 |   |
| United                        States Government (NIH), N. Bethesda, MD             |   |                                | 64,883  |                                |   | 64,883                             |   |   | 65,188  |   |   | 65,188 |   |   | 5.32 | % |   | 5.56 | % |   | Sep                        2015 |   |
| Tiffany                        & Co., Parsippany, NJ                           |   |                                | 58,400  |                                |   | 58,400                             |   |   | 58,400  |   |   | 58,400 |   |   | 5.33 | % |   | 5.34 | % |   | Oct                        2015 |   |
| Farmers                        New World Life Insurance Company, Mercer Island, WA |   |                                | 30,200  |                                |   | 30,200                             |   |   | 30,200  |   |   | 30,200 |   |   | 5.69 | % |   | 5.72 | % |   | Jan                        2016 |   |
| Allstate                        Insurance Company, Charlotte, NC                   |   |                                | 20,209  |                                |   | 20,209                             |   |   | 20,209  |   |   | 20,209 |   |   | 5.68 | % |   | 5.71 | % |   | Jan                        2016 |   |
| Allstate                        Insurance Company, Roanoke, VA                     |   |                                | 21,516  |                                |   | 21,516                             |   |   | 21,516  |   |   | 21,516 |   |   | 5.68 | % |   | 5.76 | % |   | Jan                        2016 |   |
| TJX                        Companies, Inc., Philadelphia, PA                       |   |                                | 71,625  |                                |   | 71,625                             |   |   | -       |   |   | - |   |   | 5.57 | % |   | 5.59 | % |   | Mar                        2016 |   |
| United                        States Government (VA), Ponce, PR                    |   |                                | 6,869   |                                |   | 7,172                              |   |   | 7,317   |   |   | 7,670 |   |   | 7.30 | % |   | 6.41 | % |   | Apr                        2016 |   |
| Pearson                        Plc., Lawrence, KS                                  |   |                                | 16,025  |                                |   | 16,025                             |   |   | -       |   |   | - |   |   | 5.84 | % |   | 5.95 | % |   | May                        2016 |   |
| Koninklijke                        Ahold, N.V., Levittown, PA                      |   |                                | 14,794  |                                |   | 14,794                             |   |   | -       |   |   | - |   |   | 6.05 | % |   | 6.11 | % |   | Jul                        2016 |   |
| AMVESCAP                        PLC, Denver, CO                                    |   |                                | 43,700  |                                |   | 43,700                             |   |   | -       |   |   | - |   |   | 6.03 | % |   | 6.08 | % |   | Jul                        2016 |   |
| Walgreen                        Co., Pennsauken, NJ                                |   |                                | 1,919   |                                |   | 2,059                              |   |   | 2,046   |   |   | 2,208 |   |   | 7.65 | % |   | 6.04 | % |   | Oct                        2016 |   |
| United                        States Government (FBI), Albany, NY                  |   |                                | 10,137  |                                |   | 10,137                             |   |   | -       |   |   | - |   |   | 5.50 | % |   | 5.68 | % |   | Nov                        2016 |   |
| Aetna                        Life Insurance Company, Fresno, CA                    |   |                                | 16,043  |                                |   | 16,043                             |   |   | -       |   |   | - |   |   | 5.63 | % |   | 5.68 | % |   | Dec                        2016 |   |
| Time                        Warner Entertainment Company, L.P., Milwaukee, WI      |   |                                | 17,500  |                                |   | 17,500                             |   |   | -       |   |   | - |   |   | 5.55 | % |   | 5.59 | % |   | Dec                        2016 |   |
| Johnson                        Controls, Inc., Largo, FL                           |   |                                | 16,200  |                                |   | 16,200                             |   |   | -       |   |   | - |   |   | 5.48 | % |   | 5.52 | % |   | Jan                        2017 |   |
| AmeriCredit                        Corp., Arlington, TX                            |   |                                | 29,005  |                                |   | 28,623                             |   |   | -       |   |   | - |   |   | 5.28 | % |   | 5.56 | % |   | Sep                        2017 |   |
| Walgreen                        Co., Portsmouth, VA                                |   |                                | 3,190   |                                |   | 3,391                              |   |   | 3,304   |   |   | 3,525 |   |   | 7.20 | % |   | 6.18 | % |   | Jul                        2018 |   |
| United                        States Government (EPA), Kansas City, KS             |   |                                | 21,095  |                                |   | 24,626                             |   |   | 21,395  |   |   | 25,151 |   |   | 7.57 | % |   | 5.74 | % |   | Oct                        2022 |   |
| United                        States Government (OSHA), Sandy, UT                  |   |                                | 14,669  |                                |   | 15,678                             |   |   | 14,670  |   |   | 15,738 |   |   | 6.28 | % |   | 5.52 | % |   | Jan                        2024 |   |
| Total                                                                              |   | $                                   | 789,971 |                                | $      | 794,773                            |   | $      | 546,284 |   | $      | 551,844 |   |   |   |   |   |   |   |   |   |   |

| (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. |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

*Collateralized        Debt Obligations*

----

**Table              of Contents**

|                                                       |   | Carry                      Value |    |
|------------------------------------------------------------|--------|----------------------------------|---------|
| Long-Term                      Mortgage Loans              |   | $                                | 156,124 |   |
| Corporate                      Credit Notes                |   |                             | 11,468  |   |
| CMBS                      and Other Real Estate Securities |   |                             | 78,699  |   |
| Total                                                      |   | $                                | 246,291 |   |

*Trust        Preferred Securities*

*Consolidation        of Variable Interest Entities*

|       |   | Scheduled                    Amortization |    | Balloon                    Payments |   | Total   |   |
|------------|--------|-------------------------------------------|---------|-------------------------------------|--------|---------|--------|
| 2007       |   | $                                         | 5,171   |                                | $      | – |   | $ | 5,171 |   |
| 2008       |   |                                      | 7,527   |                                |   | -       |   |   | 7,527 |   |
| 2009       |   |                                      | 9,255   |                                |   | -       |   |   | 9,255 |   |
| 2010       |   |                                      | 34,081  |                                |   | -       |   |   | 34,081 |   |
| 2011       |   |                                      | 24,713  |                                |   | -       |   |   | 24,713 |   |
| Thereafter |   |                                      | 133,236 |                                |   | 879,911 |   |   | 1,013,147 |   |
|       |   | $                                         | 213,983 |                                | $      | 879,911 |   | $ | 1,093,894 |   |

----

**Table              of Contents**

**14.         Related        Party Transactions**

**15.         **
**Commitments        and Contingencies**

----

**Table              of Contents**

| 2007       |   | $      | 738   |   |
|------------|--------|--------|-------|--------|
| 2008       |   |   | 736   |   |
| 2009       |   |   | 734   |   |
| 2010       |   |   | 732   |   |
| 2011       |   |   | 753   |   |
| Thereafter |   |   | 1,317 |   |
|       |   | $      | 5,010 |   |

**16.         **
**Minority        Interests**

**17.         **
**Stockholders’        Equity**

*Stock        Issuances*

----

**Table              of Contents**

*Dividends*

----

**Table              of Contents**

| Quarter                      Ended |   | Record                      Date |       | Payment                      Date |   | Dividend                      Per                      Share |   | Total                      Amount |   |
|------------------------------------|--------|----------------------------------|------------|-----------------------------------|--------|--------------------------------------------------------------|--------|-----------------------------------|--------|
| 3/31/2005                          |   |                             | 3/31/2005  |                              |   | 4/15/2005                                                    |   | $                                 | 0.18   |   | $ | 5,018 |   |
| 6/30/2005                          |   |                             | 6/30/2005  |                              |   | 7/15/2005                                                    |   |                              | 0.18   |   |   | 5,016 |   |
| 9/30/2005                          |   |                             | 9/30/2005  |                              |   | 10/17/2005                                                   |   |                              | 0.18   |   |   | 5,016 |   |
| 12/31/2005                         |   |                             | 12/30/2005 |                              |   | 1/17/2006                                                    |   |                              | 0.20   |   |   | 5,574 |   |
| 3/31/2006                          |   |                             | 3/31/2006  |                              |   | 4/17/2006                                                    |   |                              | 0.20   |   |   | 5,636 |   |
| 6/30/2006                          |   |                             | 6/30/2006  |                              |   | 7/17/2006                                                    |   |                              | 0.20   |   |   | 6,783 |   |
| 9/30/2006                          |   |                             | 9/29/2006  |                              |   | 10/16/2006                                                   |   |                              | 0.20   |   |   | 6,785 |   |
| 12/31/2006                         |   |                             | 12/29/2006 |                              |   | 1/16/2007                                                    |   |                              | 0.20   |   |   | 6,818 |   |

| Quarter                    Ended |   | Record                    Date |       | Payment                    Date |   | Dividend                    Per                    Share |   | Total                    Amount |      |
|----------------------------------|--------|--------------------------------|------------|---------------------------------|--------|----------------------------------------------------------|--------|---------------------------------|-----------|
| 12/31/2005                       |   |                           | 12/30/2005 |                            |   | 1/17/2006                                                |   | $                               | 0.4852400 |   | $ | 679 |   |
| 3/31/2006                        |   |                           | 3/31/2006  |                            |   | 4/17/2006                                                |   |                            | 0.5078125 |   |   | 711 |   |
| 6/30/2006                        |   |                           | 6/30/2006  |                            |   | 7/17/2006                                                |   |                            | 0.5078125 |   |   | 711 |   |
| 9/30/2006                        |   |                           | 9/29/2006  |                            |   | 10/16/2006                                               |   |                            | 0.5078125 |   |   | 711 |   |
| 12/31/2006                       |   |                           | 12/29/2006 |                            |   | 1/16/2007                                                |   |                            | 0.5078125 |   |   | 711 |   |

**18.**
**Stock        Based Compensation**

*Share-Based        Payment*

----

**Table              of Contents**

|                                                                 |   | Number                    of Shares |      |
|----------------------------------------------------------------------|--------|-------------------------------------|-----------|
| Stock                    Awards at January 1, 2006                   |   |                                | 760,546   |   |
| Granted                    During the Year Ended December 31, 2006   |   |                                | 332,450   | (1)(2) |
| Forfeited                    During the Year Ended December 31, 2006 |   |                                | (11,001   | ) |
| Stock                    Awards at December 31, 2006                 |   |                                | 1,081,995 |   |

| (1) | Shares                  are scheduled to vest between March 2007 and March 2011, but will                  generally be forfeited if the recipient either terminates his employment                  with the Company or ceases to be a member of CLF, Inc.’s Board of                  Directors at any time prior to the vesting date. Vesting of an                  aggregate                  of 133,500 shares is also subject to satisfaction of objective                  and                  subjective performance criteria, to be determined by CLF, Inc.’s                  Compensation Committee. |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (2) | Includes                  6,000 shares the Company has agreed to issue on January 2, 2007                  if an                  employee satisfies a service condition. Pursuant to SFAS 123R,                  the grant                  date for these shares occurred in September 2006 when the Company                  agreed                  to issue the shares. The service condition was satisfied and the                  shares                  were issued on January 2, 2007. |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                                              |   | Shares                    Awarded Under Plan |     | Shares                    Priced Under SFAS 123 and 123R |   | Weighted                    Average Fair Value |   |
|---------------------------------------------------|--------|----------------------------------------------|----------|----------------------------------------------------------|--------|------------------------------------------------|--------|
| Nonvested                    at January 1, 2005   |   |                                         | 254,186  |                                                     |   | 254,186                                        |   | $ | 10.50 |   |
| Current                    period awards          |   |                                         | 383,500  |                                                     |   | 259,056                                        |   |   | 10.98 |   |
| Vested                                            |   |                                         | (135,319 | )                                                        |   | (135,319                                       | )      |   | 10.60 |   |
| Forfeited                                         |   |                                         | (6,720   | )                                                        |   | (6,720                                         | )      |   | 10.80 |   |
| Nonvested                    at December 31, 2005 |   |                                         | 495,647  |                                                     |   | 371,203                                        |   |   | 10.83 |   |
| Current                    period awards          |   |                                         | 332,450  |                                                     |   | 243,450                                        |   |   | 11.07 |   |
| Prior                    period awards            |   |                                         | N/A      |                                                     |   | 62,222                                         |   |   | 10.66 |   |
| Vested                                            |   |                                         | (228,983 | )                                                        |   | (228,983                                       | )      |   | 10.72 |   |
| Forfeited                                         |   |                                         | (11,001  | )                                                        |   | (11,001                                        | )      |   | 11.02 |   |
| Nonvested                    at December 31, 2006 |   |                                         | 588,113  |                                                     |   | 436,891                                        |   |   | 10.99 |   |

|                                                                            |   | December                    31, |   |
|---------------------------------------------------------------------------------|--------|---------------------------------|--------|
|                                                                            |   | 2006                            |   | 2005 |   | 2004 |   |
| General                    and administrative expenses-stock based compensation |   | $                               | 2,621  |   | $ | 2,235 |   | $ | 3,825 |   |

----

**Table              of Contents**

**19.         **
**Other        Comprehensive Income.**

*Reporting        Comprehensive Income*

|                                                    |   | December                    31, 2006 |    | December                    31, 2005 |   |
|---------------------------------------------------------|--------|--------------------------------------|---------|--------------------------------------|--------|
| Net                    unrealized gains on securities   |   | $                                    | 6,692   |                                 | $      | 9,648 |   |
| Net                    unrealized gains on derivatives  |   |                                 | 48      |                                 |   | 786 |   |
| Net                    realized losses on derivatives   |   |                                 | (11,000 | )                                    |   | (12,182 | ) |
| Accumulated                    other comprehensive loss |   | $                                    | (4,260  | )                                    | $      | (1,748 | ) |

**20.         **
**Rental        Income**

| 2007       |   | $      | 84,899    |   |
|------------|--------|--------|-----------|--------|
| 2008       |   |   | 85,909    |   |
| 2009       |   |   | 84,382    |   |
| 2010       |   |   | 82,555    |   |
| 2011       |   |   | 83,433    |   |
| Thereafter |   |   | 626,982   |   |
|       |   | $      | 1,048,160 |   |

**21.         **
**Concentration        Risks**

----

**Table              of Contents**

**22.         401(k)        Plan**

**23.         **
**Pro        Forma Condensed Consolidated Income Statements (Unaudited)**

|                                                                                                       |   | For                    the twelve months ended                    December 31, |    |
|------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------|---------|
|                                                                                                       |   | 2006                                                                           |    | 2005 |   |
| Total                    revenues                                                                          |   | $                                                                              | 142,773 |   | $ | 128,497 |   |
| Income                    from continuing operations                                                       |   |                                                                           | 8,759   |   |   | 8,492 |   |
| Income                    per basic and diluted common share from                    continuing operations |   |                                                                           | 0.27    |   |   | 0.31 |   |
| Net                    income allocable to common stockholders                                             |   |                                                                           | 6,110   |   |   | 7,937 |   |
| Net                    income per basic and diluted common share                                           |   |                                                                           | 0.19    |   |   | 0.29 |   |

**24.         **
**Segment        Reporting**

*Disclosures        about Segments of an Enterprise and Related Information*

|                                                        |   | Corporate                    / Unallocated |    | Operating                    Real                    Estate |   | Lending                    Investments |   | Total  |    |
|-------------------------------------------------------------|--------|--------------------------------------------|---------|-------------------------------------------------------------|--------|----------------------------------------|--------|--------|---------|
| Total                    revenues                           |   | $                                          | 811     |                                                        | $      | 88,002                                 |   | $      | 35,966  |   | $ | 124,780 |   |
| Total                    expenses and minority interest     |   |                                       | 14,901  |                                                        |   | 82,754                                 |   |   | 20,070  |   |   | 117,726 |   |
| Income                    (loss) from continuing operations |   |                                       | (14,090 | )                                                           |   | 5,248                                  |   |   | 15,896  |   |   | 7,054 |   |
| Total                    assets                             |   |                                       | 30,219  |                                                        |   | 1,152,348                              |   |   | 461,732 |   |   | 1,644,300 |   |

----

**Table              of Contents**

|                                                          |   | Corporate                      / Unallocated |    | Operating                      Real                      Estate |   | Lending                      Investments |   | Total  |    |
|---------------------------------------------------------------|--------|----------------------------------------------|---------|-----------------------------------------------------------------|--------|------------------------------------------|--------|--------|---------|
| Total                      revenues                           |   | $                                            | 1,090   |                                                            | $      | 44,352                                   |   | $      | 27,609  |   | $ | 73,052 |   |
| Total                      expenses and minority interest     |   |                                         | 12,493  |                                                            |   | 39,254                                   |   |   | 16,181  |   |   | 67,928 |   |
| Income                      (loss) from continuing operations |   |                                         | (11,402 | )                                                               |   | 5,098                                    |   |   | 11,428  |   |   | 5,124 |   |
| Total                      assets                             |   |                                         | 48,007  |                                                            |   | 797,945                                  |   |   | 440,536 |   |   | 1,286,488 |   |

|                                                        |   | Corporate                    / Unallocated |    | Operating                    Real                    Estate |   | Lending                    Investments |   | Total  |    |
|-------------------------------------------------------------|--------|--------------------------------------------|---------|-------------------------------------------------------------|--------|----------------------------------------|--------|--------|---------|
| Total                    revenues                           |   | $                                          | 603     |                                                        | $      | 6,356                                  |   | $      | 14,045  |   | $ | 21,004 |   |
| Total                    expenses and minority interest     |   |                                       | 11,869  |                                                        |   | 4,206                                  |   |   | 3,569   |   |   | 19,644 |   |
| Income                    (loss) from continuing operations |   |                                       | (11,266 | )                                                           |   | 2,150                                  |   |   | 10,476  |   |   | 1,360 |   |
| Total                    assets                             |   |                                       | 31,454  |                                                        |   | 247,325                                |   |   | 302,923 |   |   | 581,702 |   |

**25.         **
**Quarterly        Financial Information (Unaudited)**

|                            |   | Revenue |   | Net                    income (loss) applicable to common shares |   | Basic                    and diluted income (loss) per common share |   |
|---------------------------------|--------|---------|--------|------------------------------------------------------------------|--------|---------------------------------------------------------------------|--------|
| 2006                            |   |    |   |                                                             |   |                                                                |   |
| December                    31  |   | $       | 35,230 |                                                             | $      | 1,244                                                               |   | $ | 0.04 |   |
| September                    30 |   |    | 30,947 |                                                             |   | 776                                                                 |   |   | 0.02 |   |
| June                    30      |   |    | 30,255 |                                                             |   | 744                                                                 |   |   | 0.02 |   |
| March                    31     |   |    | 28,348 |                                                             |   | 1,641                                                               |   |   | 0.06 |   |
| 2005                            |   |    |   |                                                             |   |                                                                |   |   |   |   |
| December                    31  |   |    | 24,572 |                                                             |   | 1,067                                                               |   |   | 0.04 |   |
| September                    30 |   |    | 21,185 |                                                             |   | (273                                                                | )      |   | (0.01 | ) |
| June                    30      |   |    | 15,388 |                                                             |   | 1,554                                                               |   |   | 0.06 |   |
| March                    31     |   |    | 11,908 |                                                             |   | 2,222                                                               |   |   | 0.08 |   |

**26.         **
**Variable        Interest Entities**

*Consolidation        of Variable Interest Entities*

|  | · | the                  equity investment at risk is not sufficient to permit the entity                  to                  finance its activities without additional subordinated financial                  support                  from other parties; |
|--|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | · | equity                  holders either (a) lack direct or indirect ability to make decisions                  about                  the entity, (b) are not obligated to absorb expected losses of                  the entity                  or (c) do not have the right to receive expected residual returns                  of the                  entity if they occur; or |
|--|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | · | equity                  holders have voting rights that are not proportionate to their                  economic                  interests, and the activities of the entity involve or are conducted                  on                  behalf of an investor with a disproportionately small voting                  interest. |
|--|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

**Table              of Contents**

----

**Table              of Contents**

**27.         Subsequent        Events**

----

**Table            of Contents**

**Capital          Lease Funding, Inc. and Subsidiaries**

|                                                                           |   |             |    | **Initial                    Cost**   |   | **Cost                    Capitalized Subsequent to Acquisition**   |   | **Gross                    Amount at Which****Carried                    at Close of Period**     |    |                                             |   |     |   |                                             |   |      |   |
|--------------------------------------------------------------------------------|--------|------------------|---------|-------------------------------------------------|--------|-------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------------------------|---------|--------------------------------------------------|--------|----------|--------|--------------------------------------------------|--------|-----------|--------|
| **Description**                                                                |   | **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                    Computed** |   |
| Abbott                    Laboratories, Columbus, OH                           |   | $                | 7,775   |                                            | $      | 1,025                                                                         |   | $                                                                                                                     | 10,066  |                                             | $      | -        |   | $                                                | -      |      | $      | 1,025 |   | $ | 10,066 |   | $ | 11,091 |   | $ | 542 |   |   | 1980,                    renovated in 2003-2004 |   |   | 11/5/2004 |   |   | 40                    years |   |
| Abbott                    Laboratories, Waukegan, IL                           |   |             | 17,570  |                                            |   | 2,500                                                                         |   |                                                                                                                  | 15,430  |                                             |   | -        |   |                                             | -      |      |   | 2,500 |   |   | 15,430 |   |   | 17,930 |   |   | 538 |   |   | 2000 |   |   | 8/9/2005 |   |   | 40                    years |   |
| Aetna                    Life Insurance Company, Fresno, CA                    |   |             | 20,416  |                                            |   | 3,000                                                                         |   |                                                                                                                  | 19,462  |                                             |   | -        |   |                                             | -      |      |   | 3,000 |   |   | 19,462 |   |   | 22,462 |   |   | 98 |   |   | 1                    story office 1969, 2 story office 1984, 2 story parking 1997,                    interior                    renovated in 2000 |   |   | 10/19/2006 |   |   | 40                    years |   |
| Allstate                    Insurance Company, Charlotte, NC                   |   |             | 24,477  |                                            |   | 7,100                                                                         |   |                                                                                                                  | 14,594  |                                             |   | -        |   |                                             | -      |      |   | 7,100 |   |   | 14,594 |   |   | 21,694 |   |   | 376 |   |   | 1973,                    renovated in the 1990s |   |   | 12/21/2005 |   |   | 40                    years |   |
| Allstate                    Insurance Company, Roanoke, VA                     |   |             | 26,059  |                                            |   | 3,200                                                                         |   |                                                                                                                  | 20,930  |                                             |   | -        |   |                                             | -      |      |   | 3,200 |   |   | 20,930 |   |   | 24,130 |   |   | 539 |   |   | 1967/70,                    with an addition in 1981 |   |   | 12/21/2005 |   |   | 40                    years |   |
| AmeriCredit                    Corp., Arlington, TX                            |   |             | 35,514  |                                            |   | 5,820                                                                         |   |                                                                                                                  | 32,212  |                                             |   | -        |   |                                             | -      |      |   | 5,820 |   |   | 32,212 |   |   | 38,032 |   |   | 9 |   |   | 1999 |   |   | 12/28/2006 |   |   | 40                    years |   |
| AMVESCAP                    PLC, Denver, CO                                    |   |             | 58,888  |                                            |   | 7,200                                                                         |   |                                                                                                                  | 55,395  |                                             |   | -        |   |                                             | -      |      |   | 7,200 |   |   | 55,395 |   |   | 62,595 |   |   | 1,081 |   |   | 2001 |   |   | 3/23/2006 |   |   | 40                    years |   |
| Aon                    Corporation, Glenview, IL                               |   |             | 72,864  |                                            |   | 11,000                                                                        |   |                                                                                                                  | 68,591  |                                             |   | -        |   |                                             | 29     |      |   | 11,000 |   |   | 68,620 |   |   | 79,620 |   |   | 4,061 |   |   | 1975,                    renovated in 1999 |   |   | 8/19/2004 |   |   | 40                    years |   |
| Baxter                    International, Inc., Bloomington, IN                 |   |             | 6,661   |                                            |   | 1,200                                                                         |   |                                                                                                                  | 9,181   |                                             |   | -        |   |                                             | -      |      |   | 1,200 |   |   | 9,181 |   |   | 10,381 |   |   | 509 |   |   | 1996,                    renovation and warehouse addition in 2004 |   |   | 10/13/2004 |   |   | 40                    years |   |
| Cadbury                    Schweppes Holdings (US), Whippany, NJ               |   |             | 39,028  |                                            |   | 6,300                                                                         |   |                                                                                                                  | 38,994  |                                             |   | -        |   |                                             | 1,217  |      |   | 6,300 |   |   | 40,211 |   |   | 46,511 |   |   | 1,507 |   |   | 2005 |   |   | 1/6/2005 |   |   | 40                    years |   |
| Capital                    One Financial Corporation, Plano, TX                |   |             | 23,489  |                                            |   | 6,670                                                                         |   |                                                                                                                  | 18,816  |                                             |   | -        |   |                                             | -      |      |   | 6,670 |   |   | 18,816 |   |   | 25,486 |   |   | 717 |   |   | 1999 |   |   | 6/23/2005 |   |   | 40                    years |   |
| Choice                    Hotels International, Inc., Silver Spring, MD        |   |             | 31,653  |                                            |   | 5,500                                                                         |   |                                                                                                                  | 36,806  |                                             |   | -        |   |                                             | 57     |      |   | 5,500 |   |   | 36,863 |   |   | 42,363 |   |   | 1,938 |   |   | Building                    10720 - 1981, 10750 - 1971, 10770 - 1986 |   |   | 11/23/2004 |   |   | 40                    years |   |
| Cott                    Corporation, Reading, PA                               |   |             | -       |                                            |   | 1,550                                                                         |   |                                                                                                                  | 2,810   |                                             |   | -        |   |                                             | -      |      |   | 1,550 |   |   | 2,810 |   |   | 4,360 |   |   | 30 |   |   | 1969,                    renovated in 1975, 1987 & 1997 |   |   | 7/28/2006 |   |   | 40                    years |   |
| Crozer-Keystone                    Health System, Ridley, PA                   |   |             | 4,104   |                                            |   | -                                                                             |   |                                                                                                                  | 5,015   |                                             |   | -        |   |                                             | 864    |      |   | - |   |   | 5,879 |   |   | 5,879 |   |   | 326 |   |   | 1977,                    renovated in 2004 |   |   | 8/9/2004 |   |   | 40                    years |   |
| CVS                    Corporation, Randolph, MA                               |   |             | 8,943   |                                            |   | 6,300                                                                         |   |                                                                                                                  | 7,801   |                                             |   | -        |   |                                             | -      |      |   | 6,300 |   |   | 7,801 |   |   | 14,101 |   |   | 440 |   |   | 1965,                    renovated in the 1980s and 1993 |   |   | 9/29/2004 |   |   | 40                    years |   |
| Farmers                    New World Life Insurance Company, Mercer Island, WA |   |             | 32,968  |                                            |   | 24,000                                                                        |   |                                                                                                                  | 10,035  |                                             |   | -        |   |                                             | -      |      |   | 24,000 |   |   | 10,035 |   |   | 34,035 |   |   | 258 |   |   | 1982 |   |   | 12/22/2005 |   |   | 40                    years |   |
| ITT                    Industries, Inc., Herndon, VA                           |   |             | 47,629  |                                            |   | 5,300                                                                         |   |                                                                                                                  | 40,221  |                                             |   | -        |   |                                             | 9,528  |      |   | 5,300 |   |   | 49,749 |   |   | 55,049 |   |   | 1,678 |   |   | 1999,                    interior renovated 2005-2006 |   |   | 5/23/2005 |   |   | 40                    years |   |
| Johnson                    Controls, Inc., Largo, FL                           |   |             | 23,152  |                                            |   | 4,600                                                                         |   |                                                                                                                  | 18,168  |                                             |   | -        |   |                                             | -      |      |   | 4,600 |   |   | 18,168 |   |   | 22,768 |   |   | 24 |   |   | 1963                    & 2001 |   |   | 12/12/2006 |   |   | 40                    years |   |
| Koninklijke                    Ahold, N.V., Levittown, PA                      |   |             | 16,484  |                                            |   | 4,000                                                                         |   |                                                                                                                  | 15,789  |                                             |   | -        |   |                                             | -      |      |   | 4,000 |   |   | 15,789 |   |   | 19,789 |   |   | 217 |   |   | 2006 |   |   | 6/13/2006 |   |   | 40                    years |   |
| Lowes                    Companies, Inc., Aliso Viejo, CA                      |   |             | 45,395  |                                            |   | 26,600                                                                        |   |                                                                                                                  | 20,829  |                                             |   | -        |   |                                             | 2      |      |   | 26,600 |   |   | 20,831 |   |   | 47,431 |   |   | 831 |   |   | 1965,                    renovated in 2004 and 2005 |   |   | 5/31/2005 |   |   | 40                    years |   |
| Omnicom                    Group, Inc., Irving, TX                             |   |             | 14,802  |                                            |   | 2,620                                                                         |   |                                                                                                                  | 11,800  |                                             |   | -        |   |                                             | -      |      |   | 2,620 |   |   | 11,800 |   |   | 14,420 |   |   | 450 |   |   | 1998 |   |   | 6/23/2005 |   |   | 40                    years |   |
| Pearson                    Plc., Lawrence, KS                                  |   |             | 17,570  |                                            |   | 1,140                                                                         |   |                                                                                                                  | 16,557  |                                             |   | -        |   |                                             | -      |      |   | 1,140 |   |   | 16,557 |   |   | 17,697 |   |   | 298 |   |   | 1997 |   |   | 4/12/2006 |   |   | 40                    years |   |
| T-Mobile                    USA, Inc., Nashville, TN                           |   |             | 10,885  |                                            |   | 2,450                                                                         |   |                                                                                                                  | 11,774  |                                             |   | -        |   |                                             | -      |      |   | 2,450 |   |   | 11,774 |   |   | 14,224 |   |   | 38 |   |   | 2002 |   |   | 11/14/2006 |   |   | 40                    years |   |
| Tiffany                    & Co., Parsippany, NJ                           |   |             | 62,475  |                                            |   | 7,400                                                                         |   |                                                                                                                  | 62,150  |                                             |   | -        |   |                                             | 47     |      |   | 7,400 |   |   | 62,197 |   |   | 69,597 |   |   | 1,957 |   |   | Office                    & Warehouse - 1996-1997, Warehouse Mezzanine - 2000, Garage - 2001,                    East Wing Office - 2002 |   |   | 9/28/2005 |   |   | 40                    years |   |
| Time                    Warner Entertainment Company, L.P., Milwaukee, WI      |   |             | 24,678  |                                            |   | 2,300                                                                         |   |                                                                                                                  | 22,299  |                                             |   | -        |   |                                             | -      |      |   | 2,300 |   |   | 22,299 |   |   | 24,599 |   |   | 51 |   |   | 1903,                    renovated in 2001 |   |   | 11/28/2006 |   |   | 40                    years |   |
| TJX                    Companies, Inc., Philadelphia, PA                       |   |             | 80,698  |                                            |   | 6,100                                                                         |   |                                                                                                                  | 79,734  |                                             |   | -        |   |                                             | -      |      |   | 6,100 |   |   | 79,734 |   |   | 85,834 |   |   | 1,613 |   |   | 2001 |   |   | 3/10/2006 |   |   | 40                    years |   |
| United                    States Government (DEA), Birmingham, AL              |   |             | 12,494  |                                            |   | 1,000                                                                         |   |                                                                                                                  | 11,643  |                                             |   | -        |   |                                             | 258    |      |   | 1,000 |   |   | 11,900 |   |   | 12,900 |   |   | 312 |   |   | 2005 |   |   | 8/11/2005 |   |   | 40                    years |   |
| United                    States Government (EPA), Kansas City, KS             |   |             | 24,626  |                                            |   | 250                                                                           |   |                                                                                                                  | 29,476  |                                             |   | -        |   |                                             | -      |      |   | 250 |   |   | 29,476 |   |   | 29,726 |   |   | 1,018 |   |   | 2003 |   |   | 8/11/2005 |   |   | 40                    years |   |
| United                    States Government (FBI), Albany, NY                  |   |             | 14,401  |                                            |   | 3,000                                                                         |   |                                                                                                                  | 12,794  |                                             |   | -        |   |                                             | -      |      |   | 3,000 |   |   | 12,794 |   |   | 15,794 |   |   | 59 |   |   | 1998 |   |   | 10/25/2006 |   |   | 40                    years |   |
| United                    States Government (FBI), Birmingham, AL              |   |             | 20,697  |                                            |   | 2,200                                                                         |   |                                                                                                                  | 20,171  |                                             |   | -        |   |                                             | -      |      |   | 2,200 |   |   | 20,171 |   |   | 22,371 |   |   | 701 |   |   | 2005 |   |   | 8/11/2005 |   |   | 40                    years |   |
| United                    States Government (NIH), N. Bethesda, MD             |   |             | 64,883  |                                            |   | 10,350                                                                        |   |                                                                                                                  | 61,512  |                                             |   | -        |   |                                             | -      |      |   | 10,350 |   |   | 61,512 |   |   | 71,862 |   |   | 2,016 |   |   | 1989 |   |   | 9/9/2005 |   |   | 40                    years |   |
| United                    States Government (OSHA), Sandy, UT                  |   |             | 15,680  |                                            |   | 1,750                                                                         |   |                                                                                                                  | 18,484  |                                             |   | -        |   |                                             | -      |      |   | 1,750 |   |   | 18,484 |   |   | 20,234 |   |   | 642 |   |   | 2004 |   |   | 8/11/2005 |   |   | 40                    years |   |
| United                    States Government (SSA), Austin, TX                  |   |             | 6,112   |                                            |   | 1,100                                                                         |   |                                                                                                                  | 4,327   |                                             |   | -        |   |                                             | 185    |      |   | 1,100 |   |   | 4,511 |   |   | 5,611 |   |   | 116 |   |   | 2005 |   |   | 8/11/2005 |   |   | 40                    years |   |
| United                    States Government (VA), Ponce, PR                    |   |             | 7,172   |                                            |   | 2,120                                                                         |   |                                                                                                                  | 10,252  |                                             |   | -        |   |                                             | -      |      |   | 2,120 |   |   | 10,252 |   |   | 12,372 |   |   | 555 |   |   | 2000 |   |   | 11/1/2004 |   |   | 40                    years |   |
| Walgreen                    Co., Pennsauken, NJ                                |   |             | 2,059   |                                            |   | 463                                                                           |   |                                                                                                                  | 2,629   |                                             |   | -        |   |                                             | -      |      |   | 463 |   |   | 2,629 |   |   | 3,092 |   |   | 142 |   |   | 1996 |   |   | 11/1/2004 |   |   | 40                    years |   |
| Walgreen                    Co., Portsmouth, VA                                |   |             | 3,390   |                                            |   | 618                                                                           |   |                                                                                                                  | 3,562   |                                             |   | -        |   |                                             | (1     | )         |   | 618 |   |   | 3,563 |   |   | 4,181 |   |   | 194 |   |   | 1998 |   |   | 11/1/2004 |   |   | 40                    years |   |
|                                                                           |   | $                | 925,691 |                                            | $      | 177,726                                                                       |   | $                                                                                                                     | 840,309 |                                             | $      | -        |   | $                                                | 12,186 |      | $      | 177,726 |   | $ | 852,495 |   | $ | 1,030,221 |   | $ | 25,881 |   |   |   |   |   |   |   |   |   |   |
|                                                                           |   |             |    |                                            |   |                                                                          |   |                                                                                                                  |    |                                             |   |     |   |                                             |   |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |

----

**Table              of Contents**

| **Capital                      Lease Funding, Inc. and Subsidiaries** |
|-----------------------------------------------------------------------|
| **Real                      Estate and Accumulated Depreciation**     |
| **December                      31, 2006**                            |
| **(amounts                      in thousands)**                       |
| **Schedule                      III—(Continued)**               |

|                                                                   |   |   |    |   |   |
|------------------------------------------------------------------------|--------|--------|---------|--------|--------|
| **Real                      estate**                                   |   |   |    |   |   |
| Balance-January                      1, 2004                           |   |   |    |   | $      | - |   |
| Additions                      during the year                    |   |   |    |   |   |   |   |
|  Property                      acquisitions                       |   |   | 182,131 |   |   |   |   |
|  Costs                      capitalized subsequent to acquisition |   |   | 174     |   |   |   |   |
| Balance-December                      31, 2004                         |   |   |    |   | $      | 182,305 |   |
|  Property                      acquisitions                       |   |   | 508,597 |   |   |   |   |
|  Costs                      capitalized subsequent to acquisition |   |   | 2,912   |   |   |   |   |
| Balance-December                      31, 2005                         |   |   |    |   | $      | 693,814 |   |
|  Property                      acquisitions                       |   |   | 324,221 |   |   |   |   |
|  Costs                      capitalized subsequent to acquisition |   |   | 12,186  |   |   |   |   |
| Balance-December                      31, 2006                         |   |   |    |   | $      | 1,030,221 |   |
|                                                                   |   |   |    |   |   |   |   |
|                                                                   |   |   |    |   |   |   |   |
|                                                                   |   |   |    |   |   |   |   |
| **Accumulated                      depreciation**                      |   |   |    |   |   |   |   |
| Balance-January                      1, 2004                           |   |   |    |   | $      | - |   |
| Additions                      during the year:                   |   |   |    |   |   |   |   |
|  Depreciation                      on property                    |   |   | 1,281   |   |   |   |   |
| Balance-December                      31, 2004                         |   |   |    |   | $      | 1,281 |   |
| Additions                      during the year:                   |   |   |    |   |   |   |   |
|  Depreciation                      on property                    |   |   | 7,118   |   |   |   |   |
| Balance-December                      31, 2005                         |   |   |    |   | $      | 8,399 |   |
| Additions                      during the year:                   |   |   |    |   |   |   |   |
|  Depreciation                      on property                    |   |   | 17,482  |   |   |   |   |
| Balance-December                      31, 2006                         |   |   |    |   | $      | 25,881 |   |

----

**Table          of Contents**

**Capital        Lease Funding, Inc. and Subsidiaries**

| **Description**                                            |   | **Location** |                                        | **Interest                    Rate** |   | **Final****Maturity****Date** |   | **Periodic                    Payment Terms** |                        | **Prior                    Liens** |   | **Face                    Amount of Mortgages**                                                                                                          |   | **Carrying                    Amount of Mortgages (1)** |   | **Principal                    Amount of Loans Subject to Delinquent Principal or                    Interest** |   |
|------------------------------------------------------------|--------|--------------|---------------------------------------------|--------------------------------------|--------|-------------------------------|--------|-----------------------------------------------|-----------------------------|------------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------------------|--------|
| **Long-Term                    Mortgage Loans**            |   |         |                                        |                                 |   |                          |   |                                          |                        |                               |   |                                                                                                                                                     |   |                                                    |   |                                                                                                            |   |
| Autozone,                    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    |                                                                                                            | $      | 1,971 |   | $ | 1,971 |   |   |   |   |
| 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    |                                                                                                            |   | 3,469 |   |   | 3,469 |   |   |   |   |
| 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    |                                                                                                            |   | 18,038 |   |   | 18,038 |   |   |   |   |
| 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    |                                                                                                            |   | 1,673 |   |   | 1,624 |   |   |   |   |
| 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    |                                                                                                            |   | 2,255 |   |   | 2,317 |   |   |   |   |
| 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    |                                                                                                            |   | 3,097 |   |   | 3,097 |   |   |   |   |
| 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    |                                                                                                            |   | 2,353 |   |   | 2,312 |   |   |   |   |
| 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    |                                                                                                            |   | 1,423 |   |   | 1,424 |   |   |   |   |
| 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    |                                                                                                            |   | 2,434 |   |   | 2,600 |   |   |   |   |
| 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    |                                                                                                            |   | 1,284 |   |   | 1,402 |   |   |   |   |
| 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    |                                                                                                            |   | 1,603 |   |   | 1,564 |   |   |   |   |
| 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    |                                                                                                            |   | 1,703 |   |   | 1,899 |   |   |   |   |
| 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    |                                                                                                            |   | 1,961 |   |   | 2,194 |   |   |   |   |
| 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    |                                                                                                            |   | 2,301 |   |   | 2,565 |   |   |   |   |
| 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    |                                                                                                            |   | 1,355 |   |   | 1,355 |   |   |   |   |
| CVS                    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    |                                                                                                            |   | 2,521 |   |   | 2,521 |   |   |   |   |
| 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    |                                                                                                            |   | 4,388 |   |   | 4,388 |   |   |   |   |
| 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    |                                                                                                            |   | 8,419 |   |   | 8,419 |   |   |   |   |
| 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    |                                                                                                            |   | 8,384 |   |   | 8,384 |   |   |   |   |
| 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    |                                                                                                            |   | 47,517 |   |   | 47,517 |   |   |   |   |
| 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    |                                                                                                            |   | 3,005 |   |   | 3,063 |   |   |   |   |
| 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    |                                                                                                            |   | 6,549 |   |   | 6,529 |   |   |   |   |
| 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    |                                                                                                            |   | 6,444 |   |   | 6,439 |   |   |   |   |
| 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    |                                                                                                            |   | 6,503 |   |   | 6,215 |   |   |   |   |
| Lowes                    Companies, Inc.                   |   |         | Framingham,                    MA           |                                 |   | 5.87                          | %      |                                          | Sep                    2031 |                               |   | Principal                    and Interest are payable monthly at a varying amount, over the                    life to                    maturity       |   |                                                    | N/A    |                                                                                                            |   | 27,829 |   |   | 27,829 |   |   |   |   |
| 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    |                                                                                                            |   | 7,119 |   |   | 7,119 |   |   |   |   |
| 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    |                                                                                                            |   | 3,005 |   |   | 3,084 |   |   |   |   |
| Natural                    Gas Pipeline Company of America |   |         | Lombard,                    IL              |                                 |   | 5.97                          | %      |                                          | Jun                    2007 |                               |   | Principal                    and Interest are payable semi-annually at a varying amount, over                    the life                    to maturity |   |                                                    | N/A    |                                                                                                            |   | 4,202 |   |   | 4,202 |   |   |   |   |
| 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    |                                                                                                            |   | 6,830 |   |   | 7,426 |   |   |   |   |
| 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    |                                                                                                            |   | 921 |   |   | 940 |   |   |   |   |
| 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    |                                                                                                            |   | 21,537 |   |   | 22,333 |   |   |   |   |
| 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    |                                                                                                            |   | 5,260 |   |   | 5,260 |   |   |   |   |
| 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    |                                                                                                            |   | 3,629 |   |   | 3,629 |   |   |   |   |
| 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    |                                                                                                            |   | 4,548 |   |   | 4,548 |   |   |   |   |
| 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    |                                                                                                            |   | 3,418 |   |   | 3,418 |   |   |   |   |
|                                                       |   |         |                                        |                                 |   |                          |   |                                          |                        |                               |   |                                                                                                                                                     |   |                                                    |   |                                                                                                            |   | 228,948 |   |   | 231,094 |   |   |   |   |

----

**Table              of Contents**

|                                                 |   |   |                                      |   |   |   |   |   |                        |   |   |                                                                                                                                               |   |   |   |   |   |   |   |   |   |   |   |   |   |
|------------------------------------------------------|--------|--------|-------------------------------------------|--------|--------|--------|--------|--------|-----------------------------|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
| **Corporate                    Credit Notes**        |   |   |                                      |   |   |   |   |   |                        |   |   |                                                                                                                                               |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Albertsons,                    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    |   |   | 327    |   |   | 297    |   |   |   |   |
| 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    |   |   | 359    |   |   | 355    |   |   |   |   |
| 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    |   |   | 509    |   |   | 485    |   |   |   |   |
| 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    |   |   | 1,323  |   |   | 1,270  |   |   |   |   |
| 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    |   |   | 644    |   |   | 627    |   |   |   |   |
| 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    |   |   | 566    |   |   | 547    |   |   |   |   |
| 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    |   |   | 374    |   |   | 361    |   |   |   |   |
| 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    |   |   | 192    |   |   | 191    |   |   |   |   |
| 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    |   |   | 274    |   |   | 268    |   |   |   |   |
| 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    |   |   | 242    |   |   | 232    |   |   |   |   |
| 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    |   |   | 325    |   |   | 318    |   |   |   |   |
| 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    |   |   | 317    |   |   | 310    |   |   |   |   |
| 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    |   |   | 1,143  |   |   | 1,132  |   |   |   |   |
| 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    |   |   | 2,350  |   |   | 2,323  |   |   |   |   |
| 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    |   |   | 19,964 |   |   | 19,964 |   |   |   |   |
| 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    |   |   | 1,070  |   |   | 1,048  |   |   |   |   |
| 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    |   |   | 567    |   |   | 555    |   |   |   |   |
| 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    |   |   | 419    |   |   | 416    |   |   |   |   |
| 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    |   |   | 190    |   |   | 188    |   |   |   |   |
| PerkinElmer,                    Inc.                 |   |   | Phelps,                    NY             |   |   | 7.35   | %      |   | Dec                    2011 |   |   | Principal                    and Interest are payable monthly at a level amount, over the                    life to                    maturity   |   |   | N/A    |   |   | 177    |   |   | 174    |   |   |   |   |
| 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    |   |   | 275    |   |   | 262    |   |   |   |   |
| 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    |   |   | 405    |   |   | 403    |   |   |   |   |
| 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    |   |   | 678    |   |   | 638    |   |   |   |   |
| 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    |   |   | 435    |   |   | 426    |   |   |   |   |
| 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    |   |   | 687    |   |   | 690    |   |   |   |   |
|                                                 |   |   |                                      |   |   |   |   |   |                        |   |   |                                                                                                                                               |   |   |   |   |   | 33,812 |   |   | 33,480 |   |   |   |   |

----

**Table              of Contents**

|                                                                                                           |   |   |                                 |   |   |   |   |   |                        |   |   |                                                                                                                                               |   |   |   |   |   |    |   |   |    |   |   |   |   |
|----------------------------------------------------------------------------------------------------------------|--------|--------|--------------------------------------|--------|--------|--------|--------|--------|-----------------------------|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|--------|--------|---------|--------|--------|---------|--------|--------|--------|--------|
| **Mezzanine                    and Other Investments**                                                         |   |   |                                 |   |   |   |   |   |                        |   |   |                                                                                                                                               |   |   |   |   |   |    |   |   |    |   |   |   |   |
| 84th                    Avenue Development, LLC                                                                |   |   | Tinley                    Park, IL   |   |   | 10.00  | %      |   | Mar                    2007 |   |   | Principal                    and Interest are payable monthly at a varying amount, over the                    life to                    maturity |   | $      | 2,395  |   |   | 498     |   |   | 498     |   |   |   |   |
| Eden                    Hylan Seaview LLC                                                                      |   |   | Staten                    Island, NY |   |   | 10.00  | %      |   | Jul                    2007 |   |   | Principal                    and Interest are payable monthly at a varying amount, over the                    life to                    maturity |   |   | 1,322  |   |   | 650     |   |   | 650     |   |   |   |   |
| Wemo                    Franchise Funding LLC                                                                  |   |   | Various                              |   |   | 10.00  | %      |   | Feb                    2007 |   |   | Principal                    and Interest are payable monthly at a varying amount, over the                    life to                    maturity |   |   | N/A    |   |   | 2,648   |   |   | 2,648   |   |   |   |   |
| West                    End Mortgage Finance Fund I L.P.                                                       |   |   | Various                              |   |   | 10.00  | %      |   | Sep                    2009 |   |   | Principal                    and Interest are payable monthly at a varying amount, over the                    life to                    maturity |   |   | N/A    |   |   | 5,715   |   |   | 5,715   |   |   |   |   |
|                                                                                                           |   |   |                                 |   |   |   |   |   |                        |   |   |                                                                                                                                               |   |   | 3,717  |   |   | 9,511   |   |   | 9,511   |   |   |   |   |
| Total                                                                                                          |   |   |                                 |   |   |   |   |   |                        |   |   |                                                                                                                                               |   | $      | 3,717  |   | $      | 272,271 |   | $      | 274,085 |   |   |   |   |
|                                                                                                           |   |   |                                 |   |   |   |   |   |                        |   |   |                                                                                                                                               |   |   |   |   |   |    |   |   |    |   |   |   |   |
| (1)                      The aggregrate cost for federal income tax purposes is                      $274,085. |
|                                                                                                           |   |   |                                 |   |   |   |   |   |                        |   |   |                                                                                                                                               |   |   |   |   |   |    |   |   |    |   |   |   |   |

----

**Table            of Contents**

| **Capital                    Lease Funding, Inc. and Subsidiaries**     |
|-------------------------------------------------------------------------|
| **Schedule                    of Mortgage and Other Real Estate Loans** |
| **December                    31, 2006**                                |
| **(amounts                    in thousands)**                           |
| **Schedule                    IV—(Continued)**                    |

| Balance-December                    31, 2003                                                                           |   |   |    |   | $      | 71,973  |   |
|------------------------------------------------------------------------------------------------------------------------|--------|--------|---------|--------|--------|---------|--------|
| Additions                    during the year:                                                                     |   |   |    |   |   |    |   |
|  New                    mortgage loans                                                                            |   |   | 167,009 |   |   |    |   |
|  Mark                    to fair value                                                                            |   |   | (343    | )      |   |    |   |
|  Fair                    value hedges allocated to unearned origination discounts and                    premiums |   |   | 2,403   |   |   |    |   |
| Deductions                    during the year:                                                                    |   |   |    |   |   |    |   |
|  Principal                    received                                                                            |   |   | (8,521  | )      |   |    |   |
|  Loans                    sold                                                                                    |   |   | (24,628 | )      |   |    |   |
| Balance-December                    31, 2004                                                                           |   |   |    |   | $      | 207,893 |   |
| Additions                    during the year:                                                                     |   |   |    |   |   |    |   |
|  New                    mortgage loans                                                                            |   |   | 115,852 |   |   |    |   |
|  Securities                    reclassified to mortgage loans                                                     |   |   | 6,932   |   |   |    |   |
| Deductions                    during the year:                                                                    |   |   |    |   |   |    |   |
|  Principal                    received                                                                            |   |   | (20,372 | )      |   |    |   |
|  Amortization                    of unearned discounts and premiums                                               |   |   | (70     | )      |   |    |   |
|  Loans                    sold                                                                                    |   |   | (11,858 | )      |   |    |   |
| Balance-December                    31, 2005                                                                           |   |   |    |   | $      | 298,377 |   |
| Additions                    during the year:                                                                     |   |   |    |   |   |    |   |
|  New                    mortgage loans                                                                            |   |   | 122,988 |   |   |    |   |
| Deductions                    during the year:                                                                    |   |   |    |   |   |    |   |
|  Principal                    received                                                                            |   |   | (69,196 | )      |   |    |   |
|  Amortization                    of unearned discounts and premiums                                               |   |   | (84     | )      |   |    |   |
|  Loans                    sold                                                                                    |   |   | (78,000 | )      |   |    |   |
| Balance-December                    31, 2006                                                                           |   |   |    |   | $      | 274,085 |   |
|                                                                                                                   |   |   |    |   |   |    |   |

----

**Table            of Contents**

| **Item              9.** | **Changes                in and Disagreements With Accountants on Accounting and Financial                Disclosure.** |
|--------------------------|-------------------------------------------------------------------------------------------------------------------------|

| **Item              9A.** | **Controls                and Procedures.** |
|---------------------------|---------------------------------------------|

*Evaluation      of Disclosure Controls and Procedures*

*Changes      in Internal Controls*

*Management’s      Report on Internal Control over Financial Reporting*

| **Item              9B.** | **Other                Information.** |
|---------------------------|---------------------------------------|

----

**Table          of Contents**

**PART      III.**

| **Item              10.** | **Directors,                Executive Officers and Corporate                Governance.** |
|---------------------------|-------------------------------------------------------------------------------------------|

| **Item              11.** | **Executive                Compensation.** |
|---------------------------|--------------------------------------------|

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

| **Item              13.** | **Certain                Relationships and Related Transactions, and Director                Independence.** |
|---------------------------|--------------------------------------------------------------------------------------------------------------|

| **Item              14.** | **Principal                Accounting Fees and                Services.** |
|---------------------------|---------------------------------------------------------------------------|

----

**Table            of Contents**

**PART      IV.**

| **Item              15.** | **Exhibits                and Financial Statement                Schedules.** |
|---------------------------|-------------------------------------------------------------------------------|

**(a)      and (c)**

----

**Table          of Contents**

| **(b)** | **Exhibits** |
|---------|--------------|

| **Exhibit****No.** |   | **Description**                                                                                                                                                                                                                                                                   |
|--------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|               |   |                                                                                                                                                                                                                                                                              |
| 3.1(1)             |   | Articles                of Amendment and Restatement of the registrant                                                                                                                                                                                                            |
| 3.2(2)             |   | Articles                Supplementary Establishing the Rights and Preferences of the 8.125%                Series                A Cumulative Redeemable Preferred Stock of the                registrant                                                                         |
| 3.3(1)             |   | Amended                and Restated Bylaws of the registrant                                                                                                                                                                                                                      |
| 4.1(1)             |   | Form                of Certificate evidencing the Common Stock, par value $0.01 per share,                of                the registrant                                                                                                                                        |
| 4.2(3)             |   | Junior                Subordinated Indenture between Caplease, LP and JPMorgan Chase Bank,                National Association, as trustee, dated December 13,                2005                                                                                                |
| 4.3(3)             |   | 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,                2005       |
| 10.1(4)            |   | Master                Repurchase Agreement, dated September 22, 2004 between the registrant,                Wachovia Bank, National Association, Caplease, LP and Certain                Special-Purpose Entity Subsidiaries thereof                                              |
| 10.2(5)            |   | Promissory                Note (Note A), dated October 28, 2004, of CLF 1000 Milwaukee Avenue                LLC in                favor of Wachovia Bank, National Association                                                                                                   |
| 10.3(6)            |   | Promissory                Note, dated December 9, 2004, of the registrant in favor of Wachovia                Bank,                National Association                                                                                                                           |
| *10.4(7)           |   | Amended                and Restated Capital Lease Funding, Inc. 2004 Stock Incentive Plan                (Effective June 14, 2006)                                                                                                                                                |
| *10.5(8)           |   | Form                of Non-Employee Director Restricted Stock Award                Agreement                                                                                                                                                                                      |
| *10.6(17)          |   | Form                of Executive Officer Restricted Stock Agreement                                                                                                                                                                                                               |
| 10.7(9)            |   | Promissory                Note, dated February 25, 2005, of CLF Parsippany LLC in favor of                Wachovia                Bank, National Association                                                                                                                      |
| *10.8(10)          |   | Form                of Employment Agreement between each of Paul H. McDowell, William                R.                Pollert, Shawn P. Seale and Robert C. Blanz, and the                registrant                                                                             |
| 10.9(11)           |   | Real                Estate Purchase and Sale Agreement, dated March 2, 2005, by and among                Capital Property Associates Limited Partnership, 6116 GP LLC, Capital                Property Acceptance LLC, and Caplease, LP                                           |
| 10.10(11)          |   | 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 Association                                   |
| 10.11(12)          |   | Second                Amendment to Purchase and Sale Agreement, dated as of April 15, 2005,                by                and between Caplease, LP and Aliso Commons at Town Center,                LLC                                                                        |
| 10.12(13)          |   | Sales                Agreement, dated as of August 15, 2005, between Cantor Fitzgerald&                Co. and Capital Lease Funding, Inc.                                                                                                                                    |
| 10.13(13)          |   | Sales                Agreement, dated as of August 15, 2005, between Brinson Patrick Securities                Corporation and Capital Lease Funding, Inc.                                                                                                                        |
| 10.14(13)          |   | Amendment                No. 1 to Master Repurchase Agreement, dated as of August 16, 2005,                by and                between Caplease, LP, Capital Lease Funding, Inc., Caplease Services                Corp.                and Wachovia Bank, National Association |
| 10.15(14)          |   | $75,000,000                Revolving Loan Agreement, dated August 26, 2005, by and among Capital                Lease Funding, Inc., Caplease Services Corp., Caplease, LP and Wachovia                Bank, National Association                                                 |
| 10.16(14)          |   | $25,000,000                Revolving Loan Agreement, dated August 26, 2005, by and among Capital                Lease Funding, Inc., Caplease Services Corp., Caplease, LP and Wachovia                Investment Holdings, LLC                                                   |
| 10.17(15)          |   | Real                Estate Purchase and Sale Agreement, dated July 18, 2005, by and between                Justice Center, LLC and CLF DEA Birmingham LLC                                                                                                                         |
| 10.18(15)          |   | Real                Estate Purchase and Sale Agreement, dated July 18, 2005, by and between                Birmingham Field Office, LLC and CLF FBI Birmingham LLC                                                                                                                |
| 10.19(15)          |   | Real                Estate Purchase and Sale Agreement, dated July 18, 2005, by and between                Utah Tech Center, LLC and Caplease, LP                                                                                                                                 |
| 10.20(15)          |   | Real                Estate Purchase and Sale Agreement, dated July 18, 2005, by and between                Kansas EPA Laboratory, LLC and Caplease,                LP                                                                                                             |

----

**Table          of Contents**

| **Exhibit****No.** |   | **Description**                                                                                                                                                                                                                                                                                          |
|--------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|               |   |                                                                                                                                                                                                                                                                                                     |
| 10.21(15)          |   | Real                    Estate Purchase and Sale Agreement, dated July 18, 2005, by and                    between                    Austin SSA, LLC and Caplease, LP                                                                                                                                   |
| 10.22(15)          |   | Promissory                    Note, dated August 16, 2005, of CLF FBI Birmingham LLC in favor                    of                    Wachovia Bank, National Association                                                                                                                               |
| 10.23(15)          |   | Promissory                    Note, dated August 16, 2005, of CLF DEA Birmingham LLC in favor                    of                    Wachovia Bank, National Association                                                                                                                               |
| 10.24(15)          |   | Promissory                    Note, dated August 16, 2005, of CLF SSA Austin, LP in favor of                    Wachovia                    Bank, National Association                                                                                                                                   |
| 10.25(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 trustee                                 |
| 10.26(15)          |   | Lease                    dated as of February 1, 2001 between Unified Government of Wyandotte                    County, Kansas City, Kansas and Kansas EPA Laboratory,                    LLC                                                                                                           |
| 10.27(15)          |   | Trust                    Indenture dated as of December 1, 2002 between Utah Tech Center,                    LLC, as                    issuer, and Security Bank of Kansas City, as trustee                                                                                                             |
| 10.28(15)          |   | Promissory                    Note, dated as of September 9, 2005, of Caplease Credit LLC in                    favor of                    Wachovia Bank, National Association                                                                                                                          |
| 10.29(15)          |   | Purchase                    and Sale Agreement dated September 23, 2005 between Tiffany and                    Company                    and Caplease, LP                                                                                                                                               |
| 10.30(15)          |   | Promissory                    Note, dated as of September 28, 2005, of CLF Sylvan Way LLC in                    favor of                    Wachovia Bank, National Association                                                                                                                          |
| 10.31(3)           |   | Parent                    Guarantee Agreement between Capital Lease Funding, Inc. and JPMorgan                    Chase                    Bank, National Association, as guarantee trustee, dated December                    13,                    2005                                               |
| 10.32(3)           |   | Purchase                    Agreement among Capital Lease Funding, Inc., Caplease, LP, Caplease                    Statutory Trust I and Merrill Lynch International, dated December                    13,                    2005                                                                      |
| 10.33(16)          |   | Real                    Estate Sale Agreement between Caplease, LP and Allstate Insurance                    Company,                    dated November 22, 2005                                                                                                                                         |
| 10.34(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                    Association                                                        |
| *10.35(17)         |   | Employment                    Agreement, dated as of February 13, 2007, between Paul Hughes                    and the                    registrant                                                                                                                                                     |
| *10.36(17)         |   | Amendment                    No. 1 to the Employment Agreement dated as of March 24, 2004                    between                    Robert C. Blanz and the registrant, dated February 13,                    2007                                                                                   |
| *10.37(17)         |   | Summary                    of Compensation for the Chief Executive Officer and each of the                    Named                    Executive Officers for Fiscal 2007                                                                                                                                |
| *10.38             |   | Summary                    of Independent Director Compensation for Fiscal 2007                                                                                                                                                                                                                          |
| 12.1               |   | Computation                    of Ratio of Earnings to Fixed Charges and Preferred Stock                    Dividends                                                                                                                                                                                    |
| 21.1               |   | List                    of Subsidiaries                                                                                                                                                                                                                                                                  |
| 23.1               |   | Consent                    of Ernst & Young LLP                                                                                                                                                                                                                                                      |
| 23.2               |   | Consent                    of McGladrey & Pullen LLP                                                                                                                                                                                                                                                 |
| 31.1               |   | 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 2002 |
| 31.2               |   | 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 2002 |
| 32.1               |   | 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                    2002                                                                                |
| 32.2               |   | 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                                                                                |
|                    |   |                                                                                                                                                                                                                                                                                                     |

----

| * | 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 Registration                  Statement on Form 8-A filed with the Securities and Exchange Commission                  on                  October 17, 2005. |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (3) | Incorporated                  by reference from the registrant’s Current Report on Form 8-K filed with                  the Securities and Exchange Commission on December 19,                  2005. |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (4) | Incorporated                  by reference from the registrant’s Current Report on Form 8-K filed with                  the Securities and Exchange Commission on September 24,                  2004. |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (5) | Incorporated                  by reference from the registrant’s Current Report on Form 8-K filed with                  the Securities and Exchange Commission on November 3,                  2004. |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (6) | Incorporated                  by reference from the registrant’s Current Report on Form 8-K filed with                  the Securities and Exchange Commission on December 15,                  2004. |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (7) | Incorporated                  by reference from the registrant’s Definitive Proxy Statement filed with                  the Securities and Exchange Commission on April 17,                  2006. |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (8) | Incorporated                  by reference from the registrant’s Current Report on Form 8-K filed with                  the Securities and Exchange Commission on June 19,                  2006. |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (9) | 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. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

| (11) | Incorporated                  by reference from the registrant’s Quarterly Report on Form 10-Q filed                  with the Securities and Exchange Commission on May 16,                  2005. |
|------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (12) | Incorporated                  by reference from the registrant’s Quarterly Report on Form 10-Q filed                  with the Securities and Exchange Commission on August 11,                  2005. |
|------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (13) | Incorporated                  by reference from the registrant’s Current Report on Form 8-K filed with                  the Securities and Exchange Commission on August 17,                  2005. |
|------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (14) | Incorporated                  by reference from the registrant’s Current Report on Form 8-K filed with                  the Securities and Exchange Commission on September 1,                  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. |
|------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

**Table          of Contents**

**PART      V.**

**SIGNATURES**

|                               |   | **CAPITAL                LEASE FUNDING, INC.**                        |
|------------------------------------|--------|-----------------------------------------------------------------------|
|                               |   | *Registrant*                                                          |
|                               |   |                                                                  |
| Date:                March 7, 2007 |   | /s/                Paul                H. McDowell                    |
|                               |   | Paul                H. McDowellChief                Executive Officer |

| Signature                              |   | Title                                                                                                                   | Date                         |
|----------------------------------------|--------|-------------------------------------------------------------------------------------------------------------------------|------------------------------|
|                                   |   |                                                                                                                    |                         |
| /s/Lewis                S. Ranieri     |   | Chairman                of the Board                                                                                    | March                7, 2007 |
| Lewis                S. Ranieri        |   |                                                                                                                    |
|                                   |   |                                                                                                                    |                         |
| /s/Paul                H. McDowell     |   | Chief                Executive Officer and Director(Principal                Executive Officer)                         | March                7, 2007 |
| Paul                H. McDowell        |   |                                                                                                                    |
|                                   |   |                                                                                                                    |                         |
| /s/William                R. Pollert   |   | President                and Director                                                                                   | March                7, 2007 |
| William                R. Pollert      |   |                                                                                                                    |
|                                   |   |                                                                                                                    |                         |
| /s/Shawn                P. Seale       |   | Senior                Vice President, Chief Financial Officer and Treasurer(Principal                Financial Officer) | March                7, 2007 |
| Shawn                P. Seale          |   |                                                                                                                    |
|                                   |   |                                                                                                                    |                         |
| /s/John                E. Warch        |   | Senior                Vice President and Chief Accounting Officer(Principal                Accounting Officer)          | March                7, 2007 |
| John                E. Warch           |   |                                                                                                                    |
|                                   |   |                                                                                                                    |                         |
| /s/Michael                E. Gagliardi |   | Director                                                                                                                | March                7, 2007 |
| Michael                E. Gagliardi    |   |                                                                                                                    |
|                                   |   |                                                                                                                    |                         |
| /s/Stanley                Kreitman     |   | Director                                                                                                                | March                7, 2007 |
| Stanley                Kreitman        |   |                                                                                                                    |
|                                   |   |                                                                                                                    |                         |
| /s/Jeffrey                F. Rogatz    |   | Director                                                                                                                | March                7, 2007 |
| Jeffrey                F. Rogatz       |   |                                                                                                                    |
|                                   |   |                                                                                                                    |                         |
| /s/Howard                A. Silver     |   | Director                                                                                                                | March                7, 2007 |
| Howard                A. Silver        |   |                                                                                                                    |

----