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


FORM
10-K


(Mark
One)




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


For the
fiscal year ended December 31, 2009


OR


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


For the
transition period from ____________to _____________


Commission
file number 001-32039








CAPLEASE,
INC.


(Exact
Name of Registrant as Specified in its Charter)








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


(212)
217-6300


(Registrant’s
Telephone Number, Including Area Code)




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




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








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




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




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




Indicate
by check mark whether the registrant:  (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.  Yes  x No
 ̈




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




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




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




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





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




As of
June 30, 2009, the aggregate market value of the common stock, $0.01 par
value per share, of CapLease, Inc. (“Common Stock”), held by non-affiliates
(outstanding shares, excluding shares held by executive officers and directors)
of the registrant was approximately $128 million, based upon the closing
price of $2.76 on the New York Stock Exchange on such date.




As of
February 24, 2010, there were 53,429,211 shares of Common Stock
outstanding.




DOCUMENTS
INCORPORATED BY REFERENCE




Portions
of the registrant's definitive proxy statement for the registrant's 2010 Annual
Meeting, to be filed within 120 days after the close of the registrant's
fiscal year, are incorporated by reference into Part III of this Annual
Report on Form 10-K.










TABLE
OF CONTENTS




PART
      I.
                1Item
      1.
                Business.
                1Item
      1A.
                Risk
      Factors.
                15Item
      1B.
                Unresolved
      Staff Comments.
                29Item
      2.
                Properties.
                29Item
      3.
                Legal
      Proceedings.
                30Item
      4.
                Submission
      of Matters to a Vote of Security Holders.
                30PART
      II.
                31Item
      5.
                Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities.
                31Item
      6.
                Selected
      Financial Data.
                33Item
      7.
                Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations.
                35Item
      7A.
                Quantitative
      and Qualitative Disclosures about Market Risk.
                45Item
      8.
                Financial
      Statements and Supplementary Data.
                50Item
      9.
                Changes
      in and Disagreements With Accountants on Accounting and Financial
      Disclosure.
                94Item
      9A.
                Controls
      and Procedures.
                94Item 9B.
                Other
      Information.
                94PART
      III.
                95Item
      10.
                Directors,
      Executive Officers and Corporate Governance.
                95Item
      11.
                Executive
      Compensation.
                95Item
      12.
                Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters.
                95Item
      13.
                Certain
      Relationships and Related Transactions, and Director
      Independence.
                95Item
      14.
                Principal
      Accounting Fees and Services.
                95PART
      IV.
                96Item
      15.
                Exhibits
      and Financial Statement Schedules.
                96PART
      V.
                100SIGNATURES
                100





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





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





PART
I.




Item
1.       Business.




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




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




Overview




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




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




Our
portfolio produces stable, high quality cash flows generated by long-term leases
to primarily investment grade tenants.  As of December 31, 2009, we
had an approximately $2.0 billion investment portfolio, including the following
assets by type:




Investment(1)(in thousands)
                              
                              PercentageOwned
      properties
                              
                              $
                              1,607,302
                              
                              
                              81.0
                              %Debt
      investmentsLoansLong-term
      mortgage loans
                              
                              
                              195,645
                              
                              
                              9.9
                              %Corporate
      credit notes
                              
                              
                              25,511
                              
                              
                              1.3
                              %Mezzanine
      and other investments
                              
                              
                              1,000
                              
                              
                              0.1
                              %Commercial
      mortgage loan securitizations
                              
                              
                              71,962
                              
                              
                              3.6
                              %Certificated
      mortgage loan investments
                              
                              
                              81,094
                              
                              
                              4.1
                              %Other
                              
                              
                              1,094
                              
                              
                              0.1
                              %Total
                              
                              $
                              1,983,608
                              
                              
                              100.0
                              %


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





Our
primary business objective is to generate stable, long-term and attractive
returns based on the spread between the yields generated by our assets and the
cost of financing our portfolio.  We did not make any new asset
investments during the years ended December 31, 2009 and December 31, 2008,
other than some nominal securities investments during the 2009 period through
the reinvestment feature of our CDO.  As a result of market
conditions, the focus of our portfolio activity during 2009 and 2008 was
reducing primarily recourse debt and strengthening our balance
sheet.  During this two-year period, we retired an aggregate of
$189.2 million of principal on our debt, including $106.6 million of
borrowings to Wachovia Bank.  During 2010, we expect to continue to
strengthen our balance sheet through debt repayment and/or repurchase and also
opportunistically resume portfolio growth as market conditions
permit.




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


1


Multi-Tenant
Properties




As
described above and throughout this Annual Report on Form 10-K, we invest
primarily in single tenant commercial real estate assets.  However, as
a result of lease non-renewals or lease terminations, we have classified three
properties as “multi-tenant properties,” as each has either become or we expect
will become over time no longer leased primarily by a single
tenant.  The first property is located in Johnston, Rhode Island, was
leased to Factory Mutual Insurance Company until October 31, 2009, and is now
vacant.  The other two properties are located in Omaha, Nebraska and
were formerly leased to Qwest Corporation.  As described in greater
detail below, on December 31, 2009, we agreed to terminate our leases with Qwest
and we assumed the existing subleases which had been entered into by
Qwest.  We refer to these three properties as the “Multi-Tenant
Properties” in this Form 10-K and have excluded them from certain of our
statistical measures.  When we refer to our “Single Tenant Portfolio”
in this Form 10-K, we mean our entire portfolio (e.g., all owned properties,
loans and securities) other than the three Multi-Tenant Properties, and when we
refer to our “Single Tenant Owned Property Portfolio” in this Form 10-K, we mean
our owned property portfolio other than the three Multi-Tenant
Properties.




Investment
Strategy




We focus
on the following core business strategies:




·
            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, 2009, approximately 91% of our
      Single Tenant Portfolio was invested in properties leased to investment
      grade or implied investment grade tenants and the weighted average
      underlying tenant credit rating on our Single Tenant Portfolio was
      A-.  Further, our top ten tenant exposures, which comprise
      approximately 50% of our entire portfolio, were all rated investment grade
      or implied investment grade and had a weighted average credit rating of
      A+.  As of December 31, 2009, our Single Tenant Portfolio had
      the following credit
characteristics:




Credit Rating(1)
      (2)
                        
                        Investment
                          (in
      thousands)
                        
                        
                        PercentageInvestment
      grade rating of A- or A3 and above
                        
                        $
                        790,873
                        
                        
                        
                        41.7
                        %Investment
      grade rating of below A- or A3
                        
                        
                        695,209
                        
                        
                        
                        36.7
                        %Implied
      investment grade rating
                        
                        
                        247,101
                        
                        
                        
                        13.0
                        %Non-investment
      grade rating
                        
                        
                        161,300
                        
                        
                        
                        8.5
                        %Unrated
      (3)
                        
                        
                        1,652
                        
                        
                        
                        0.1
                        %$
                        1,896,135
                        
                        
                        
                        100.00
                        %




(1)
            Reflects
      the tenant’s or lease guarantor’s actual or implied S&P rating or
      equivalent rating if rated only by Moody’s, or in the case of our CMBS
      securities, actual ratings of the securities.  In addition to
      the Multi-Tenant Properties, table does not include a development property
      with a total investment of $1,025.




(2)
            Four
      of our owned real properties within the Single Tenant Owned Property
      Portfolio where our aggregate investment is $269,124 are leased to more
      than one tenant and, for purposes of determining the underlying tenant’s
      credit rating on these properties, we have considered the credit rating of
      only our primary tenant.




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




·
            Long-Term Assets Held for
      Investment.  We invest in commercial real estate assets
      subject to long-term leases.  As of December 31, 2009, the
      weighted average underlying tenant remaining lease term on our Single
      Tenant Portfolio was approximately 9 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 may selectively sell assets,
      particularly the Multi-Tenant Assets.  During 2009, we began
      selectively selling assets in order to enable us to continue to reduce our
      debt and strengthen our liquidity position, and we may continue to do so
      in 2010.




·
            Flexible Investment
      Approach.  We have the expertise and ability to invest at
      all levels of the capital structure of primarily single tenant
      properties.  Owned properties comprise approximately 81% of our
      current portfolio, and our target is to maintain a portfolio mix of 75% to
      90% owned real estate, and 10% to 25% mortgage loans and other debt
      investments.  For properties that we own, in addition to high
      quality tenant credit quality, we also seek to invest in strong real
      estate locations that will appreciate in value over
  time.




2


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




·
            Finance with Long-Term, Fixed
      Rate, Non-Recourse Debt.  We seek to borrow against, or
      finance, our assets with long-term, fixed rate, non-recourse debt,
      effectively locking in the spread we expect to generate on our assets and
      isolating the default risk to solely the asset or assets
      financed.  Our financing strategy allows us to invest in a
      greater number of assets and enhance our asset returns.  As a
      result of market conditions, the focus of our portfolio activity during
      2009 and 2008 was reducing primarily recourse debt and strengthening our
      balance sheet.  During this two-year period, we retired an
      aggregate of $189.2 million of principal on our debt, including
      $106.6 million of borrowings to Wachovia Bank.  During
      2010, we expect to continue to strengthen our balance sheet through debt
      repayment and/or repurchase and also opportunistically resume portfolio
      growth as market conditions permit.




Our
Competitive Strengths




·
            Established Investment and
      Portfolio Management Capabilities.  We have an
      experienced in-house team of investment professionals that source,
      structure, underwrite and close our transactions. In addition, we have
      developed an extensive national network of property owners, investment
      sale brokers, tenants, borrowers, mortgage brokers, lenders, institutional
      investors and other market participants that helps us to identify and
      evaluate a variety of single tenant investment
      opportunities.    Our senior management team is
      comprised of individuals with expertise in commercial real estate, credit
      capital markets, asset management and
legal.




·
            Experienced Senior Management
      Team.  Our senior management team has worked together for
      more than 15 years.  Over this period, we have built and
      maintain today a strong credit philosophy and underwriting
      discipline.  Since our initial public offering in March 2004, we
      have purchased $1.6 billion of single tenant properties.  Since
      1996, we have originated and underwritten more than $4.0 billion in single
      tenant transactions, involving more than 500 properties with more than 100
      underlying tenants.




·
            Financing
      Expertise.  We have substantial experience in financing
      single tenant assets.  We have developed and continue to enhance
      financing structures that have enabled us to efficiently finance a portion
      of our owned properties through term loan and securitization
      transactions.  These financing structures enable us to enhance
      the returns on our portfolio without reducing credit quality in search of
      yield.




·
            Market
      Expertise.  We have recognized expertise in the net lease
      marketplace.  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 finance a portion of
      our owned property investments.  We developed the specialized
      lease enhancement mechanisms that are utilized in net lease lending
      transactions.




Our
Portfolio




Owned
Properties




Owned
properties comprise approximately 81% of our current portfolio.  All
of our owned properties have been acquired since the closing of our initial
public offering.  We invest in most commercial property types (e.g.,
office, warehouse, GSA and retail), and our investment underwriting includes an
analysis of the credit quality of the underlying tenant and the strength of the
related lease.  We also analyze the property’s real estate
fundamentals, including location and type of the property, vacancy rates and
trends in vacancy rates in the property’s market, rental rates within the
property’s market, recent sales prices and demographics in the property’s
market.  We believe that over time, the value of our owned real estate
will appreciate.  For more detail on our underwriting process, please
see “Underwriting Process” below.  We target properties that have one
or more of the following characteristics:




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




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




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




·
            core
      facility of the tenant.




As of
December 31, 2009, we had an approximately $1.6 billion owned property
portfolio.  We believe the strength of this portfolio is exhibited by
the following:




·
            approximately
      10.4 million rentable square feet with 95.4%
  occupancy;




3


·
            61
      properties in 25 states and leases with 31 different tenants across the
      Single Tenant Owned Property
Portfolio;




·
            no
      tenant represents more than five percent of our entire portfolio, except
      Nestlé Holdings, Inc. at 10.0% and the United States Government at
      9.7%;




·
            97%
      investment grade or implied investment grade tenants in the Single Tenant
      Owned Property Portfolio;




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




·
            weighted
      average remaining lease term of approximately 8 years in the Single Tenant
      Owned Property Portfolio; and




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




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




2009
                    
                    
                    2008
                    
                    
                    2007Occupancy
      rate
                    
                    
                    95.4
                    %
                    
                    
                    99.9
                    %
                    
                    
                    99.8
                    %Average
      annual rent per square foot
                    
                    $
                    12.86
                    
                    
                    $
                    12.56
                    
                    
                    $
                    12.06





Property Type
Diversification




The
following pie chart summarizes the property types comprising our owned property
portfolio as of December 31, 2009.









4


Tenant Industry
Diversification




The
following table sets forth certain information regarding the tenant industry
concentrations in our owned property portfolio as of December 31,
2009.




Industry
                                    
                                    Number of Tenants
                                    
                                    
                                    Weighted AverageCredit Rating (1)
                                    
                                    
                                    Investment (2)(in thousands)
                                    
                                    
                                    Percent of TotalInsurance
                                    
                                    
                                    9
                                    
                                    
                                    A
                                    
                                    
                                    $
                                    300,573
                                    
                                    
                                    
                                    19.4
                                    %Food
      & Beverage
                                    
                                    
                                    3
                                    
                                    
                                    AA-
                                    
                                    
                                    
                                    258,724
                                    
                                    
                                    
                                    16.7
                                    %Government
                                    
                                    
                                    2
                                    
                                    
                                    AAA
                                    
                                    
                                    
                                    209,243
                                    
                                    
                                    
                                    13.5
                                    %Financial
                                    
                                    
                                    5
                                    
                                    
                                    BBB-
                                    
                                    
                                    
                                    146,145
                                    
                                    
                                    
                                    9.4
                                    %Grocery
                                    
                                    
                                    2
                                    
                                    
                                    BBB
                                    
                                    
                                    
                                    108,986
                                    
                                    
                                    
                                    7.0
                                    %Retail
      Department Stores
                                    
                                    
                                    1
                                    
                                    
                                    A
                                    
                                    
                                    
                                    93,016
                                    
                                    
                                    
                                    6.0
                                    %Retail
      Jewelry
                                    
                                    
                                    1
                                    
                                    
                                    A-
                                    
                                    
                                    
                                    77,640
                                    
                                    
                                    
                                    5.0
                                    %Engineering
                                    
                                    
                                    3
                                    
                                    
                                    BBB+
                                    
                                    
                                    
                                    57,560
                                    
                                    
                                    
                                    3.7
                                    %Building
      Materials
                                    
                                    
                                    1
                                    
                                    
                                    A+
                                    
                                    
                                    
                                    52,874
                                    
                                    
                                    
                                    3.4
                                    %Healthcare
                                    
                                    
                                    3
                                    
                                    
                                    AA-
                                    
                                    
                                    
                                    49,084
                                    
                                    
                                    
                                    3.2
                                    %Communications
                                    
                                    
                                    2
                                    
                                    
                                    BBB+
                                    
                                    
                                    
                                    47,499
                                    
                                    
                                    
                                    3.1
                                    %Hotel
                                    
                                    
                                    1
                                    
                                    
                                    BBB
                                    
                                    
                                    
                                    46,424
                                    
                                    
                                    
                                    3.0
                                    %Automotive
                                    
                                    
                                    1
                                    
                                    
                                    BBB
                                    
                                    
                                    
                                    27,266
                                    
                                    
                                    
                                    1.8
                                    %Retail
      Drug
                                    
                                    
                                    2
                                    
                                    
                                    A-
                                    
                                    
                                    
                                    21,720
                                    
                                    
                                    
                                    1.4
                                    %Publishing
                                    
                                    
                                    1
                                    
                                    
                                    BBB+
                                    
                                    
                                    
                                    20,837
                                    
                                    
                                    
                                    1.3
                                    %Telecommunications
                                    
                                    
                                    1
                                    
                                    
                                    BBB+
                                    
                                    
                                    
                                    16,250
                                    
                                    
                                    
                                    1.0
                                    %Other
                                    
                                    
                                    9
                                    
                                    
                                    NR
                                    
                                    
                                    
                                    17,231
                                    
                                    
                                    
                                    1.1
                                    %Total
                                    
                                    
                                    47
                                    
                                    
                                    A
                                    
                                    
                                    $
                                    1,551,072
                                    
                                    
                                    
                                    100.0
                                    %




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




(2)
            Does
      not include our Johnston, Rhode Island property or development property in
      Simi Valley, California neither of which is currently occupied by a
      tenant. Also does not include a portion of our investment attributed to
      vacant space in the Omaha, Nebraska
properties.




5


Geographic
Diversification




The
following table sets forth certain information regarding the top twenty states
where our owned properties are located as of December 31, 2009.




State
                    
                    Number of
                      Properties
                    
                    
                    Investment
                      (inthousands)
                    
                    
                    Percent of TotalPennsylvania
                    
                    
                    4
                    
                    
                    $
                    205,937
                    
                    
                    
                    12.8
                    %California
                    
                    
                    7
                    
                    
                    
                    202,474
                    
                    
                    
                    12.6
                    %New
      Jersey
                    
                    
                    3
                    
                    
                    
                    131,123
                    
                    
                    
                    8.2
                    %Maryland
                    
                    
                    4
                    
                    
                    
                    128,292
                    
                    
                    
                    8.0
                    %Texas
                    
                    
                    5
                    
                    
                    
                    110,166
                    
                    
                    
                    6.9
                    %Illinois
                    
                    
                    2
                    
                    
                    
                    108,320
                    
                    
                    
                    6.7
                    %Virginia
                    
                    
                    3
                    
                    
                    
                    90,049
                    
                    
                    
                    5.6
                    %Colorado
                    
                    
                    2
                    
                    
                    
                    69,975
                    
                    
                    
                    4.4
                    %Indiana
                    
                    
                    2
                    
                    
                    
                    58,915
                    
                    
                    
                    3.7
                    %Kansas
                    
                    
                    3
                    
                    
                    
                    54,143
                    
                    
                    
                    3.4
                    %Nebraska
                    
                    
                    2
                    
                    
                    
                    43,492
                    
                    
                    
                    2.7
                    %Rhode
      Island
                    
                    
                    1
                    
                    
                    
                    42,956
                    
                    
                    
                    2.7
                    %Washington
                    
                    
                    1
                    
                    
                    
                    39,612
                    
                    
                    
                    2.5
                    %Alabama
                    
                    
                    2
                    
                    
                    
                    39,221
                    
                    
                    
                    2.4
                    %Connecticut
                    
                    
                    1
                    
                    
                    
                    37,685
                    
                    
                    
                    2.3
                    %Georgia
                    
                    
                    4
                    
                    
                    
                    36,348
                    
                    
                    
                    2.3
                    %Tennessee
                    
                    
                    3
                    
                    
                    
                    34,169
                    
                    
                    
                    2.1
                    %Kentucky
                    
                    
                    5
                    
                    
                    
                    33,614
                    
                    
                    
                    2.1
                    %Wisconsin
                    
                    
                    1
                    
                    
                    
                    29,165
                    
                    
                    
                    1.8
                    %Florida
                    
                    
                    1
                    
                    
                    
                    27,266
                    
                    
                    
                    1.7
                    %Other
                    
                    
                    5
                    
                    
                    
                    84,380
                    
                    
                    
                    5.2
                    %Total
                    
                    
                    61
                    
                    
                    $
                    1,607,302
                    
                    
                    
                    100.0
                    %




Lease
Expirations




The
following table sets forth certain information regarding scheduled lease
expirations in our owned property portfolio as of December 31,
2009.




Year
      of Lease
                      Expiration
                    
                    Number
      of
                      Expiring
                      Leases
      (1)
                    
                    
                    Square
      Feet
                      Subject
      to
                      Expiring
      Lease
                    
                    
                    2009
      Actual
                      Annual
      Rent
                      (inthousands)
                    
                    
                    Percent
                      of AnnualRent (2)2010
                    
                    
                    18
                    (3)
                    
                    
                    237,899
                    
                    
                    $
                    4,064
                    
                    
                    
                    3.5
                    %2011
                    
                    
                    1
                    
                    
                    
                    130,000
                    
                    
                    
                    6,044
                    
                    
                    
                    5.1
                    %2012
                    
                    
                    17
                    (4)
                    
                    
                    2,822,437
                    
                    
                    
                    20,019
                    
                    
                    
                    17.0
                    %2013
                    
                    
                    16
                    (5)
                    
                    
                    333,284
                    
                    
                    
                    6,595
                    
                    
                    
                    5.6
                    %2014
                    
                    
                    1
                    
                    
                    
                    88,420
                    
                    
                    
                    769
                    
                    
                    
                    0.7
                    %2015
                    
                    
                    5
                    
                    
                    
                    598,039
                    
                    
                    
                    8,109
                    
                    
                    
                    6.9
                    %2016
                    
                    
                    8
                    
                    
                    
                    1,127,586
                    
                    
                    
                    13,382
                    
                    
                    
                    11.4
                    %2017
                    
                    
                    11
                    
                    
                    
                    1,122,727
                    
                    
                    
                    15,675
                    
                    
                    
                    13.3
                    %2018
                    
                    
                    2
                    
                    
                    
                    112,089
                    
                    
                    
                    1,668
                    
                    
                    
                    1.4
                    %2019
                    
                    
                    2
                    
                    
                    
                    189,993
                    
                    
                    
                    5,556
                    
                    
                    
                    4.7
                    %Thereafter
                    
                    
                    14
                    
                    
                    
                    3,156,332
                    
                    
                    
                    35,589
                    
                    
                    
                    30.3
                    %




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




(2)  Represents
lease expiration dates as a percentage of 2009 actual annual rent on all
properties other than the Johnston, Rhode Island property which is currently
vacant.




(3)  90%
of the leases expiring in 2010 (by square footage) represent two properties in
Omaha, Nebraska formerly leased to Qwest Corporation.




(4)  97%
of the leases expiring in 2012 (by square footage) represent Nestle Properties
and the US Government (NIH) property.




(5)  96%
of the leases expiring in 2013 (by square footage) represent the Choice property
in Silver Spring, MD and Omnicom property in Irving, Texas.


6


The
following is a tabular presentation of our owned property portfolio as of
December 31, 2009:




(in
      thousands)Tenant
      or Guarantor
              
              Location
              
              Property
                Type
              
              Square
                Feet
              
              
              Purchase
      Date
              
              
              Lease
      Maturity (1)
              
              Form
      of Ownership
              
              2010
      Estimated Annual Rent (2)
              
              
              Purchase
                Price
              
              
              Investment
      (3)Abbott
      Laboratories
              
              6480
      Busch Blvd, Columbus, OH
              
              Office
              
              
              111,776
              
              
              
              11/2004
              
              
              
              10/2016
              
              Fee
              
              $
              1,010
              
              
              $
              12,025
              
              
              $
              12,065Abbott
      Laboratories
              
              1850
      Norman Drive North, Waukegan, IL
              
              Office
              
              
              131,341
              
              
              
              8/2005
              
              
              
              8/2017
              
              Fee
              
              
              1,539
              
              
              
              20,325
              
              
              
              20,362Aetna
      Life Insurance Company
              
              1333
      - 1385 East Shaw Avenue, Fresno, CA
              
              Office
              
              
              122,605
              
              
              
              10/2006
              
              
              
              11/2016
              
              Fee
              
              
              1,770
              
              
              
              24,255
              
              
              
              25,688Allstate
      Insurance Company
              
              401
      McCullough Drive, Charlotte, NC
              
              Office
              
              
              191,681
              
              
              
              12/2005
              
              
              
              12/2015
              
              Fee
              
              
              2,063
              
              
              
              27,172
              
              
              
              27,236Allstate
      Insurance Company
              
              1819
      Electric Road (aka State Hwy. 419), Roanoke, VA
              
              Office
              
              
              165,808
              
              
              
              12/2005
              
              
              
              12/2015
              
              Fee
              
              
              2,196
              
              
              
              28,928
              
              
              
              28,935AmeriCredit
      Corp.
              
              4001
      Embarcadero Drive, Arlington, TX
              
              Office
              
              
              246,060
              
              
              
              12/2006
              
              
              
              8/2017
              
              Fee
              
              
              3,146
              
              
              
              43,000
              
              
              
              43,374AMVESCAP
      PLC
              
              4340,
      4346 & 4350 South Monaco St., Denver, CO
              
              Office
              
              
              263,770
              
              
              
              3/2006
              
              
              
              10/2016
              
              Fee
              
              
              5,197
              
              
              
              69,300
              
              
              
              69,975Aon
      Corporation (4)
              
              1000
      Milwaukee Ave, Glenview, IL
              
              Office
              
              
              412,409
              
              
              
              8/2004
              
              
              
              4/2017
              
              Fee
              
              
              6,975
              
              
              
              85,750
              
              
              
              87,958Baxter
      International, Inc.
              
              555
      North Daniels Way, Bloomington, IN
              
              Warehouse
              
              
              125,500
              
              
              
              10/2004
              
              
              
              9/2016
              
              Fee
              
              
              790
              
              
              
              10,500
              
              
              
              10,779Bunge
      North America, Inc.
              
              6700
      Snowden Road, Fort Worth, TX
              
              Industrial
              
              
              107,520
              
              
              
              4/2007
              
              
              
              4/2026
              
              Fee
              
              
              623
              
              
              
              10,100
              
              
              
              10,268Cadbury
      Schweppes Plc
              
              945
      Route 10, Whippany, NJ
              
              Office
              
              
              149,475
              
              
              
              1/2005
              
              
              
              3/2021
              
              Fee
              
              
              3,655
              
              
              
              48,000
              
              
              
              50,231Capital
      One Financial Corporation
              
              3905
      N. Dallas Parkway, Plano, TX
              
              Office
              
              
              159,000
              
              
              
              6/2005
              
              
              
              2/2015
              
              Fee
              
              
              2,207
              
              
              
              27,900
              
              
              
              31,175Choice
      Hotels International, Inc. (5)
              
              10720,
      10750 & 10770 Columbia Pike, Silver Spring, MD
              
              Office
              
              
              223,912
              
              
              
              11/2004
              
              
              
              5/2013
              
              Fee
              
              
              5,315
              
              
              
              43,500
              
              
              
              46,424County
      of Yolo, California
              
              25
      North Cottonwood Street, Woodland, CA
              
              Office
              
              
              63,000
              
              
              
              1/2007
              
              
              
              6/2023
              
              Fee
              
              
              1,023
              
              
              
              16,400
              
              
              
              16,857Crozer-Keystone
      Health System
              
              8
      Morton Avenue, Ridley, PA
              
              Medical
      Office
              
              
              22,708
              
              
              
              8/2004
              
              
              
              4/2019
              
              Ground
      Lease
              
              
              435
              
              
              
              4,477
              
              
              
              5,879CVS
      Corporation
              
              100
      Mazzeo Drive, Randolph, MA
              
              Retail
              
              
              88,420
              
              
              
              9/2004
              
              
              
              1/2014
              
              Fee
              
              
              771
              
              
              
              10,450
              
              
              
              14,101Farmers
      Group, Inc.
              
              3039-3041
      Cochran Street, Simi Valley, CA
              
              Office
              
              
              271,000
              
              
              
              1/2007
              
              
              
              1/2017
              
              Fee
              
              
              3,009
              
              
              
              41,812
              
              
              
              41,879Farmers
      New World Life Insurance Company
              
              3003
      77th Avenue Southeast, Mercer Island, WA
              
              Office
              
              
              155,200
              
              
              
              12/2005
              
              
              
              12/2020
              
              Fee
              
              
              2,595
              
              
              
              39,550
              
              
              
              39,612ITT
      Industries, Inc.
              
              12975
      Worldgate Drive, Herndon, VA
              
              Office
              
              
              167,285
              
              
              
              5/2005
              
              
              
              3/2019
              
              Fee
              
              
              5,258
              
              
              
              46,081
              
              
              
              56,747Johnson
      Controls, Inc.
              
              6750
      Bryan Dairy Road, Largo, FL
              
              Warehouse
              
              
              307,275
              
              
              
              12/2006
              
              
              
              8/2016
              
              Fee
              
              
              2,035
              
              
              
              27,000
              
              
              
              27,266Koninklijke
      Ahold, N.V.
              
              4001
      New Falls Road, Levittown, PA
              
              Retail
              
              
              70,020
              
              
              
              6/2006
              
              
              
              4/2026
              
              Fee
              
              
              1,439
              
              
              
              18,575
              
              
              
              21,104Lowes
      Companies, Inc. (6)
              
              26501
      Aliso Creek Rd., Aliso Viejo, CA
              
              Retail
              
              
              181,160
              
              
              
              5/2005
              
              
              
              8/2024
              
              Fee
              
              
              3,441
              
              
              
              52,860
              
              
              
              52,874Multi-Tenant
              
              1299
      Farnam Street, Omaha, NE
              
              Office
              
              
              291,020
              
              
              
              4/2007
              
              
              Various
              
              Estate
      for
                Years
              
              
              1,520
              
              
              
              30,097
              
              
              
              31,866Multi-Tenant
              
              9394
      West Dodge Road, Omaha, NE
              
              Office
              
              
              127,825
              
              
              
              4/2007
              
              
              
              6/2010
              
              Estate
      for Years
              
              
              931
              
              
              
              10,785
              
              
              
              11,626Multi-Tenant
      (currently vacant)
              
              1301
      Atwood Avenue, Johnston, RI
              
              Office
              
              
              345,842
              
              
              
              4/2007
              
              
              
              N/A
              
              Ground
      Lease
              
              
              –
              
              
              
              55,443
              
              
              
              42,956N/A
      (Development Property)
              
              2423
      Galena Avenue, Simi Valley, CA
              
              Undeveloped
      Land
              
              
              N/A
              
              
              
              5/2007
              
              
              
              N/A
              
              Fee
              
              
              –
              
              
              
              1,000
              
              
              
              1,025Nestle
      Holdings, Inc.
              
              555
      Nestle Way, Breinigsville, PA
              
              Warehouse
              
              
              1,045,150
              
              
              
              4/2007
              
              
              
              12/2012
              
              Estate
      for Years
              
              
              6,301
              
              
              
              74,215
              
              
              
              85,938Nestle
      Holdings, Inc.
              
              2909
      Pleasant Center Road, Fort Wayne, IN
              
              Warehouse
              
              
              764,177
              
              
              
              4/2007
              
              
              
              12/2012
              
              Estate
      for Years
              
              
              3,762
              
              
              
              43,837
              
              
              
              48,136Nestle
      Holdings, Inc.
              
              2
      Nestle Way, Lathrop, CA
              
              Warehouse
              
              
              751,021
              
              
              
              4/2007
              
              
              
              12/2012
              
              Estate
      for Years
              
              
              4,007
              
              
              
              52,357
              
              
              
              64,151Omnicom
      Group, Inc.
              
              1660
      North Westridge Circle, Irving, TX
              
              Office
              
              
              101,120
              
              
              
              6/2005
              
              
              
              5/2013
              
              Fee
              
              
              1,409
              
              
              
              18,100
              
              
              
              18,333Pearson
      Plc.
              
              3833
      Greenway and 2201 Noria Road, Lawrence, KS
              
              Office
              
              
              194,665
              
              
              
              4/2006
              
              
              
              4/2021
              
              Fee
              
              
              1,455
              
              
              
              20,750
              
              
              
              20,837T-Mobile
      USA, Inc.
              
              695
      Grassmere Park, Nashville, TN
              
              Office
              
              
              69,287
              
              
              
              11/2006
              
              
              
              1/2017
              
              Fee
              
              
              1,378
              
              
              
              16,195
              
              
              
              16,250The
      Kroger Co.
              
              Various
      locations in KY (five), GA (four), and TN (two)
              
              Retail
              
              
              685,135
              
              
              
              4/2007
              
              
              
              1/2022
              
              Estate
      for Years
              
              
              5,056
              
              
              
              64,037
              
              
              
              87,882The
      Travelers Corporation
              
              200
      Constitution Plaza, Hartford, CT
              
              Office
              
              
              130,000
              
              
              
              4/2007
              
              
              
              10/2011
              
              Fee
              
              
              6,162
              
              
              
              33,628
              
              
              
              37,685Tiffany
      & Co.
              
              15
      Sylvan Way, Parsippany, NJ
              
              Office/Warehouse
              
              
              367,740
              
              
              
              9/2005
              
              
              
              9/2025
              
              Fee
              
              
              4,705
              
              
              
              75,000
              
              
              
              77,640Time
      Warner Entertainment Company, L.P.
              
              1320
      North  Dr. Martin Luther King Jr. Drive, Milwaukee,
      WI
              
              Office
              
              
              154,849
              
              
              
              11/2006
              
              
              
              12/2016
              
              Fee
              
              
              1,865
              
              
              
              28,530
              
              
              
              29,165TJX
      Companies, Inc.
              
              2760
      Red Lion Road, Philadelphia, PA
              
              Warehouse
              
              
              1,015,500
              
              
              
              3/2006
              
              
              
              6/2021
              
              Fee
              
              
              6,215
              
              
              
              90,125
              
              
              
              93,016United
      States Government (DEA)
              
              1003
      17th Street North, Birmingham, AL
              
              GSA
      (US Government)
              
              
              35,616
              
              
              
              8/2005
              
              
              
              12/2020
              
              Fee
              
              
              1,297
              
              
              
              13,369
              
              
              
              13,422United
      States Government (EPA)
              
              300
      Minnesota Avenue, Kansas City, KS
              
              GSA
      (US Government)
              
              
              71,979
              
              
              
              8/2005
              
              
              
              3/2023
              
              Fee
              
              
              2,652
              
              
              
              29,250
              
              
              
              33,306United
      States Government (FBI)
              
              200
      McCarty Avenue, Albany, NY
              
              GSA
      (US Government)
              
              
              98,184
              
              
              
              10/2006
              
              
              
              9/2018
              
              Fee
              
              
              1,312
              
              
              
              16,350
              
              
              
              17,217United
      States Government (FBI)
              
              1100
      18th Street, North, Birmingham, AL
              
              GSA
      (US Government)
              
              
              96,278
              
              
              
              8/2005
              
              
              
              4/2020
              
              Fee
              
              
              2,770
              
              
              
              21,850
              
              
              
              25,799United
      States Government (NIH) (7)
              
              6116
      Executive Bvd, N. Bethesda, MD
              
              GSA
      (US Government)
              
              
              207,055
              
              
              
              9/2005
              
              
              
              5/2012
              
              Fee
              
              
              7,404
              
              
              
              81,500
              
              
              
              81,868United
      States Government (SSA)
              
              1029
      Camino La Costa, Austin, TX
              
              GSA
      (US Government)
              
              
              23,311
              
              
              
              8/2005
              
              
              
              2/2016
              
              Fee
              
              
              710
              
              
              
              6,900
              
              
              
              7,016United
      States Government (VA)
              
              Lot
      37, Santiago De los Caballeros Avenue, Ponce, PR
              
              GSA
      (US Government)
              
              
              56,500
              
              
              
              11/2004
              
              
              
              2/2015
              
              Fee
              
              
              1,300
              
              
              
              13,218
              
              
              
              13,758Walgreen
      Co.
              
              4601
      Westfield Avenue, Pennsauken, NJ
              
              Retail
      Drug
              
              
              18,500
              
              
              
              11/2004
              
              
              
              10/2016
              
              Fee
              
              
              297
              
              
              
              3,089
              
              
              
              3,252Walgreen
      Co.
              
              700
      Frederick Blvd, Portsmouth, VA
              
              Retail
      Drug
              
              
              13,905
              
              
              
              11/2004
              
              
              
              7/2018
              
              Fee
              
              
              354
              
              
              
              4,167
              
              
              
              4,369Total
              
              
              
              
              
              
              10,401,584
              
              
              
              
              
              
              
              
              
              
              
              $
              119,354
              
              
              $
              1,511,752
              
              
              $
              1,607,302




(1)
            Except
      in the case of our Multi-Tenant Properties, includes lease maturity for
      our primary tenant.  Four of our owned properties within the
      Single Tenant Owned Property Portfolio are leased to more than one tenant
      (see footnotes (4) through (7)
below).




(2)
            Reflects
      scheduled base rent due for 2010 under our lease with the tenant or
      tenants.  Does not reflect straight-line rent adjustments
      required under generally accepted accounting principles
      (“GAAP”).  Also does not include expense recoveries or above or
      below market rent amortization adjustments required by
    GAAP.




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




(4)
            As
      of December 31, 2009, approximately 2% of the property was leased to one
      other tenant.




(5)
            As
      of December 31, 2009, approximately 22% of the property was leased to six
      other tenants.




(6)
            As
      of December 31, 2009, approximately 18% of the property was leased to two
      other tenants.




(7)
            As
      of December 31, 2009, approximately 6% of the property was leased to three
      other tenants.





Estate for Years and Ground
Leased Properties





With
respect to certain of our owned properties, we own the improvements on the land
and control the land through an estate for years with an option to enter into a
ground lease at the expiration of the estate for years (Nestlé, Kroger and
Omaha, Nebraska properties).  For each of these properties, we also
have an option to purchase the land at the expiration of the estate for years
and on the last day of the primary term and each renewal term of the ground
lease for fair market value.  If we exercise the purchase option, the
fair market value will be agreed to by us and the seller or if the parties
cannot agree determined through an appraisal process.  For two of our
owned properties, we own the improvements on the land and control the land
through a ground lease (Crozer-Keystone Health System and vacant property in
Johnston, Rhode Island).  We can transfer our interest in all of these
properties at any time and our interest in all of these properties will revert
to the land owner at the expiration of the ground lease estate unless we have
purchased the land or extended the leasehold estate.  The approximate
duration of our interest in these properties assuming the full estate for years
term, if any, and all ground lease options are exercised, is as follows: Nestlé
properties, 63 years; Kroger properties, 72 years; Omaha, Nebraska properties,
66 years; Crozer-Keystone Health System property, 37 years; and Johnston, Rhode
Island property, 50 years.




Multi-Tenant
Properties




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


7


With
respect to the property in Johnston, Rhode Island, the tenant vacated the
property on October 31, 2009, and the building is now vacant.  We are
actively marketing the building to prospective tenants.  We expect to
re-let this property over time on a multi-tenant basis.




With
respect to the two properties in Omaha, Nebraska, they have become or are in the
process of becoming multi-tenant assets, as we agreed at December 31, 2009 to
terminate the lease on each building with Qwest Corporation and we assumed the
existing subleases which had been entered into by Qwest and which expire in June
2010.  We believe the lease termination transaction with Qwest
provides us with the following benefits:




·
            It
      is expected to have a positive impact on the cash rent we collect from the
      properties, as the rent under the various subleases exceeds that under our
      leases with Qwest.




·
            It
      enabled us to secure immediate control of the properties, thus putting us
      in a stronger position to retain the existing subtenants and lease up
      vacant space prior to the scheduled lease maturity in June
      2010.




·
            It
      allowed us to settle Qwest’s end-of-lease obligations on favorable terms
      without a protracted dispute with
Qwest.




The
larger property in Omaha comprises about 291,020 square feet and is now
approximately 67% occupied by 14 different tenants.  The smaller
property comprises about 127,825 square feet and is now approximately 85%
occupied by two different tenants.  We are actively working to retain
the existing tenants and lease up vacant space in both buildings.




Loan
Investments




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




Long-Term Mortgage
Loans.  We make long-term fully or nearly fully amortizing
loans secured by first mortgages on properties subject to long-term net leases
(typically at least 15 years).  As of December 31, 2009, our portfolio
included $195.6 million of long-term mortgage loans.




Corporate Credit
Notes.  Our corporate credit notes represent one of two notes
comprising a single first mortgage loan on a net lease
property.  Through a process we have patented, we allocate the loan
cash flows and establish priorities to the collateral among the two
notes.  The corporate credit note will generally range from 10% to 20%
of the full loan amount, is fully amortizing and has a junior claim on the real
estate mortgage, but a senior claim on the rents in the event of a tenant
bankruptcy and lease rejection.  We retain the corporate credit note
in our portfolio and typically sell the related real estate note to a third
party.  As of December 31, 2009, our portfolio included $25.5 million
of corporate credit notes.




Mezzanine and Other
Investments.  We also offer a variety of other loan and loan
type products primarily to owners of single tenant properties, including
mezzanine loans, bridge loans, development loans and preferred equity
financings.  These investments are typically shorter term in nature
and are often subordinate to other financing.  Our only mezzanine
investment as of December 31, 2009 was $1.4 million of remaining principal
on our indirect investment in franchise loans to YUM! Brands, Inc.
franchisees.




As of
December 31, 2009, we had an approximately $222.2 million loan
portfolio.  We believe the strength of our loan portfolio is exhibited
by the following:




·
            weighted
      average remaining lease term on the underlying leases of approximately 17
      years;




·
            89%
      investment grade or implied investment grade underlying
      tenants;




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




·
            weighted
      average underlying tenant credit rating of
BBB+.




8


The
following is a tabular presentation of our loan portfolio as of December 31,
2009:




(in thousands)Tenant or Guarantor
                                              
                                              Location
                                              
                                              Property Type
                                              
                                              Square Feet
                                              
                                              
                                              Coupon
                                              
                                              
                                              Lease
                                                Expiration
                                              
                                              
                                              Loan
                                                Maturity
                                              
                                              
                                              Original
                                                Principal
                                                Balance
                                              
                                              
                                              Principal
                                                Balance
                                              
                                              
                                              Carry Value
                                              
                                              
                                              Loan to Realty
                                                Value (1)Long-Term Mortgage
      LoansAutozone,
      Inc.
                                              
                                              Douglas
      and Valdosta, GA
                                              
                                              Retail
                                              
                                              
                                              13,383
                                              
                                              
                                              
                                              6.50
                                              %
                                              
                                              
                                              4/2024
                                              
                                              
                                              
                                              11/2022
                                              
                                              
                                              $
                                              2,108
                                              
                                              
                                              $
                                              1,739
                                              
                                              
                                              $
                                              1,739
                                              
                                              
                                              
                                              64
                                              %Bank
      of America, N.A.
                                              
                                              Glenview,
      IL
                                              
                                              Bank
      Branch
                                              
                                              
                                              4,500
                                              
                                              
                                              
                                              6.34
                                              %
                                              
                                              
                                              12/2028
                                              
                                              
                                              
                                              12/2028
                                              
                                              
                                              
                                              4,317
                                              
                                              
                                              
                                              4,273
                                              
                                              
                                              
                                              4,273
                                              
                                              
                                              
                                              75
                                              %Bank
      of America, N.A.
                                              
                                              Mt.
      Airy, MD
                                              
                                              Bank
      Branch
                                              
                                              
                                              4,500
                                              
                                              
                                              
                                              6.42
                                              %
                                              
                                              
                                              12/2026
                                              
                                              
                                              
                                              12/2026
                                              
                                              
                                              
                                              3,469
                                              
                                              
                                              
                                              3,310
                                              
                                              
                                              
                                              3,310
                                              
                                              
                                              
                                              75
                                              %Best
      Buy Co., Inc.
                                              
                                              Chicago,
      IL
                                              
                                              Retail
                                              
                                              
                                              45,720
                                              
                                              
                                              
                                              6.40
                                              %
                                              
                                              
                                              3/2025
                                              
                                              
                                              
                                              3/2025
                                              
                                              
                                              
                                              18,522
                                              
                                              
                                              
                                              17,062
                                              
                                              
                                              
                                              17,062
                                              
                                              
                                              
                                              88
                                              %City
      of Jasper, Texas
                                              
                                              Jasper,
      TX
                                              
                                              Office
                                              
                                              
                                              12,750
                                              
                                              
                                              
                                              7.00
                                              %
                                              
                                              
                                              12/2024
                                              
                                              
                                              
                                              11/2024
                                              
                                              
                                              
                                              1,736
                                              
                                              
                                              
                                              1,549
                                              
                                              
                                              
                                              1,510
                                              
                                              
                                              
                                              78
                                              %CVS
      Corporation
                                              
                                              Asheville,
      NC
                                              
                                              Retail
      Drug
                                              
                                              
                                              10,880
                                              
                                              
                                              
                                              6.53
                                              %
                                              
                                              
                                              1/2026
                                              
                                              
                                              
                                              1/2026
                                              
                                              
                                              
                                              2,360
                                              
                                              
                                              
                                              2,099
                                              
                                              
                                              
                                              2,149
                                              
                                              
                                              
                                              82
                                              %CVS
      Corporation
                                              
                                              Athol,
      MA
                                              
                                              Retail
      Drug
                                              
                                              
                                              13,013
                                              
                                              
                                              
                                              6.46
                                              %
                                              
                                              
                                              1/2025
                                              
                                              
                                              
                                              1/2025
                                              
                                              
                                              
                                              1,502
                                              
                                              
                                              
                                              1,287
                                              
                                              
                                              
                                              1,287
                                              
                                              
                                              
                                              68
                                              %CVS
      Corporation
                                              
                                              Bangor,
      PA
                                              
                                              Retail
      Drug
                                              
                                              
                                              13,013
                                              
                                              
                                              
                                              6.28
                                              %
                                              
                                              
                                              1/2026
                                              
                                              
                                              
                                              1/2026
                                              
                                              
                                              
                                              2,521
                                              
                                              
                                              
                                              2,143
                                              
                                              
                                              
                                              2,111
                                              
                                              
                                              
                                              77
                                              %CVS
      Corporation
                                              
                                              Bluefield,
      WV
                                              
                                              Retail
      Drug
                                              
                                              
                                              10,125
                                              
                                              
                                              
                                              8.00
                                              %
                                              
                                              
                                              1/2021
                                              
                                              
                                              
                                              1/2021
                                              
                                              
                                              
                                              1,439
                                              
                                              
                                              
                                              1,143
                                              
                                              
                                              
                                              1,228
                                              
                                              
                                              
                                              67
                                              %CVS
      Corporation
                                              
                                              Evansville,
      IN
                                              
                                              Retail
      Drug
                                              
                                              
                                              12,900
                                              
                                              
                                              
                                              6.22
                                              %
                                              
                                              
                                              1/2033
                                              
                                              
                                              
                                              1/2033
                                              
                                              
                                              
                                              3,351
                                              
                                              
                                              
                                              3,213
                                              
                                              
                                              
                                              3,213
                                              
                                              
                                              
                                              73
                                              %CVS
      Corporation
                                              
                                              Greensboro,
      GA
                                              
                                              Retail
      Drug
                                              
                                              
                                              11,970
                                              
                                              
                                              
                                              6.52
                                              %
                                              
                                              
                                              1/2030
                                              
                                              
                                              
                                              1/2030
                                              
                                              
                                              
                                              1,395
                                              
                                              
                                              
                                              1,273
                                              
                                              
                                              
                                              1,273
                                              
                                              
                                              
                                              75
                                              %CVS
      Corporation
                                              
                                              Oak
      Ridge, NC
                                              
                                              Retail
      Drug
                                              
                                              
                                              10,880
                                              
                                              
                                              
                                              6.99
                                              %
                                              
                                              
                                              1/2025
                                              
                                              
                                              
                                              8/2024
                                              
                                              
                                              
                                              3,243
                                              
                                              
                                              
                                              2,865
                                              
                                              
                                              
                                              2,865
                                              
                                              
                                              
                                              74
                                              %CVS
      Corporation
                                              
                                              Shelby
      Twp., MI
                                              
                                              Retail
      Drug
                                              
                                              
                                              11,970
                                              
                                              
                                              
                                              5.98
                                              %
                                              
                                              
                                              1/2031
                                              
                                              
                                              
                                              1/2031
                                              
                                              
                                              
                                              2,540
                                              
                                              
                                              
                                              2,434
                                              
                                              
                                              
                                              2,434
                                              
                                              
                                              
                                              85
                                              %CVS
      Corporation
                                              
                                              Southington,
      CT
                                              
                                              Retail
      Drug
                                              
                                              
                                              10,125
                                              
                                              
                                              
                                              8.26
                                              %
                                              
                                              
                                              1/2020
                                              
                                              
                                              
                                              1/2020
                                              
                                              
                                              
                                              1,768
                                              
                                              
                                              
                                              1,585
                                              
                                              
                                              
                                              1,735
                                              
                                              
                                              
                                              77
                                              %CVS
      Corporation
                                              
                                              Stow,
      OH
                                              
                                              Retail
      Drug
                                              
                                              
                                              10,125
                                              
                                              
                                              
                                              8.26
                                              %
                                              
                                              
                                              1/2020
                                              
                                              
                                              
                                              1/2020
                                              
                                              
                                              
                                              2,407
                                              
                                              
                                              
                                              2,114
                                              
                                              
                                              
                                              2,313
                                              
                                              
                                              
                                              74
                                              %CVS
      Corporation
                                              
                                              Sunbury,
      PA
                                              
                                              Retail
      Drug
                                              
                                              
                                              10,125
                                              
                                              
                                              
                                              7.50
                                              %
                                              
                                              
                                              1/2021
                                              
                                              
                                              
                                              1/2021
                                              
                                              
                                              
                                              1,829
                                              
                                              
                                              
                                              1,415
                                              
                                              
                                              
                                              1,387
                                              
                                              
                                              
                                              67
                                              %CVS
      Corporation
                                              
                                              Washington,
      DC
                                              
                                              Retail
      Drug
                                              
                                              
                                              7,920
                                              
                                              
                                              
                                              8.10
                                              %
                                              
                                              
                                              1/2023
                                              
                                              
                                              
                                              1/2023
                                              
                                              
                                              
                                              2,781
                                              
                                              
                                              
                                              2,186
                                              
                                              
                                              
                                              2,312
                                              
                                              
                                              
                                              66
                                              %CVS
      Corporation
                                              
                                              Willimantic,
      CT
                                              
                                              Retail
      Drug
                                              
                                              
                                              10,125
                                              
                                              
                                              
                                              8.26
                                              %
                                              
                                              
                                              1/2023
                                              
                                              
                                              
                                              1/2023
                                              
                                              
                                              
                                              2,028
                                              
                                              
                                              
                                              1,848
                                              
                                              
                                              
                                              2,041
                                              
                                              
                                              
                                              75
                                              %Harris
      Bankcorp, Inc.
                                              
                                              Chicago,
      IL
                                              
                                              Bank
      Branch
                                              
                                              
                                              4,750
                                              
                                              
                                              
                                              6.81
                                              %
                                              
                                              
                                              8/2025
                                              
                                              
                                              
                                              8/2025
                                              
                                              
                                              
                                              4,467
                                              
                                              
                                              
                                              4,066
                                              
                                              
                                              
                                              4,066
                                              
                                              
                                              
                                              67
                                              %Home
      Depot USA, Inc.
                                              
                                              Chelsea,
      MA
                                              
                                              Retail
                                              
                                              
                                              117,034
                                              
                                              
                                              
                                              5.36
                                              %
                                              
                                              
                                              1/2036
                                              
                                              
                                              
                                              1/2031
                                              
                                              
                                              
                                              8,501
                                              
                                              
                                              
                                              7,964
                                              
                                              
                                              
                                              7,964
                                              
                                              
                                              
                                              87
                                              %Home
      Depot USA, Inc.
                                              
                                              Tullytown,
      PA
                                              
                                              Retail
                                              
                                              
                                              116,016
                                              
                                              
                                              
                                              6.62
                                              %
                                              
                                              
                                              1/2033
                                              
                                              
                                              
                                              1/2033
                                              
                                              
                                              
                                              8,447
                                              
                                              
                                              
                                              8,322
                                              
                                              
                                              
                                              8,322
                                              
                                              
                                              
                                              97
                                              %Kohls
      Corporation
                                              
                                              Chicago,
      IL
                                              
                                              Retail
                                              
                                              
                                              133,000
                                              
                                              
                                              
                                              6.69
                                              %
                                              
                                              
                                              5/2030
                                              
                                              
                                              
                                              5/2030
                                              
                                              
                                              
                                              48,270
                                              
                                              
                                              
                                              45,862
                                              
                                              
                                              
                                              45,862
                                              
                                              
                                              
                                              89
                                              %Koninklijke
      Ahold, N.V.
                                              
                                              Bensalem,
      PA
                                              
                                              Retail
                                              
                                              
                                              67,000
                                              
                                              
                                              
                                              7.24
                                              %
                                              
                                              
                                              5/2020
                                              
                                              
                                              
                                              5/2020
                                              
                                              
                                              
                                              3,153
                                              
                                              
                                              
                                              2,680
                                              
                                              
                                              
                                              2,723
                                              
                                              
                                              
                                              77
                                              %Koninklijke
      Ahold, N.V.
                                              
                                              North
      Kingstown, RI
                                              
                                              Retail
                                              
                                              
                                              125,772
                                              
                                              
                                              
                                              7.50
                                              %
                                              
                                              
                                              11/2025
                                              
                                              
                                              
                                              11/2025
                                              
                                              
                                              
                                              6,794
                                              
                                              
                                              
                                              6,210
                                              
                                              
                                              
                                              6,193
                                              
                                              
                                              
                                              69
                                              %Koninklijke
      Ahold, N.V.
                                              
                                              Tewksbury,
      MA
                                              
                                              Retail
                                              
                                              
                                              58,450
                                              
                                              
                                              
                                              7.50
                                              %
                                              
                                              
                                              1/2027
                                              
                                              
                                              
                                              1/2027
                                              
                                              
                                              
                                              6,625
                                              
                                              
                                              
                                              6,102
                                              
                                              
                                              
                                              6,098
                                              
                                              
                                              
                                              69
                                              %Koninklijke
      Ahold, N.V.
                                              
                                              Upper
      Darby Township, PA
                                              
                                              Retail
                                              
                                              
                                              54,800
                                              
                                              
                                              
                                              7.29
                                              %
                                              
                                              
                                              4/2024
                                              
                                              
                                              
                                              4/2024
                                              
                                              
                                              
                                              6,867
                                              
                                              
                                              
                                              5,968
                                              
                                              
                                              
                                              5,739
                                              
                                              
                                              
                                              82
                                              %Lowes
      Companies, Inc.
                                              
                                              Framingham,
      MA
                                              
                                              Retail
                                              
                                              
                                              156,543
                                              
                                              
                                              
                                              0.87
                                              %
                                              
                                              
                                              10/2031
                                              
                                              
                                              
                                              9/2031
                                              
                                              
                                              
                                              5,545
                                              
                                              
                                              
                                              5,564
                                              
                                              
                                              
                                              1,399
                                              
                                              
                                              
                                              82
                                              %Lowes
      Companies, Inc.
                                              
                                              Matamoras,
      PA
                                              
                                              Retail
                                              
                                              
                                              162,070
                                              
                                              
                                              
                                              6.61
                                              %
                                              
                                              
                                              5/2030
                                              
                                              
                                              
                                              5/2030
                                              
                                              
                                              
                                              7,208
                                              
                                              
                                              
                                              6,984
                                              
                                              
                                              
                                              6,984
                                              
                                              
                                              
                                              93
                                              %National
      City Bank
                                              
                                              Chicago,
      IL
                                              
                                              Bank
      Branch
                                              
                                              
                                              5,274
                                              
                                              
                                              
                                              5.89
                                              %
                                              
                                              
                                              12/2024
                                              
                                              
                                              
                                              12/2024
                                              
                                              
                                              
                                              3,114
                                              
                                              
                                              
                                              2,800
                                              
                                              
                                              
                                              2,864
                                              
                                              
                                              
                                              70
                                              %Neiman
      Marcus Group, Inc.
                                              
                                              Las
      Vegas, NV
                                              
                                              Retail
                                              
                                              
                                              167,000
                                              
                                              
                                              
                                              6.06
                                              %
                                              
                                              
                                              11/2022
                                              
                                              
                                              
                                              11/2021
                                              
                                              
                                              
                                              8,267
                                              
                                              
                                              
                                              6,089
                                              
                                              
                                              
                                              6,539
                                              
                                              
                                              
                                              64
                                              %United
      States Postal Service
                                              
                                              Scammon
      Bay, AK
                                              
                                              Post
      Office
                                              
                                              
                                              2,080
                                              
                                              
                                              
                                              7.05
                                              %
                                              
                                              
                                              10/2021
                                              
                                              
                                              
                                              10/2021
                                              
                                              
                                              
                                              1,015
                                              
                                              
                                              
                                              804
                                              
                                              
                                              
                                              818
                                              
                                              
                                              
                                              62
                                              %University
      of Connecticut Health Center
                                              
                                              Farmington,
      CT
                                              
                                              Medical
      Office
                                              
                                              
                                              100,000
                                              
                                              
                                              
                                              6.34
                                              %
                                              
                                              
                                              11/2029
                                              
                                              
                                              
                                              11/2024
                                              
                                              
                                              
                                              22,800
                                              
                                              
                                              
                                              19,399
                                              
                                              
                                              
                                              20,017
                                              
                                              
                                              
                                              78
                                              %Walgreen
      Co.
                                              
                                              Dallas,
      TX
                                              
                                              Retail
      Drug
                                              
                                              
                                              14,550
                                              
                                              
                                              
                                              6.46
                                              %
                                              
                                              
                                              12/2029
                                              
                                              
                                              
                                              12/2029
                                              
                                              
                                              
                                              3,534
                                              
                                              
                                              
                                              3,207
                                              
                                              
                                              
                                              3,207
                                              
                                              
                                              
                                              75
                                              %Walgreen
      Co.
                                              
                                              Montebello,
      CA
                                              
                                              Retail
      Drug
                                              
                                              
                                              14,414
                                              
                                              
                                              
                                              6.10
                                              %
                                              
                                              
                                              3/2030
                                              
                                              
                                              
                                              2/2030
                                              
                                              
                                              
                                              4,680
                                              
                                              
                                              
                                              4,257
                                              
                                              
                                              
                                              4,257
                                              
                                              
                                              
                                              63
                                              %Walgreen
      Co.
                                              
                                              Nacogdoches,
      TX
                                              
                                              Retail
      Drug
                                              
                                              
                                              14,820
                                              
                                              
                                              
                                              6.80
                                              %
                                              
                                              
                                              9/2030
                                              
                                              
                                              
                                              9/2030
                                              
                                              
                                              
                                              3,649
                                              
                                              
                                              
                                              3,427
                                              
                                              
                                              
                                              3,427
                                              
                                              
                                              
                                              67
                                              %Walgreen
      Co.
                                              
                                              Rosemead,
      CA
                                              
                                              Retail
      Drug
                                              
                                              
                                              12,004
                                              
                                              
                                              
                                              6.26
                                              %
                                              
                                              
                                              12/2029
                                              
                                              
                                              
                                              12/2029
                                              
                                              
                                              
                                              5,334
                                              
                                              
                                              
                                              4,927
                                              
                                              
                                              
                                              4,924
                                              
                                              
                                              
                                              69
                                              %217,586
                                              
                                              
                                              
                                              198,170
                                              
                                              
                                              
                                              195,645Corporate
      Credit NotesAlbertsons,
      LLC
                                              
                                              Los
      Angeles, CA
                                              
                                              Retail
      Drug
                                              
                                              
                                              16,475
                                              
                                              
                                              
                                              6.50
                                              %
                                              
                                              
                                              7/2028
                                              
                                              
                                              
                                              9/2013
                                              
                                              
                                              
                                              437
                                              
                                              
                                              
                                              201
                                              
                                              
                                              
                                              190
                                              
                                              
                                              
                                              76
                                              %Albertsons,
      LLC
                                              
                                              Norwalk,
      CA
                                              
                                              Retail
      Drug
                                              
                                              
                                              14,696
                                              
                                              
                                              
                                              6.33
                                              %
                                              
                                              
                                              11/2028
                                              
                                              
                                              
                                              12/2013
                                              
                                              
                                              
                                              470
                                              
                                              
                                              
                                              225
                                              
                                              
                                              
                                              223
                                              
                                              
                                              
                                              69
                                              %Best
      Buy Co., Inc.
                                              
                                              Olathe,
      KS
                                              
                                              Retail
                                              
                                              
                                              48,744
                                              
                                              
                                              
                                              5.40
                                              %
                                              
                                              
                                              1/2018
                                              
                                              
                                              
                                              6/2013
                                              
                                              
                                              
                                              1,779
                                              
                                              
                                              
                                              792
                                              
                                              
                                              
                                              774
                                              
                                              
                                              
                                              69
                                              %Best
      Buy Co., Inc.
                                              
                                              Wichita
      Falls, TX
                                              
                                              Retail
                                              
                                              
                                              30,038
                                              
                                              
                                              
                                              6.15
                                              %
                                              
                                              
                                              1/2017
                                              
                                              
                                              
                                              11/2012
                                              
                                              
                                              
                                              743
                                              
                                              
                                              
                                              274
                                              
                                              
                                              
                                              268
                                              
                                              
                                              
                                              66
                                              %CVS
      Corporation
                                              
                                              Clemmons,
      NC
                                              
                                              Retail
      Drug
                                              
                                              
                                              10,880
                                              
                                              
                                              
                                              5.54
                                              %
                                              
                                              
                                              1/2022
                                              
                                              
                                              
                                              1/2015
                                              
                                              
                                              
                                              285
                                              
                                              
                                              
                                              164
                                              
                                              
                                              
                                              160
                                              
                                              
                                              
                                              57
                                              %CVS
      Corporation
                                              
                                              Commerce,
      MI
                                              
                                              Retail
      Drug
                                              
                                              
                                              10,880
                                              
                                              
                                              
                                              5.85
                                              %
                                              
                                              
                                              4/2025
                                              
                                              
                                              
                                              5/2013
                                              
                                              
                                              
                                              501
                                              
                                              
                                              
                                              225
                                              
                                              
                                              
                                              221
                                              
                                              
                                              
                                              76
                                              %CVS
      Corporation
                                              
                                              Garwood,
      NJ
                                              
                                              Retail
      Drug
                                              
                                              
                                              11,970
                                              
                                              
                                              
                                              6.12
                                              %
                                              
                                              
                                              6/2025
                                              
                                              
                                              
                                              8/2013
                                              
                                              
                                              
                                              879
                                              
                                              
                                              
                                              387
                                              
                                              
                                              
                                              381
                                              
                                              
                                              
                                              74
                                              %CVS
      Corporation
                                              
                                              Kennett
      Square, PA
                                              
                                              Retail
      Drug
                                              
                                              
                                              12,150
                                              
                                              
                                              
                                              6.40
                                              %
                                              
                                              
                                              1/2025
                                              
                                              
                                              
                                              10/2012
                                              
                                              
                                              
                                              857
                                              
                                              
                                              
                                              302
                                              
                                              
                                              
                                              296
                                              
                                              
                                              
                                              76
                                              %CVS
      Corporation
                                              
                                              Knox,
      IN
                                              
                                              Retail
      Drug
                                              
                                              
                                              10,125
                                              
                                              
                                              
                                              7.60
                                              %
                                              
                                              
                                              1/2024
                                              
                                              
                                              
                                              12/2011
                                              
                                              
                                              
                                              322
                                              
                                              
                                              
                                              86
                                              
                                              
                                              
                                              86
                                              
                                              
                                              
                                              62
                                              %CVS
      Corporation
                                              
                                              Rockingham,
      NC
                                              
                                              Retail
      Drug
                                              
                                              
                                              10,125
                                              
                                              
                                              
                                              6.12
                                              %
                                              
                                              
                                              1/2025
                                              
                                              
                                              
                                              10/2013
                                              
                                              
                                              
                                              435
                                              
                                              
                                              
                                              199
                                              
                                              
                                              
                                              196
                                              
                                              
                                              
                                              68
                                              %CVS
      Corporation
                                              
                                              Rutherford
      College, NC
                                              
                                              Retail
      Drug
                                              
                                              
                                              10,125
                                              
                                              
                                              
                                              6.12
                                              %
                                              
                                              
                                              1/2025
                                              
                                              
                                              
                                              10/2013
                                              
                                              
                                              
                                              346
                                              
                                              
                                              
                                              176
                                              
                                              
                                              
                                              174
                                              
                                              
                                              
                                              69
                                              %Federal
      Express Corporation
                                              
                                              Bellingham,
      WA
                                              
                                              Warehouse
                                              
                                              
                                              30,313
                                              
                                              
                                              
                                              5.78
                                              %
                                              
                                              
                                              10/2018
                                              
                                              
                                              
                                              3/2015
                                              
                                              
                                              
                                              362
                                              
                                              
                                              
                                              229
                                              
                                              
                                              
                                              226
                                              
                                              
                                              
                                              65
                                              %FedEx
      Ground Package System, Inc.
                                              
                                              McCook,
      IL
                                              
                                              Warehouse
                                              
                                              
                                              159,699
                                              
                                              
                                              
                                              5.89
                                              %
                                              
                                              
                                              1/2019
                                              
                                              
                                              
                                              2/2015
                                              
                                              
                                              
                                              2,737
                                              
                                              
                                              
                                              1,619
                                              
                                              
                                              
                                              1,607
                                              
                                              
                                              
                                              75
                                              %FedEx
      Ground Package System, Inc.
                                              
                                              Reno,
      NV
                                              
                                              Warehouse
                                              
                                              
                                              106,396
                                              
                                              
                                              
                                              5.90
                                              %
                                              
                                              
                                              9/2018
                                              
                                              
                                              
                                              10/2014
                                              
                                              
                                              
                                              1,374
                                              
                                              
                                              
                                              769
                                              
                                              
                                              
                                              764
                                              
                                              
                                              
                                              71
                                              %Hercules
      Incorporated
                                              
                                              Wilmington,
      DE
                                              
                                              Office
                                              
                                              
                                              518,409
                                              
                                              
                                              
                                              9.32
                                              %
                                              
                                              
                                              5/2013
                                              
                                              
                                              
                                              5/2013
                                              
                                              
                                              
                                              20,000
                                              
                                              
                                              
                                              17,086
                                              
                                              
                                              
                                              17,086
                                              
                                              
                                              
                                              76
                                              %Lowes
      Companies, Inc.
                                              
                                              N.
      Windham, ME
                                              
                                              Retail
                                              
                                              
                                              138,134
                                              
                                              
                                              
                                              5.28
                                              %
                                              
                                              
                                              1/2026
                                              
                                              
                                              
                                              9/2015
                                              
                                              
                                              
                                              1,140
                                              
                                              
                                              
                                              758
                                              
                                              
                                              
                                              748
                                              
                                              
                                              
                                              79
                                              %PerkinElmer,
      Inc.
                                              
                                              Beltsville,
      MD
                                              
                                              Office/Industrial
                                              
                                              
                                              65,862
                                              
                                              
                                              
                                              7.35
                                              %
                                              
                                              
                                              11/2021
                                              
                                              
                                              
                                              12/2011
                                              
                                              
                                              
                                              707
                                              
                                              
                                              
                                              186
                                              
                                              
                                              
                                              186
                                              
                                              
                                              
                                              69
                                              %PerkinElmer,
      Inc.
                                              
                                              Daytona
      Beach, FL
                                              
                                              Office/Industrial
                                              
                                              
                                              34,196
                                              
                                              
                                              
                                              7.35
                                              %
                                              
                                              
                                              11/2021
                                              
                                              
                                              
                                              12/2011
                                              
                                              
                                              
                                              321
                                              
                                              
                                              
                                              84
                                              
                                              
                                              
                                              84
                                              
                                              
                                              
                                              66
                                              %PerkinElmer,
      Inc.
                                              
                                              Phelps,
      NY
                                              
                                              Office/Industrial
                                              
                                              
                                              32,700
                                              
                                              
                                              
                                              7.35
                                              %
                                              
                                              
                                              11/2021
                                              
                                              
                                              
                                              12/2011
                                              
                                              
                                              
                                              299
                                              
                                              
                                              
                                              79
                                              
                                              
                                              
                                              78
                                              
                                              
                                              
                                              70
                                              %PerkinElmer,
      Inc.
                                              
                                              Warwick,
      RI
                                              
                                              Industrial
                                              
                                              
                                              95,720
                                              
                                              
                                              
                                              7.68
                                              %
                                              
                                              
                                              12/2021
                                              
                                              
                                              
                                              1/2012
                                              
                                              
                                              
                                              939
                                              
                                              
                                              
                                              260
                                              
                                              
                                              
                                              257
                                              
                                              
                                              
                                              70
                                              %Staples,
      Inc.
                                              
                                              Odessa,
      TX
                                              
                                              Retail
                                              
                                              
                                              23,942
                                              
                                              
                                              
                                              6.41
                                              %
                                              
                                              
                                              6/2015
                                              
                                              
                                              
                                              9/2012
                                              
                                              
                                              
                                              408
                                              
                                              
                                              
                                              157
                                              
                                              
                                              
                                              153
                                              
                                              
                                              
                                              65
                                              %Walgreen
      Co.
                                              
                                              Delray
      Beach, FL
                                              
                                              Retail
      Drug
                                              
                                              
                                              15,120
                                              
                                              
                                              
                                              6.20
                                              %
                                              
                                              
                                              1/2021
                                              
                                              
                                              
                                              1/2013
                                              
                                              
                                              
                                              595
                                              
                                              
                                              
                                              225
                                              
                                              
                                              
                                              224
                                              
                                              
                                              
                                              66
                                              %Walgreen
      Co.
                                              
                                              Jefferson
      City, TN
                                              
                                              Retail
      Drug
                                              
                                              
                                              14,266
                                              
                                              
                                              
                                              5.49
                                              %
                                              
                                              
                                              3/2030
                                              
                                              
                                              
                                              5/2015
                                              
                                              
                                              
                                              786
                                              
                                              
                                              
                                              479
                                              
                                              
                                              
                                              479
                                              
                                              
                                              
                                              82
                                              %Walgreen
      Co.
                                              
                                              Riverside,
      CA
                                              
                                              Retail
      Drug
                                              
                                              
                                              12,804
                                              
                                              
                                              
                                              6.10
                                              %
                                              
                                              
                                              10/2028
                                              
                                              
                                              
                                              12/2013
                                              
                                              
                                              
                                              571
                                              
                                              
                                              
                                              271
                                              
                                              
                                              
                                              268
                                              
                                              
                                              
                                              69
                                              %Walgreen
      Co.
                                              
                                              Waterford,
      MI
                                              
                                              Retail
      Drug
                                              
                                              
                                              14,490
                                              
                                              
                                              
                                              5.50
                                              %
                                              
                                              
                                              1/2023
                                              
                                              
                                              
                                              6/2013
                                              
                                              
                                              
                                              953
                                              
                                              
                                              
                                              395
                                              
                                              
                                              
                                              382
                                              
                                              
                                              
                                              71
                                              %38,246
                                              
                                              
                                              
                                              25,628
                                              
                                              
                                              
                                              25,511Mezzanine
      and Other InvestmentsWest
      End Mortgage Finance Fund I L.P.
                                              
                                              Various
                                              
                                              Other
                                              
                                              
                                              N/A
                                              
                                              
                                              
                                              10.00
                                              %
                                              
                                              
                                              N/A
                                              
                                              
                                              Delinquent
                                              
                                              
                                              
                                              7,154
                                              
                                              
                                              
                                              1,444
                                              
                                              
                                              
                                              1,000
                                              
                                              
                                              
                                              N/A7,154
                                              
                                              
                                              
                                              1,444
                                              
                                              
                                              
                                              1,000Total
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              $
                                              262,986
                                              
                                              
                                              $
                                              225,242
                                              
                                              
                                              $
                                              222,156





(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, 2009 to the appraised value of
      the real estate that secures the loan at the time the loan was
      made.  The current value of the real estate may be
      different.  The loan to realty value for each corporate credit
      note includes the principal balance of the portion of the loan we have
      sold.




9


Commercial
Mortgage-Backed and Other Real Estate Securities




As of
December 31, 2009, real estate securities aggregated approximately $153.1
million, or approximately 8% of our portfolio.  We invest in
commercial mortgage-backed securities, or CMBS, and other real estate
securities.  Our CMBS investments include senior, subordinate and
interest-only classes of primarily net lease loan securitizations or pass
through trusts.  Our other real estate securities represent our pro
rata investments in one or more first mortgage loans on properties net leased to
a single tenant.  We believe we are well-positioned to evaluate net
lease CMBS investments and other real estate securities due to our expertise
with net lease loan assets and our experience in structuring CMBS
transactions.  We structured four CMBS securitizations aggregating
approximately $1.5 billion prior to our initial public offering.  As a
result of our familiarity with the collateral included in these transactions,
many of our CMBS investments to date have been made in classes of our prior
securitizations.




The
weighted average credit rating on our securities portfolio was BB as of December
31, 2009, with 38% of the portfolio rated investment grade or implied investment
grade.  These statistics reflect the actual ratings on our CMBS
securities and underlying tenant ratings on our other real estate
securities.




Our CMBS
and other real estate securities as of December 31, 2009 are summarized in the
following table:




(in
      thousands)Security
      Description
                                                
                                                CUSIP
      No.
                                                
                                                Face
      Amount (1)
                                                
                                                
                                                Carry
      Value
                                                
                                                
                                                Coupon
                                                
                                                Maturity DateInvestments in Commercial
      Mortgage Loan SecuritizationsBACM
      2006-4, Class H
                                                
                                                05950WAT5
                                                
                                                $
                                                8,000
                                                
                                                
                                                $
                                                6,876
                                                
                                                
                                                
                                                6.01
                                                %
                                                Aug
      2016Banc
      of America 2007-1, Class C
                                                
                                                059497AB3
                                                
                                                
                                                500
                                                
                                                
                                                
                                                156
                                                
                                                
                                                
                                                5.56
                                                %
                                                Feb
      2017BSCMS
      1999 CLF1, Class E
                                                
                                                07383FCC0
                                                
                                                
                                                3,326
                                                
                                                
                                                
                                                166
                                                
                                                
                                                
                                                3.70
                                                %
                                                May
      2028BSCMS
      1999 CLF1, Class F
                                                
                                                07383FCD8
                                                
                                                
                                                251
                                                
                                                
                                                
                                                –
                                                
                                                
                                                
                                                6.41
                                                %
                                                Sep
      2025CALFS
      1997-CTL1, Class D
                                                
                                                140281AF3
                                                
                                                
                                                6,000
                                                
                                                
                                                
                                                5,257
                                                
                                                
                                                
                                                6.16
                                                %
                                                Jan
      2016CMLBC
      2001-CMLB-1, Class E
                                                
                                                201736AJ4
                                                
                                                
                                                9,526
                                                
                                                
                                                
                                                9,661
                                                
                                                
                                                
                                                7.87
                                                %
                                                Jul
      2022CMLBC
      2001-CMLB-1, Class G
                                                
                                                201736AL9
                                                
                                                
                                                9,526
                                                
                                                
                                                
                                                4,837
                                                
                                                
                                                
                                                7.87
                                                %
                                                Feb
      2023CMLBC
      2001-CMLB-1, Class H
                                                
                                                201736AM7
                                                
                                                
                                                11,907
                                                
                                                
                                                
                                                1,943
                                                
                                                
                                                
                                                6.25
                                                %
                                                Mar
      2024CMLBC
      2001-CMLB-1, Class J
                                                
                                                201736AN5
                                                
                                                
                                                6,383
                                                
                                                
                                                
                                                470
                                                
                                                
                                                
                                                6.25
                                                %
                                                Oct
      2025JP
      Morgan 2006-LDP9
                                                
                                                46629PAF5
                                                
                                                
                                                200
                                                
                                                
                                                
                                                90
                                                
                                                
                                                
                                                5.41
                                                %
                                                Dec
      2016NLFC
      1999-LTL-1, Class E
                                                
                                                63859CCL5
                                                
                                                
                                                11,081
                                                
                                                
                                                
                                                6,271
                                                
                                                
                                                
                                                5.00
                                                %
                                                Jan
      2022NLFC
      1999-LTL-1, Class X (IO)
                                                
                                                63859CCG6
                                                
                                                
                                                5,055
                                                
                                                
                                                
                                                2,975
                                                
                                                
                                                
                                                0.52
                                                %
                                                Jan
      2024Wachovia
      2007-C30, Class AJ
                                                
                                                92978QAJ6
                                                
                                                
                                                200
                                                
                                                
                                                
                                                87
                                                
                                                
                                                
                                                5.41
                                                %
                                                Feb
      2017Wachovia
      2007-C31, Class AJ
                                                
                                                92978TAJ0
                                                
                                                
                                                200
                                                
                                                
                                                
                                                88
                                                
                                                
                                                
                                                5.66
                                                %
                                                Apr
      2017Wachovia
      2007-C33, Class AJ
                                                
                                                92978NAK0
                                                
                                                
                                                200
                                                
                                                
                                                
                                                89
                                                
                                                
                                                
                                                5.90
                                                %
                                                Jul
      2017WBCMT
      2004-C15 180D
                                                
                                                929766YG2
                                                
                                                
                                                15,000
                                                
                                                
                                                
                                                14,958
                                                
                                                
                                                
                                                5.59
                                                %
                                                Nov
      2012WBCMT
      2004-C15 180E
                                                
                                                929766YH0
                                                
                                                
                                                8,000
                                                
                                                
                                                
                                                6,401
                                                
                                                
                                                
                                                5.59
                                                %
                                                Nov
      2012WBCMT
      2006-C27, Class C
                                                
                                                92977QAK4
                                                
                                                
                                                11,000
                                                
                                                
                                                
                                                10,548
                                                
                                                
                                                
                                                5.89
                                                %
                                                Aug
      2016BACMS
      2002-2, Class V-1 (7-Eleven, Inc.)
                                                
                                                05947UJE9
                                                
                                                
                                                553
                                                
                                                
                                                
                                                437
                                                
                                                
                                                
                                                8.72
                                                %
                                                Sep
      2019BACMS
      2002-2, Class V-2 (Sterling Jewelers)
                                                
                                                05947UJF6
                                                
                                                
                                                845
                                                
                                                
                                                
                                                652
                                                
                                                
                                                
                                                8.68
                                                %
                                                Jan
      2021107,753
                                                
                                                
                                                
                                                71,962Investments
      in Certificated Mortgage Loan TransactionsCVS
      Corporation
                                                
                                                126650BB5
                                                
                                                
                                                18,058
                                                
                                                
                                                
                                                17,218
                                                
                                                
                                                
                                                5.88
                                                %
                                                Jan
      2028Koninklijke
      Ahold, N.V. 7.82% Jan 2020
                                                
                                                008686AA5
                                                
                                                
                                                8,283
                                                
                                                
                                                
                                                8,651
                                                
                                                
                                                
                                                7.82
                                                %
                                                Jan
      2020Lucent
      6.70% due 9/1/2020
                                                
                                                72817#AA6
                                                
                                                
                                                35,754
                                                
                                                
                                                
                                                34,949
                                                
                                                
                                                
                                                6.70
                                                %
                                                Sep
      2020Yahoo,
      Inc.
                                                
                                                984332AC0
                                                
                                                
                                                22,028
                                                
                                                
                                                
                                                20,276
                                                
                                                
                                                
                                                6.65
                                                %
                                                Aug
      202684,123
                                                
                                                
                                                
                                                81,094Total
                                                
                                                
                                                
                                                $
                                                191,876
                                                
                                                
                                                $
                                                153,056




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




The
weighted average life of our securities portfolio as of December 31, 2009 was
8.1 years.




Portfolio
Financing




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




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


10


We are
not dependent on the structured credit markets for financing.  The net
lease asset class has long-attracted institutional financing and we expect that
our deep contacts developed over our more than 15 years in the business will
provide us with a wide variety of financing opportunities.  For
example, we completed a $129.5 million original principal balance secured term
loan with a European based institutional lender in December
2007.  Upon closing of the financing, we pledged approximately $163.1
million principal amount of collateral to secure our obligations under the
loan.  The interest coupon on the loan is fixed at 5.81% annually
until the loan matures in January 2018.  Our effective financing rate
on the loan is 6.0% annually (inclusive of hedge and closing
costs).




We issued
an entirely fixed rate on balance sheet CDO financing in March
2005.  We aggregated approximately $300 million of assets into the
pool, and we issued $285 million face amount of multi-class notes and $15
million of preferred equity through the CDO trust.  The net amount of
the debt we issued was $268.1 million, inclusive of a $0.4 million discount to
face, as we retained the three most junior note classes aggregating a face
amount of $16.5 million and the full $15 million of preferred
equity.  Each of the five note classes of the CDO was and continues to
be rated investment grade.  The CDO notes have a stated maturity in
January 2040, although the actual life of the notes is expected to be
substantially shorter.  Our weighted average effective financing rate
(inclusive of original issue discount and debt issuance and hedge costs) on our
CDO is approximately 5.7%.




We
have financed certain of our portfolio assets pursuant to a credit agreement we
entered into with Wachovia Bank in April 2008.  We have $126.3 million
outstanding under the agreement as of December 31, 2009.  Our
borrowings are scheduled to mature in April 2011.  The agreement is a
floating rate LIBOR based recourse borrowing facility.  We intend to
continue to pursue a variety of strategies for the assets financed on the
facility, which may include obtaining longer-term floating-rate financing,
obtaining long-term fixed rate financing when market conditions permit, pursuing
selected asset sales, and retiring the debt on selected assets and holding the
assets unlevered.  Through a combination of asset sales and scheduled
principal amortization, we reduced the borrowings under the agreement by
$63.0 million during 2009.




As of
December 31, 2009, the following statistics summarize our overall portfolio
financing position:




·
            leverage
      of approximately 75.7%, which includes secured and unsecured
      debt;




·
            $943.8
      million of non-recourse first mortgage debt at a weighted average coupon
      of 5.62% and a weighted average effective financing rate of
      5.6%;




·
            $263.3
      million of non-recourse CDO debt at a weighted average effective financing
      rate of approximately 5.7%;




·
            $114.1
      million of non-recourse other term debt at a coupon of 5.81% and an
      effective financing rate of 6.0%;
and




·
            $126.3
      million of recourse debt to Wachovia Bank under the credit agreement
      described above at an effective financing rate of
  3.2%.




We expect
our leverage levels to decrease over time, as a result of one or more of the
following factors: scheduled principal amortization on our debt, voluntary debt
reduction including through selected asset sales, and lower leverage on new
asset acquisitions.  As a result of market conditions, the focus of
our portfolio activity during 2009 and 2008 was reducing primarily recourse debt
and strengthening our balance sheet.




Hedging
Strategy




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




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




We will
continue to seek to manage our interest rate exposure taking into account market
conditions, the cost of the hedging transactions and the limitations on hedging
transactions imposed by the REIT tax rules.  As of December 31, 2009,
we had no open hedge transactions.




Revenue
Concentrations in 2009




Other
than the United States Government, which accounted for approximately 11.9% of
our total revenue and approximately 14.4% of our total revenue from our owned
properties segment, we had no greater than 10% revenue concentrations based on
total revenue or on a total revenue by segment basis during
2009.  Approximately 11.6% and 10.4%, respectively, of our total
revenue from our debt investments segment during 2009 was obtained from
investments where Koninklijke Ahold, N.V. and Kohl’s Corporation is the tenant
(or lease guarantor), but not our obligor.


11


Investment
Network




Our level
of new investment activity is influenced by market conditions.  During
2009 and 2008, we did not add any new assets to our portfolio, other than some
nominal securities investments we made in the 2009 period through the
reinvestment feature of our CDO.  We intend to resume new asset
investment activity when market conditions permit.




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




Property
Acquisitions.




Since our
initial public offering, we have leveraged our relationships within our loan
origination business and our knowledge of the single tenant business to develop
relationships with investment sale brokers, through which we primarily identify
real property for purchase.  We also source property acquisition
opportunities directly from developers and owners or investors in real estate
assets.  Because of the inherent synergies among our products, from
time to time we identify property acquisition opportunities through our loan
origination network and vice versa.




Our
property acquisition network is smaller and less specialized than our loan
origination network.  As a result, we have found that our sources for
property acquisition opportunities require less marketing and training efforts
than those required in our loan origination business.  We frequently
meet with investment sale brokers to discuss our investment
criteria.  We also include members of our property acquisition network
on distributions of our bimonthly newsletters, brochures and other written
marketing materials.




Loan
Origination.




Our
principal source of loan origination is our national network of independent
mortgage brokers.  We also originate loans directly from developers
and owners or investors in net leased properties.  A significant
portion of our loan business is with repeat customers.




Mortgage
brokers working with net lease products need specialized knowledge and skills
not generally required for traditional real estate debt and equity
activities.  We routinely meet with mortgage brokers to discuss the
latest developments in net lease financing.  As part of our efforts to
educate our mortgage broker network about net lease financing, we provide
bimonthly newsletters, brochures and other written material intended to keep
mortgage brokers up to date on the latest underwriting requirements for net
lease financings and net leases, lease enhancements, and changes in tenant
credit ratings, as well as to provide information on our latest
programs.




Underwriting
Process




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




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




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




·
            a
      real estate fundamentals review and analysis;
  and




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




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


12


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




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




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




In the
case of a loan to a property owner, our real estate due diligence includes a
review of the background and financial capabilities of the
owner/borrower.




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




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




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




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




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




·
            determines
      our plans for financing and hedging the
asset.




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




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




We
believe that when we resume new investment activity, we can continue to grow our
business more rapidly than we need to expand our general and administrative
costs and headcount.




Asset
Management




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


13


·
            meeting
      periodically with our tenants;




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




·
            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




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




·
            tracks
      the status of our investments and investment
  opportunities;




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




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




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




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




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




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




·
            computes
      coverage and compliance tests for our CDO
  transactions.




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




Closing
Process




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




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




Competition




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


14


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




Environmental
Matters




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




Prior to
acquisition of a property, we obtain Phase I environmental
reports.  These reports are prepared in accordance with an appropriate
level of due diligence based on our underwriting standards and generally include
a physical site inspection, a review of relevant federal, state and local
environmental and health agency database records, one or more interviews with
appropriate site-related personnel, review of the property’s chain of title and
review of historic aerial photographs and other information on past uses of the
property and nearby or adjoining properties.  We may also obtain a
Phase II investigation which may include limited subsurface investigations and
tests for substances of concern where the results of the Phase I environmental
reports or other information indicates possible contamination or where our
consultants recommend such procedures.




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




At
December 31, 2009, we were not aware of any environmental concerns that would
have a material adverse effect on our financial position or results of
operations.




Employees




As of
December 31, 2009, we had 19 employees, as compared to 20 employees at December
31, 2008.  We have an experienced staff, many of the members of which
have been previously employed by the real estate departments from major
financial institutions, law firms and rating agencies.  We believe
that our relations with our employees are good.  None of our employees
are unionized.




Available
Information




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




We also
make available free of charge on or through our Web site (www.caplease.com), our
Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on
Form 8-K and amendments to those reports filed or furnished pursuant to Section
13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as
reasonably practicable after we electronically file such material with, or
furnish it to, the SEC.  Investors can access our filings with the SEC
by visiting the investor relations section of our web site at
www.caplease.com.




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




Item
1A.    Risk Factors.




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


15


Risks
Related to Operations




Current
economic conditions and turmoil in the credit markets expose us to a variety of
risks.




Current
economic and credit market conditions have contributed to increased volatility
and diminished expectations for real estate markets and the economy as a whole
and may cause commercial real estate values and market rental rates to decline
significantly.  These declines could adversely impact us in a number
of ways, including by causing us to record losses on our assets, reducing the
proceeds we receive upon sale or refinance of our assets or adversely impacting
our ability to re-let our owned properties.  Current economic and
credit market conditions may also cause one or more of the tenants to whom we
have exposure to fail or default in their payment obligations, which could cause
us to record material losses or a material reduction in our cash
flows.




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




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




If
we pay our dividend in shares of common stock, the market value of our common
stock may decline.




In order
to maintain our status as a REIT, we are required to distribute at least 90% of
our taxable income to stockholders each year.  IRS guidance allows us
to pay a portion of our annual distributions in shares of common stock rather
than cash (generally up to 90% in 2010) if we meet certain
conditions.  In order to preserve liquidity, our board of directors
may conclude to pay a portion of our dividend in shares of common
stock.  If they do so, the market value of common stock in our company
could be adversely affected.




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




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




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




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




·
            sell
      assets in adverse market
conditions;




·
            borrow
      on unfavorable terms;




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




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




·
            utilize
      cash on hand to fund distributions.




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




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




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


16


·
            Wachovia
      Bank and its affiliates provide us with debt financing through a credit
      agreement.




·
            We
      have obtained mortgage financing on our owned properties from Wachovia
      Bank in the past, and we expect to continue to do so in the
      future.




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




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




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




The
markets in which we compete for investments are competitive and our pace of
investment activity continues to be impacted by competitive and market
conditions.  We have not added meaningfully to our investment
portfolio since the credit market stress began in the summer of 2007 and as a
result of market conditions we may be unable to grow our portfolio during
2010.  If our pace of investment activity does not match market
expectations the market price of our stock could be adversely
affected.




Risks
Related to Portfolio Assets




Single
tenant leases involve significant risks of tenant default.




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




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




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




·
            The
      bankruptcy or insolvency of any of our tenants could result in that tenant
      ceasing to make rental payments, resulting in a reduction of our cash
      flows and losses to our company.




·
            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 Statement of
Operations.




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




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




Our
investments may be subject to impairment charges.




We
periodically evaluate our investments for impairment indicators.  The
judgment regarding the existence of impairment indicators is based on a variety
of factors depending upon the type of investment, but generally includes an
evaluation of the credit quality of the underlying tenant or tenants, our
expectations regarding future cash flows and the estimated fair value of our
investment and/or related collateral.  With respect to our securities
investments, we also consider the length of time and the extent to which the
estimated fair value has been below cost and whether we have the intent and
ability to retain our investment for a period of time sufficient to allow for a
full recovery.  Market conditions since the summer of 2007 have
resulted in increases in credit spreads and generally lower fair valuations for
our securities.  If these conditions persist or intensify, we may be
required to record impairment losses on our securities, and these losses may be
significant.  If we determine that an impairment has occurred, we
would be required to reduce the carry value of our investment, which would
adversely affect our results of operations and funds from operations through
losses recorded directly to our Statement of Operations in the applicable
period.


17


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




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




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




We are
subject to tenant credit concentrations, the most significant of which are the
following as of December 31, 2009:




·
            approximately
      $198.2 million, or 10.0%, of our assets represent investments in
      properties leased to, or leases guaranteed by, Nestlé Holdings, Inc.;
      and




·
            approximately
      $192.4 million, or 9.7%, of our assets represent investments in properties
      leased to the United States
Government.




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




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




We are
subject to industry concentrations, the most significant of which are the
following as of December 31, 2009:




·
            approximately
      $300.6 million, or 15.2%, of our assets represent investments in
      properties leased to, or leases guaranteed by, companies in the insurance
      industry (e.g., Aon Corporation, Allstate Insurance Company, Farmers New
      World Life Insurance Company, Aetna Life Insurance Company and Travelers
      Corporation);




·
            approximately
      $258.7 million, or 13.0%, of our assets represent investments in
      properties leased to, or leases guaranteed by, companies in the food and
      beverage industry (e.g., Nestlé Holdings, Inc. and Cadbury Schweppes
      Holdings (US));




·
            approximately
      $146.1 million, or 7.4%, of our assets represent investments in properties
      leased to, or leases guaranteed by, companies in the financial industry
      (e.g., Capital One Financial Corporation, AmeriCredit Corp. and AMVESCAP
      PLC);




·
            approximately
      $138.9 million, or 7.0%, of our assets represent investments in properties
      leased to, or leases guaranteed by, companies in the retail department
      stores industry (e.g., TJX Companies, Inc. and Kohl’s Corporation);
      and




·
            approximately
      $138.4 million, or 7.0%, of our assets represent investments in properties
      leased to, or leases guaranteed by, companies in the retail grocery
      industry (e.g., The Kroger Co. and Koninklijke Ahold,
    N.V.).




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




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




We are
subject to geographic concentrations, the most significant of which are the
following as of December 31, 2009:




·
            approximately
      $226.0 million, or 11.4%, of our assets represent investments in
      properties located in the Philadelphia, Pennsylvania metropolitan
      area;




·
            approximately
      $187.5 million, or 9.5%, of our assets represent investments in properties
      located in the Washington, D.C. metropolitan
  area;




18


·
            approximately
      $184.1 million, or 9.3%, of our assets represent investments in properties
      located in the Chicago, Illinois metropolitan
  area;




·
            approximately
      $149.6 million, or 7.6%, of our assets represent investments in properties
      located in the New York City and Northern New Jersey
  area;




·
            approximately
      $106.4 million, or 5.4%, of our assets represent investments in properties
      located in the Dallas/Fort Worth, Texas metropolitan area;
    and




·
            approximately
      $104.6 million, or 5.3%, of our assets represent investments in properties
      located in the Southern California
area.




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




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




We invest
in assets where the underlying tenant’s credit rating is below investment grade
(approximately $161.3 million, or 8.5%, of our portfolio as of December 31,
2009).  These investments will have a greater risk of default and
bankruptcy than investments in properties leased exclusively to investment grade
tenants.




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




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




Risks
Related to Ownership of Real Estate




It
may be difficult for us to buy and sell real estate quickly and their values may
decline.




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




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




Upon the
expiration of leases on our properties, we may not be able to re-let all or a
portion of that property, or the terms of re-letting (including the cost of
concessions to tenants) may be less favorable to us than current lease
terms.  There can be no assurance that we will be able to retain
tenants upon the expiration of their leases.  If we are unable to
re-let promptly, or if the rental rates upon re-letting are significantly lower
than the current rates, our funds from operations and cash available for
distribution to stockholders will be adversely affected due to the resulting
reduction in rental receipts and increase in property operating
costs.




These
risks are increased as a result of our acquisition of the EntreCap portfolio
during 2007.  For example, one of those properties located in
Johnston, Rhode Island is currently unoccupied and our estimates of when and on
what terms we will be able to re-let this property are highly subjective and
actual results may differ materially.  Also, with respect to the two
properties located in Omaha, Nebraska, the subleases we assumed from Qwest in
connection with the December 2009 Qwest lease termination are scheduled to
expire in June 2010.  We have begun to extend some of the subleases,
and while we believe we have been reasonable in our estimates, we cannot provide
any assurance as to  whether and on what terms we will be able to
retain the subtenants and/or lease up vacant space in the
buildings.  The remaining properties in the EntreCap portfolio other
than the Kroger properties are subject to leases that are scheduled to expire
over the next three years.  It may be difficult to re-let these
properties at the end of the lease term, and the terms of any such re-let may be
less favorable to us than the current lease terms.




19


Deteriorating
economic conditions could adversely impact our ability to re-let space on
favorable terms as leases expire.




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




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




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




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




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




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




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




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




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




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




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




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




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




20


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




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




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




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




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




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




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




·
            other
      circumstances beyond our control.




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




Risks
Related to Debt Assets




We
invest in CMBS securities, including "first loss" and other subordinate
securities, which entail certain risks.




We invest
in commercial mortgage-backed securities, or CMBS.  CMBS securities
entitle the holder to receive payments that depend primarily on the cash flow
from a specified pool of commercial mortgage loans.  Our CMBS
investments include classes of securities backed by pools of first mortgage
loans on net lease properties (with most of the underlying loan collateral
originated by us in the mid to late 1990s), as well as investments in generic
CMBS pools, or securities backed by loans on a variety of multifamily and
commercial properties, such as regional malls, other retail space, office
buildings, industrial or warehouse properties, hotels, apartment buildings,
mobile home parks, nursing homes and senior living
centers.  Generally, we have invested in subordinate classes of the
securitization pool, including ownership of the “first loss” position or near
“first loss” position in the event of losses on the assets within the
pool.  We may not be able to recover all or part of our investment in
our CMBS securities.  In addition, the value of these investments may
be adversely affected by defaults or decreases in the value of the underlying
collateral, increases in market rates for similar collateral pools or economic
downturns, and we may be required under GAAP to record an impairment loss on our
investments if any of these developments occur.  Current economic
conditions have increased the likelihood of losses on assets within the pool
and, therefore, increased the likelihood that we will incur losses on our
securities.




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




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





The
following table summarizes the geographic concentrations of five percent or more
within our securities portfolio as of December 31, 2009.




State
                    
                    Allocated
                      Cost Basis
                      (in thousands)
                    
                    
                    PercentageColorado
                    
                    $
                    37,764
                    
                    
                    
                    21.9
                    %New
      York
                    
                    
                    29,085
                    
                    
                    
                    16.8
                    %California
                    
                    
                    27,938
                    
                    
                    
                    16.2
                    %


21




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




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




We
may experience losses on our mortgage loans.




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




Our
collateral rights under our corporate credit notes are limited.




Our
collateral rights on our corporate credit notes are more limited than the
collateral rights we have under our long-term mortgage loans.  Our
corporate credit notes represent one of two notes comprising a single first
mortgage loan on a net lease property.  Both notes are secured by the
same first mortgage and assignment of the tenant’s lease and rents, and the note
holders have agreed amongst themselves that the corporate credit note holder
will have a junior claim on the real estate mortgage and a senior claim on the
rents in the event of a tenant bankruptcy and lease rejection.  So our
collateral rights with respect to the real estate mortgage will be junior to the
holder of the related real estate note.  Further, while we will have a
senior claim on the lease assignment in a tenant bankruptcy, as discussed above,
our claim for damages will be unsecured and limited to an amount defined under
the Bankruptcy Code (the greater of one year’s rent or 15% (but not more than
three years) of rent over the remaining lease term, plus rent already due but
unpaid).




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




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




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




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




As of
December 31, 2009, our sole mezzanine investment was $1.4 million of
remaining principal under a loan to a third party borrower to support the
borrower’s capital contributions to a joint venture that makes franchise loans
to franchisees of YUM! Brands, Inc. restaurant concepts such as Taco Bell,
Kentucky Fried Chicken and Pizza Hut.  Our interest in the cash flows
from the related franchise loans is subordinate to the interest of a senior
lender.  Further, that lender declared defaults under its agreement
with the borrower which have resulted in our scheduled principal and interest
being redirected and our loan becoming delinquent.  We cannot provide
any assurance that our cash flows from this loan will resume or that our
collateral will be adequate to allow us to recover our investment.  As
a result, we could lose some or all of our investment in this loan.




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




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


22


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




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




Risks
Related to Borrowings




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




We are
subject to the risks normally associated with debt financing, including the risk
that our cash flows will be insufficient to meet required principal and interest
payments and the risk that we will be unable to refinance our existing
indebtedness, or that the terms of such refinancing will not be as favorable as
the terms of our existing indebtedness.  As of December 31, 2009, the
scheduled principal payments on our long-term debt over the next five years and
thereafter were as follows:




Expected Maturity Dates2010
                    
                    
                    2011
                    
                    
                    2012
                    
                    
                    2013
                    
                    
                    2014
                    
                    
                    Thereafter(in thousands, notional amounts where appropriate,
                      otherwise carrying amounts)Mortgages
      on real estate investments
                    
                    $
                    15,382
                    
                    
                    $
                    35,929
                    
                    
                    $
                    131,486
                    
                    
                    $
                    69,445
                    
                    
                    $
                    67,678
                    
                    
                    $
                    623,891Collateralized
      debt obligations
                    
                    
                    9,100
                    
                    
                    
                    10,266
                    
                    
                    
                    10,949
                    
                    
                    
                    26,065
                    
                    
                    
                    19,221
                    
                    
                    
                    187,709Credit
      facility
                    
                    
                    9,760
                    
                    
                    
                    116,502
                    
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    –Secured
      term loan
                    
                    
                    12,191
                    
                    
                    
                    13,737
                    
                    
                    
                    15,380
                    
                    
                    
                    13,602
                    
                    
                    
                    12,349
                    
                    
                    
                    46,811Convertible
      senior notes
                    
                    
                    (991
                    )
                    
                    
                    (1,099
                    )
                    
                    
                    51,542
                    
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    –Other
      long-term debt
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    30,930




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




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




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




Our
April 2008 credit facility with Wachovia Bank is a secured, recourse obligation
and exposes us to interest rate and margin call risks.




We have
financed certain of our portfolio assets pursuant to a credit agreement we
entered into with Wachovia Bank in April 2008.  This borrowing
facility exposes us to a variety of risks, including the following:




·
            It
      is priced at floating rates based on 30-day LIBOR, or the London Interbank
      Offered Rate.  Therefore, increases in the 30-day LIBOR rate
      will cause our borrowing costs to increase and our net income to
      decrease.




23


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




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




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




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




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




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




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




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




·
            Our
      credit facility with Wachovia Bank is a fully recourse lending
      arrangement.  Therefore, if we default on this facility, 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.




The
profitability of our portfolio (and, in turn, our business) is driven by the
returns on our assets, based on the spread between the yields generated by our
assets and the cost of financing our portfolio.  We generally secure
long-term financing for our assets after we agree to acquire
them.  Therefore, if our cost to finance our assets increases over our
assumptions at the time we commit to invest, the spread we expected to earn on
the asset (and hence our overall portfolio) will erode.  Various
factors could cause our financing cost to increase, including:




·
            widening
      of credit spreads as investors’ appetite for credit risk
      diminishes;




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




·
            increases
      in long-term interest rates;




·
            market
      dislocation events;




·
            ineffectiveness
      of our hedging strategies;




·
            weakening
      economic conditions; and




·
            United
      States military activity and terrorist
  activities.




Spread
erosion could have a material adverse effect on our cash flows, results of
operations and financial condition.




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




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


24


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




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




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




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




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




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




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




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




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




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




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




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




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




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




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




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




25


·
            Hedging
      costs increase as the period covered by the hedge increases and during
      periods of rising and volatile interest rates. We may increase our hedging
      activity and thus increase our hedging costs during periods when interest
      rates are volatile or rising.




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




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




We
may fail to qualify for hedge accounting treatment.




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




Risks
Related to Lease Enhancements




Our
lease enhancement mechanisms may fail.




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




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




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




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




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




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




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




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




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




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




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


26


Risks
Related to Business Strategy and Policies




We
face significant competition that could harm our business.




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




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




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




Joint
venture investments will expose us to certain risks.




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




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




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




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




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




We expect
to fund future investments primarily from debt or equity
capital.  Therefore, we are dependent upon our ability to attract debt
or equity capital from public or institutional lenders.  Since the
second half of 2007, the capital markets have entered a period of significant
instability, and this instability may continue and/or intensify, and result in
us being unable to raise additional debt and/or equity capital at an acceptable
cost.  The capital markets also have been, and in the future may be,
adversely affected by various other events or conditions beyond our control,
such as the United States’ military involvement in the Middle East and
elsewhere, the terrorist attacks on September 11, 2001, the ongoing War on
Terrorism by the United States and the bankruptcy of major companies, such as
Lehman Brother Holdings Inc. and Enron Corp.  Events such as an
escalation in the War on Terrorism, new terrorist attacks, or additional
bankruptcies in the future, as well as other events beyond our control, could
adversely affect the availability and cost of capital for our
business.  As a REIT, we will also be dependent upon the availability
and cost of capital in the REIT markets specifically, which can be impacted by
various factors such as interest rate levels, the strength of real estate
markets and investors’ appetite for REIT investments.  We cannot
assure you that we will be successful in attracting sufficient debt or equity
financing to fund future investments, or at an acceptable cost.




Future
offerings of debt and equity may not be available to us or may adversely affect
the market price of our common stock.




We expect
to continue to increase our capital resources by making additional offerings of
equity and debt securities in the future, which would include classes of
preferred stock, common stock and senior or subordinated notes.  All
debt securities and other borrowings, as well as all classes of preferred stock,
will be senior to our common stock in a liquidation of our company. Additional
equity offerings could dilute our stockholders’ equity, reduce the market price
of shares of our common stock, or be of preferred stock having a distribution
preference that may limit our ability to make distributions on our common
stock.  Continued credit market weakness could cause us to seek
sources of potentially less attractive capital.  Our ability to
estimate the amount, timing or nature of additional offerings is limited as
these factors will depend upon market conditions and other
factors.


27


We
may fail to manage our anticipated growth.




As of
December 31, 2009, our company had 19 employees.  As our asset base
and/or portfolio management duties continue to grow, we may experience a
significant strain on our management, operational, financial and other
resources.  Our ability to manage growth effectively will require us
to continue to improve our operational and financial systems, expand our
employee base and train and manage our employees and develop additional
management expertise.  Failure to manage growth effectively could have
a material adverse effect on our financial condition and operating
results.




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




As of
December 31, 2009, approximately 45.5% of our common stock was owned by eight
unrelated institutional investors (based on SEC filings made by these
investors).  This concentration of ownership could have an adverse
impact on the value of your investment, including as a result of the
following:




·
            Trading
      volume in our stock may be limited, which will reduce the liquidity of
      your investment.




·
            The
      sale of a significant number of our shares in the open market by a
      significant stockholder or otherwise could cause our stock price to
      decline.




·
            Although
      none of these investors on its own controls a majority of our common
      stock, these owners could determine to act together and given their
      significant concentration may be able to take actions that are not in your
      best interest.




Our
board of directors may change our investment and operational policies without
stockholder consent.




Our board
of directors determines our investment and operational policies and may amend or
revise these policies at any time, including our policies with respect to our
REIT status, investment objectives, acquisitions, growth, operations,
indebtedness, capitalization and distributions, or approve transactions that
deviate from these policies without a vote of or notice to our
stockholders.  Investment and operational policy changes could
adversely affect the market price of stock in our company and our ability to
make distributions to our stockholders.




The
federal income tax laws governing REITs are complex, and our failure to qualify
as a REIT under the federal tax laws will result in adverse tax
consequences.




We intend
to continue to operate in a manner that will allow us to qualify as a REIT under
the federal income tax laws. The REIT qualification requirements are extremely
complex, however, and interpretations of the federal income tax laws governing
qualification as a REIT are limited.  Accordingly, we cannot be
certain that we will be successful in qualifying as a REIT. At any time, new
laws, interpretations, or court decisions may change the federal tax laws or the
federal income tax consequences of our qualification as a REIT.




If we
fail to qualify as a REIT in any taxable year, we will be subject to federal
income tax on our taxable income. Our taxable income would be determined without
deducting any distributions to our stockholders.  We might need to
borrow money or sell assets in order to pay any such tax.  If we cease
to qualify as a REIT, we no longer would be required to distribute most of our
taxable income to our stockholders.  Unless the federal income tax
laws excused our failure to qualify as a REIT, we could not re-elect REIT status
until the fifth calendar year after the year in which we failed to qualify as a
REIT.




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




In order
to maintain our REIT qualification, no more than 50% in value of our outstanding
stock may be owned, directly or indirectly, by five or fewer individuals (as
defined in the federal income tax laws to include various kinds of entities)
during the last half of any taxable year.  “Individuals” for this
purpose include natural persons, private foundations, some employee benefit
plans and trusts, and some charitable trusts.  In order to preserve
our REIT qualification, our charter generally prohibits any person from directly
or indirectly owning more than 9.9% in value or in number of shares, whichever
is more restrictive, of any class or series of the outstanding shares of our
capital stock.




If anyone
transfers shares in a way that would violate our ownership limits, or prevent us
from continuing to qualify as a REIT under the federal income tax laws, we will
consider the transfer to be null and void from the outset and the intended
transferee of those shares will be deemed never to have owned the shares or
those shares instead will be transferred to a trust for the benefit of a
charitable beneficiary and will be either redeemed by us or sold to a person
whose ownership of the shares will not violate our ownership
limits.  Anyone who acquires shares in violation of our ownership
limits or the other restrictions on transfer in our charter bears the risk of
suffering a financial loss when the shares are redeemed or sold if the market
price of our stock falls between the date of purchase and the date of redemption
or sale.


28


Provisions
of our charter and Maryland law may limit the ability of a third-party to
acquire control of our company.




Our
charter contains restrictions on stock ownership and transfer.




As
described above, our charter contains stock ownership limits.  These
limits may delay, defer or prevent a transaction or a change of control of our
company that might involve a premium price for stock of our company or otherwise
be in the best interest of our stockholders.




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




Our
charter authorizes our board of directors to amend the charter to increase or
decrease the aggregate number of shares of stock we have authority to issue,
without any action by the stockholders. Issuances of additional shares of stock
may delay, defer or prevent a transaction or a change of control of our company
that might involve a premium price for stock of our company or otherwise be in
the best interest of our stockholders.




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




Our
charter and bylaws also contain other provisions that may delay, defer or
prevent a transaction or a change of control of our company that might involve a
premium price for our common stock or otherwise be in the best interest of our
stockholders.  For example, our charter and bylaws provide
that:  a two-thirds vote of stockholders is required to remove a
director, vacancies on our board may only be filled by the remaining directors
(or, if no directors remain, by the stockholders), the number of directors may
be fixed only by the directors, our bylaws may only be amended by our directors
and a majority of shares is required to call a special stockholders
meeting.




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




We
believe that investors consider the dividend distribution rate on shares of REIT
stock, expressed as a percentage of the market price of the shares, relative to
market interest rates as an important factor in deciding whether to buy or sell
shares of REIT stock.  If market interest rates go up, prospective
purchasers of REIT stock may expect a higher dividend distribution
rate.  Higher interest rates would also likely increase our borrowing
costs and might decrease cash available for distribution.  Thus,
higher market interest rates could cause the market price of stock in our
company to decline.




The
market price of our stock may vary substantially.




Various
factors can affect the market price of our stock including the
following:




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




·
            the
      extent of investor interest in our company, real estate generally or
      commercial real estate
specifically;




·
            the
      reputation of REITs generally and the attractiveness of their equity
      securities in comparison to other equity securities, including securities
      issued by other real estate companies, and fixed income
      securities;




·
            changes
      in expectations of future financial performance or changes in estimates of
      securities analysts;




·
            fluctuations
      in stock market prices and volumes;
and




·
            announcements
      by us or our competitors of acquisitions, investments or strategic
      alliances.




We
depend on our key personnel.




We depend
on the efforts and expertise of our senior management team.  There is
no guarantee that any member of our senior management team will remain employed
with our company.  If any member of our senior management team were to
die, become disabled or otherwise leave our employ, we may not be able to
replace him with a person of equal skill, ability and industry
expertise.




Item
1B.    Unresolved Staff Comments.




None.




Item
2.     Properties.




Our
corporate offices are located at 1065 Avenue of the Americas, New York, New York
10018.  Our lease at this property expires in September
2013.


29


Our owned
real properties are described above under “Business—Our Portfolio—Owned
Properties.”




Item
3.     Legal Proceedings.




From time
to time, we are involved in legal proceedings in the ordinary course of
business.  We do not believe that any matter we are currently involved
in will have a material adverse effect on our business, results of operations or
financial condition.  However, periodic settlements and/or
professional or other fees and expenses related to any matter could have an
adverse impact on our results of operations in the quarterly or annual period in
which they are recognized.




Item
4.     Submission of Matters to a Vote of Security
Holders.




No
matters were submitted to a vote of our stockholders during the fourth quarter
ended December 31, 2009.


30


PART
II.




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




Information
and Holders of Record




Our
common stock has been listed for trading on the New York Stock Exchange (“NYSE”)
under the symbol “LSE” since our initial public offering on March 19,
2004.  On February 24, 2010, the reported closing sale price per
share of common stock on the NYSE was $4.73 and there were 777 holders of record
of our common stock.  The table below sets forth the quarterly high
and low sales prices of our common stock on the NYSE for the periods
indicated.




Fiscal
      Year
                
                Low
                
                
                High2008First
      Quarter
                
                $
                6.85
                
                
                $
                9.00Second
      Quarter
                
                
                7.34
                
                
                
                8.65Third
      Quarter
                
                
                6.75
                
                
                
                10.14Fourth
      Quarter
                
                
                1.40
                
                
                
                7.962009First
      Quarter
                
                $
                1.46
                
                
                $
                2.43Second
      Quarter
                
                
                1.92
                
                
                
                3.51Third
      Quarter
                
                
                2.63
                
                
                
                4.45Fourth
      Quarter
                
                
                3.08
                
                
                
                5.07





Dividends




The table
below sets forth the cash dividends paid on our common stock for the periods
indicated:




Quarter
      Ended
                
                Dividend Payment Date
                
                Dividend per Share2008March
      31, 2008
                
                April
      15, 2008
                
                $
                0.20June
      30, 2008
                
                July
      15, 2008
                
                
                0.20September
      30, 2008
                
                October 15, 2008
                
                
                0.202009March
      31, 2009
                
                April
      15, 2009
                
                $
                0.05June
      30, 2009
                
                July
      15, 2009
                
                
                0.05September
      30, 2009
                
                October 15, 2009
                
                
                0.05December
      31, 2009
                
                January 15, 2010
                
                
                0.06





We did
not pay a dividend on our common stock for the quarter ended December 31,
2008.




We
generally intend to distribute each year all or substantially all of our REIT
taxable income (which does not necessarily equal net income as calculated in
accordance with generally accepted accounting principles) to our stockholders so
as to comply with the REIT provisions of the Internal Revenue Code and to avoid
federal income tax and the nondeductible excise tax.  Our dividend
policy is determined from time to time by our board of directors in their sole
discretion, and will depend on factors such as our cash available for
distribution, our funds from operations, our maintenance of REIT status, market
conditions and such other factors as our board of directors deems
relevant.




Tax
Characteristics of 2009 Dividends




The
following table summarizes the taxable nature of our common dividends during
2009:




Total common dividend per share (tax
      basis)
                  
                  $
                  0.21Capital
      gain
                  
                  
                  0.00
                  %Ordinary
      income
                  
                  
                  100.00
                  %Return
      of capital
                  
                  
                  0.00
                  %100.00
                  %




31


Stock
Price Performance Graph




The graph
below compares the cumulative total stockholder return of our common stock with
that of the Standard & Poor’s 500 Composite Stock Price Index and the
Standard & Poor’s 500 REIT Index from December 31, 2004 through December 31,
2009.  The graph assumes that you invested $100 at the close of market
on December 31, 2004 in our common stock and each of the indexes, with dividends
reinvested.  The comparisons in this graph are provided in accordance
with Securities and Exchange Commission disclosure requirements and are not
intended to forecast or be indicative of the future performance of our common
stock.





Company / Index
                
                Base
                  Period
                  12/31/04
                
                
                12/31/05
                
                
                12/31/06
                
                
                12/31/07
                
                
                12/31/08
                
                
                12/31/09CapLease,
      Inc.
                
                
                100
                
                
                
                90.23
                
                
                
                106.63
                
                
                
                83.82
                
                
                
                18.59
                
                
                
                50.44S&P
      500 Index
                
                
                100
                
                
                
                104.91
                
                
                
                121.48
                
                
                
                128.16
                
                
                
                80.74
                
                
                
                102.11S&P
      500 REIT Index
                
                
                100
                
                
                
                112.56
                
                
                
                159.56
                
                
                
                132.27
                
                
                
                77.79
                
                
                
                97.25








32




Item
6.    Selected Financial Data.




The
following selected historical financial information for the five years ended
December 31, 2009 is derived from our audited consolidated financial
statements.  The data should be read in conjunction with the
consolidated financial statements, related notes, and other financial
information included in this Form 10-K.




Year ended December 31,2009
              
              
              2008
              
              
              2007
              
              
              2006
              
              
              2005(in thousands, except per share amounts)Statement
      of Operations dataRevenues:Rental
      revenue
              
              $
              134,496
              
              
              $
              135,026
              
              
              $
              122,064
              
              
              $
              76,127
              
              
              $
              37,055Interest
      income from loans and securities
              
              
              30,667
              
              
              
              35,040
              
              
              
              35,368
              
              
              
              32,446
              
              
              
              27,893Property
      expense recoveries
              
              
              11,473
              
              
              
              11,457
              
              
              
              11,215
              
              
              
              8,828
              
              
              
              6,269Gains
      on sale of mortgage loans and securities
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              2,923
              
              
              
              447Other
      revenue
              
              
              1,532
              
              
              
              764
              
              
              
              583
              
              
              
              1,903
              
              
              
              479Total
      revenues
              
              
              178,168
              
              
              
              182,287
              
              
              
              169,770
              
              
              
              122,227
              
              
              
              72,143Expenses:Interest
      expense
              
              
              90,270
              
              
              
              98,217
              
              
              
              96,419
              
              
              
              62,350
              
              
              
              31,064Property
      expenses
              
              
              20,442
              
              
              
              19,526
              
              
              
              18,556
              
              
              
              15,511
              
              
              
              10,287(Gain)
      loss on derivatives
              
              
              —
              
              
              
              19,496
              
              
              
              (203
              )
              
              
              (413
              )
              
              
              (159
              )Loss
      on investments
              
              
              26,885
              
              
              
              3,663
              
              
              
              427
              
              
              
              907
              
              
              
              2,372General
      and administrative expenses
              
              
              10,894
              
              
              
              11,669
              
              
              
              10,660
              
              
              
              9,769
              
              
              
              10,140General
      and administrative expenses - stock based compensation
              
              
              2,118
              
              
              
              1,978
              
              
              
              1,621
              
              
              
              2,621
              
              
              
              2,235Depreciation
      and amortization expense on realproperty
              
              
              51,410
              
              
              
              53,132
              
              
              
              46,866
              
              
              
              24,782
              
              
              
              11,041Loan
      processing expenses
              
              
              309
              
              
              
              314
              
              
              
              306
              
              
              
              268
              
              
              
              283Total
      expenses
              
              
              202,328
              
              
              
              207,995
              
              
              
              174,652
              
              
              
              115,795
              
              
              
              67,263Gain
      on extinguishment of debt
              
              
              9,829
              
              
              
              1,713
              
              
              
              1,363
              
              
              
              —
              
              
              
              —Provision
      for income taxes
              
              
              (201
              )
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —Income
      (loss) from continuing operations
              
              
              (14,532
              )
              
              
              (23,995
              )
              
              
              (3,519
              )
              
              
              6,432
              
              
              
              4,880Income
      from discontinued operations
              
              
              514
              
              
              
              707
              
              
              
              981
              
              
              
              834
              
              
              
              195Net
      income (loss) before non-controlling interest in consolidated
      subsidiaries
              
              
              (14,018
              )
              
              
              (23,288
              )
              
              
              (2,538
              )
              
              
              7,266
              
              
              
              5,075Non-controlling
      interest in consolidated subsidiaries
              
              
              51
              
              
              
              124
              
              
              
              33
              
              
              
              (17
              )
              
              
              55Net
      income (loss)
              
              
              (13,967
              )
              
              
              (23,164
              )
              
              
              (2,505
              )
              
              
              7,249
              
              
              
              5,130Dividends
      allocable to preferred shares
              
              
              (2,844
              )
              
              
              (2,844
              )
              
              
              (2,844
              )
              
              
              (2,844
              )
              
              
              (561
              )Net
      income (loss) allocable to common stockholders
              
              $
              (16,811
              )
              
              $
              (26,008
              )
              
              $
              (5,349
              )
              
              $
              4,405
              
              
              $
              4,569Earnings
      per share:Net
      income (loss) per common share, basic and diluted
              
              $
              (0.34
              )
              
              $
              (0.57
              )
              
              $
              (0.13
              )
              
              $
              0.14
              
              
              $
              0.16Weighted
      average number of common shares outstanding, basic
              
              
              49,297
              
              
              
              45,526
              
              
              
              40,739
              
              
              
              31,939
              
              
              
              27,784Weighted
      average number of common shares outstanding, diluted
              
              
              49,297
              
              
              
              45,526
              
              
              
              40,739
              
              
              
              31,941
              
              
              
              27,784Dividends
      declared per common share
              
              $
              0.21
              
              
              $
              0.60
              
              
              $
              0.80
              
              
              $
              0.80
              
              
              $
              0.74Dividends
      declared per preferred share
              
              $
              2.03125
              
              
              $
              2.03125
              
              
              $
              2.03125
              
              
              $
              2.03125
              
              
              $
              0.48524Other
      dataCash
      flows from operating activities
              
              $
              56,614
              
              
              $
              64,359
              
              
              $
              30,945
              
              
              $
              27,443
              
              
              $
              (17,111
              )Cash
      flows from investing activities
              
              
              70,342
              
              
              
              9,547
              
              
              
              (309,062
              )
              
              
              (361,854
              )
              
              
              (675,408
              )Cash
      flows from financing activities
              
              
              (96,849
              )
              
              
              (99,514
              )
              
              
              307,739
              
              
              
              319,520
              
              
              
              681,114




33





As of December 31,2009
              
              
              2008
              
              
              2007
              
              
              2006
              
              
              2005(in thousands)Balance
      sheet dataReal
      estate investments, net
              
              $
              1,408,819
              
              
              $
              1,510,413
              
              
              $
              1,563,570
              
              
              $
              1,115,001
              
              
              $
              764,930Loans
      held for investment
              
              
              221,211
              
              
              
              285,779
              
              
              
              269,293
              
              
              
              273,170
              
              
              
              297,551Commercial
      mortgage-backed securities
              
              
              153,056
              
              
              
              161,842
              
              
              
              198,187
              
              
              
              183,066
              
              
              
              137,409Cash
      and cash equivalents
              
              
              38,546
              
              
              
              8,439
              
              
              
              34,047
              
              
              
              4,425
              
              
              
              19,316Structuring
      fees receivable
              
              
              3,410
              
              
              
              1,863
              
              
              
              2,576
              
              
              
              3,253
              
              
              
              3,862Total
      assets
              
              
              1,904,415
              
              
              
              2,045,525
              
              
              
              2,158,067
              
              
              
              1,644,300
              
              
              
              1,286,488Mortgages
      on real estate investments
              
              
              943,811
              
              
              
              972,324
              
              
              
              983,770
              
              
              
              794,773
              
              
              
              551,844Collateralized
      debt obligations
              
              
              263,310
              
              
              
              268,265
              
              
              
              268,227
              
              
              
              268,190
              
              
              
              268,156Repurchase
      agreement obligations
              
              
              —
              
              
              
              —
              
              
              
              232,869
              
              
              
              195,485
              
              
              
              129,965Credit
      facility
              
              
              126,262
              
              
              
              189,262
              
              
              
              —
              
              
              
              —
              
              
              
              —Secured
      term loan
              
              
              114,070
              
              
              
              123,719
              
              
              
              129,521
              
              
              
              —
              
              
              
              —Convertible
      senior notes
              
              
              49,452
              
              
              
              66,239
              
              
              
              68,017
              
              
              
              —
              
              
              
              —Other
      long-term debt
              
              
              30,930
              
              
              
              30,930
              
              
              
              30,930
              
              
              
              30,930
              
              
              
              30,930Stockholders’
      equity
              
              
              313,210
              
              
              
              323,578
              
              
              
              356,440
              
              
              
              307,656
              
              
              
              270,031




34




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.




Overview




We are a
diversified REIT that invests primarily in single tenant commercial real estate
assets subject to long-term leases to high credit quality tenants.  We
focus on properties that are subject to a net lease.  See
“Business—Overview” for what constitutes a net lease.  We also have
made and expect to continue to make investments in single tenant properties
where the owner has exposure to property expenses when we determine we can
sufficiently underwrite that exposure and isolate a predictable cash
flow.




We have
two complementary business lines:  owning single tenant properties and
making first mortgage loans and other debt investments on single tenant
properties.




The
principal sources of our revenues are rental income on our owned real properties
and interest income from our debt investments (loans and
securities).  The principal sources of our expenses are interest
expense on our assets financed, depreciation expense on our real properties,
general and administrative expenses and property expenses (net of expense
recoveries).




Our
primary business objective is to generate stable, long-term and attractive
returns based on the spread between the yields generated by our assets and the
cost of financing our portfolio.  We rely on leverage to allow us to
invest in a greater number of assets and enhance our asset
returns.  Our overall portfolio leverage as of December 31, 2009 was
approximately 75.7%.  We expect our leverage levels to decrease over
time, as a result of one or more of the following factors: scheduled principal
amortization on our debt, voluntary debt reduction including through selected
asset sales, and lower leverage on new asset acquisitions.  As a
result of market conditions, the focus of our portfolio activity during 2009 and
2008 was reducing primarily recourse debt and strengthening our balance
sheet.   During 2010, we expect to continue to strengthen our
balance sheet through debt repayment and/or repurchase and also
opportunistically resume portfolio growth as market conditions
permit.




Our
portfolio financing strategy is to finance our assets with long-term fixed rate
debt as soon as practicable after we invest, generally on a secured,
non-recourse basis.  Through non-recourse debt, we seek to limit the
overall company exposure in the event we default on the debt to the amount we
have invested in the asset or assets financed.  We seek to finance our
assets with “match-funded” or substantially “match-funded” debt, meaning that we
seek to obtain debt whose maturity matches as closely as possible the maturity
of the asset financed.  Through December 31, 2009, our long-term fixed
rate asset financings have been in the form of traditional third party
non-recourse mortgage financings (on most of our owned real properties) and two
non-recourse term financings, including a secured term loan (completed in
December 2007) and one CDO (completed in March 2005).  We have also
financed certain of our assets on a non-match-funded floating rate recourse
credit agreement.




As
discussed in greater detail under “Business Environment” below, credit market
conditions have adversely impacted our company in a variety of ways, including
by causing us to suspend growth, significantly curtailing our access to credit
and capital on attractive terms and causing us to finance a portion of our
long-term fixed rate assets on a non-match-funded, floating rate, recourse
credit agreement.  In response to market conditions we have refocused
our strategy in a number of ways, including by reducing our debt levels,
selectively selling assets, intensively managing our portfolio and reducing our
general and administrative expenses.  We do not know when conditions
will normalize, if adverse conditions will intensify or the full extent to which
the disruptions will affect us.




Summary
of Investment and Financing Activity in 2009




As a
result of market conditions, we did not add any new assets to our portfolio
during 2009, other than some nominal securities investments we made through the
reinvestment feature of our CDO.  Instead, the focus of our portfolio
activity during 2009 was reducing primarily recourse debt and strengthening our
balance sheet.  During 2009, we retired $125.0 million of
principal on our debt, including $63.0 million of borrowings to Wachovia
Bank.  During 2010, we expect to continue to strengthen our balance
sheet through debt repayment and/or repurchase and also opportunistically resume
portfolio growth as market conditions permit.




Business
Environment




While
conditions within the United States credit markets in general and United States
real estate credit markets in particular have improved from the historic levels
of dislocation and stress that began in the summer of 2007, these markets remain
significantly stressed.  Credit conditions continue to impact us in a
variety of ways, including by:


35


·
            making
      it difficult for us to price and finance new investment opportunities on
      attractive terms.  As a result of market conditions, we have not
      been adding new asset investments to our investment
    portfolio.




·
            causing
      us to preserve our liquidity rather than make new investments due to the
      limited availability of debt or equity capital on attractive
      terms.




·
            causing
      a delay in the long-term fixed rate financing of the mortgage assets
      financed under our recourse credit agreement with Wachovia
      Bank.  We expect credit market conditions to continue to impact
      our ability to obtain long-term fixed rate financing and, therefore, we
      cannot provide any assurance as to the timing or our ability to do
      so.  Further, to the extent we continue to finance a portion of
      our portfolio through the credit agreement with Wachovia Bank, that
      agreement is recourse to all of our other assets, we will continue to be
      subject to potential margin calls from the lender (primarily for credit
      events related to the assets financed) and we will be subject to interest
      rate risk as the borrowings are priced at floating rates based on 30-day
      LIBOR, or the London Interbank Offered Rate.  Increases in LIBOR
      rates will cause our borrowing costs on the Wachovia credit agreement to
      increase.




·
            causing
      us to sell selected assets to reduce debt and generate
      liquidity.




Credit
market conditions and limited market trading activity for real estate securities
continue to result in depressed valuations on our real estate
securities.  If these conditions do not improve, we may be required to
record impairment losses on our securities, and these losses may be
significant.




We do not
know when market conditions will normalize, if adverse conditions will intensify
or the full extent to which the disruptions will affect us.  If market
weakness persists or intensifies, the trends discussed above may continue and we
may be impacted in a variety of additional ways.  For example, we may
experience challenges in refinancing debt as it matures or raising additional
capital, margin calls on our Wachovia Bank credit agreement and impairment
charges on our assets.  If weak economic conditions continue and
capital for commercial real estate remains limited, certain collateral within
our CDO may default, which could cause the CDO to fail to satisfy certain cash
flow coverage tests, which would result in a redirection of the cash
distributions payable to us from the CDO until the tests are back into
compliance.




We have
taken and may continue to take a variety of cash conservation measures such as
asset sales, expense reductions and dividend adjustments to increase our
liquidity levels until credit markets normalize.  Our ability to sell
collateral to generate liquidity could also be impacted by factors such as
market conditions, the relative illiquidity of certain of our assets (i.e., our
owned property and loan investments) and limitations on sale imposed pursuant to
the debt financing terms of our assets.




Current
economic and credit market conditions may cause commercial real estate values
and market rental rates to decline significantly.  These declines
could adversely impact us in a number of ways, including by causing us to record
losses on our assets, reducing the proceeds we receive upon sale or refinance of
our assets or adversely impacting our ability to re-let, sell or refinance our
owned properties.




Current
economic conditions have contributed to unexpected bankruptcies and rapid
declines in financial condition at a number of companies, particularly in the
retail and financial sectors.  These conditions could cause one or
more of the tenants to whom we have exposure to fail or default in their payment
obligations, which could cause us to record material losses or a material
reduction in our revenue and cash flows.




Application
of Critical Accounting Policies




Our
discussion and analysis of financial condition and results of operations is
based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States,
or GAAP.  The preparation of financial statements in conformity with
GAAP requires the use of judgments, estimates and assumptions that could affect
the reported amounts of assets and liabilities, the disclosure of contingent
assets and liabilities and the reported amounts of revenues and
expenses.  Actual results could differ from these
estimates.  The following is a summary of our accounting policies that
are most affected by judgments, estimates and assumptions.  The
summary should be read in conjunction with the more complete discussion of our
accounting policies included in Note 2 to the consolidated financial statements
in this Annual Report on Form 10-K.




Impairment
on Owned Real Properties.




We are
required under GAAP to review our owned properties for impairment whenever
events or changes in circumstances indicate that the carrying value of an asset
may not be recoverable.  Upon determination of impairment, we would
record a write-down of the asset, which would be charged to
earnings.  Significant judgment is required both in determining
impairment and in estimating the resulting write-down, including an evaluation
of factors such as the credit quality of the tenant, the anticipated cash flows
of the property, based on current leases in place, and an estimate of what lease
rents will be if the property is vacated coupled with an estimate of proceeds to
be realized upon sale.  These estimates are highly subjective and
could differ materially from actual results.  We recorded impairment
losses on our owned properties of $16.0 million in 2009 (including $11.9 million
on the write-down to estimated fair value of a property in Johnston, Rhode
Island that is now vacant and $4.1 million on the sale of one property and
expected sale of another during 2010).  We also recognized impairment
losses on our owned properties of $0.4 million in 2008.


36


Impairment
of Loan Investments.




We are
required under GAAP to periodically evaluate each of our loan investments for
possible impairment.  In accordance with applicable accounting
guidance, our impairment analysis includes both a general reserve component (on
performing loans) and an asset-specific component (on loans where we have deemed
it probable that we will not be able to collect all amounts due according to the
contractual terms).  Significant judgment is required in the analysis
of each component, including (under the general reserve component) making
estimates of the likelihood of default and lease rejection given the credit
characteristics of the tenant, and estimates of stressed collateral values and
potential bankruptcy claim recoveries, and (under the asset-specific component)
evaluating factors such as the status of the loans (i.e., current or expected
payment or other defaults), the credit quality of the underlying tenants, the
present value of expected future cash flows on the loans, the fair market value
of our collateral, and the amount and status of any senior
debt.  These estimates are highly subjective and could differ
materially from actual results.  As of December 31, 2009, we had a
general loan loss reserve of $0.5 million (established in 2008) and an
asset-specific loan loss reserve related to a mezzanine loan investment of $0.4
million (established in 2009).




Commercial
Mortgage-Backed Securities.




Under
applicable accounting guidance, we estimate the fair value on our investments in
securities quarterly.  Management evaluates a variety of inputs and
then estimates fair value based on those inputs.  The primary inputs
evaluated by management are broker quotations, index pricing, market yields and
credit spreads on securities with similar credit ratings and duration,
collateral values, and liquidity of the security.  Our estimates of
fair value are subject to significant variability based on market conditions,
including interest rates and credit spreads.  We are then required
under GAAP to assess whether any unrealized losses on securities below our carry
value reflect a decline in value which is other-than-temporary.  If an
other-than-temporarily impaired security is intended to be sold or required to
be sold prior to the recovery of its carrying amount, the full amount of the
impairment loss is charged to earnings.  Otherwise, losses on the
security must be separated into two categories, the portion which is considered
credit loss, which is charged to earnings, and the portion due to other factors,
which is charged to other comprehensive income (loss), a component of balance
sheet equity.  Significant judgment is required in this
analysis.  Current credit market conditions have made these judgments
even more challenging.  In determining whether a decline in value is
other-than-temporary, we consider whether the decline is due to factors such as
changes in interest rates or credit spreads (indicator of temporary decline) or
credit rating downgrades on the securities or credit defaults on the underlying
collateral assets (indicator of an other-than-temporary decline).  In
estimating other-than-temporary impairment losses, management considers a
variety of factors including (1) the financial condition and near-term prospects
of the credit, including credit rating of the security and the underlying tenant
and an estimate of the likelihood and expected timing of any default, (2)
whether we expect to hold the investment for a period of time sufficient to
allow for anticipated recovery in fair value, (3) the length of time and the
extent to which the fair value has been below cost, (4) current market
conditions, (5) expected cash flows from the underlying collateral and an
estimate of underlying collateral values, and (6) subordination levels within
the securitization pool.  These estimates are highly subjective and
could differ materially from actual results.  We recorded
other-than-temporary declines in the fair value of our CMBS securities of $0.1
million in 2009, $1.0 million in 2008 and $0.4 million for 2007.




Stock Based
Compensation.




Pursuant
to our 2004 stock incentive plan, we have made and expect to continue to make
awards of common stock to our employees with vesting subject to attainment of
performance criteria.  Under applicable accounting guidance, we are
required to estimate the probability of vesting of these shares quarterly and
recognize expense (generally equal to the fair market value of the shares
awarded on the grant date) for any shares deemed probable to vest over the
period the employee is required to perform services to receive the
shares.  We base our estimates of probability on an assessment of our
actual results against the relevant performance criteria.  These
estimates may change over time as our actual results against the criteria are
re-assessed.  Changes in these estimates could have a material impact
on the expense we recognize.




Property
Acquisitions




During
the quarter ended December 31, 2009, we did not make any new
investments.  We also did not complete any new asset
financings.




Business
Segments




We
conduct our business through two operating 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).




37


Segment
data for the year ended December 31, 2009 are as follows (amounts in
thousands):




Corporate /
                        Unallocated
                      
                      
                      Operating
                        Real Estate
                      
                      
                      Lending
                        Investments
                      
                      
                      TotalTotal
      revenues
                      
                      $
                      492
                      
                      
                      $
                      147,408
                      
                      
                      $
                      30,268
                      
                      
                      $
                      178,168Total
      expenses
                      
                      
                      21,210
                      
                      
                      
                      150,516
                      
                      
                      
                      30,602
                      
                      
                      
                      202,328Gain
      on extinguishment of debt
                      
                      
                      9,829
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      9,829Provision
      for income tax
                      
                      
                      201
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      201Loss
      from continuing operations
                      
                      
                      (11,090
                      )
                      
                      
                      (3,109
                      )
                      
                      
                      (333
                      )
                      
                      
                      (14,532
                      )Total
      assets
                      
                      
                      54,618
                      
                      
                      
                      1,471,987
                      
                      
                      
                      377,810
                      
                      
                      
                      1,904,415




Segment
data for the year ended December 31, 2008 are as follows (amounts in
thousands):




Corporate /
                      Unallocated
                    
                    
                    Operating
                      Real Estate
                    
                    
                    Lending
                      Investments
                    
                    
                    TotalTotal
      revenues
                    
                    $
                    777
                    
                    
                    $
                    147,172
                    
                    
                    $
                    34,338
                    
                    
                    $
                    182,287Total
      expenses
                    
                    
                    23,457
                    
                    
                    
                    144,776
                    
                    
                    
                    39,762
                    
                    
                    
                    207,995Gain
      on extinguishment of debt
                    
                    
                    1,713
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    1,713Income
      (loss) from continuing operations
                    
                    
                    (20,967
                    )
                    
                    
                    2,396
                    
                    
                    
                    (5,424
                    )
                    
                    
                    (23,995
                    )Total
      assets
                    
                    
                    26,620
                    
                    
                    
                    1,566,405
                    
                    
                    
                    452,500
                    
                    
                    
                    2,045,525




Segment
data for the year ended December 31, 2007 are as follows (amounts in
thousands):




Corporate /
                      Unallocated
                    
                    
                    Operating
                      Real Estate
                    
                    
                    Lending
                      Investments
                    
                    
                    TotalTotal
      revenues
                    
                    $
                    602
                    
                    
                    $
                    134,529
                    
                    
                    $
                    34,639
                    
                    
                    $
                    169,770Total
      expenses
                    
                    
                    16,388
                    
                    
                    
                    133,844
                    
                    
                    
                    24,420
                    
                    
                    
                    174,652Gain
      on extinguishment of debt
                    
                    
                    -
                    
                    
                    
                    1,363
                    
                    
                    
                    -
                    
                    
                    
                    1,363Income
      (loss) from continuing operations
                    
                    
                    (15,785
                    )
                    
                    
                    2,048
                    
                    
                    
                    10,218
                    
                    
                    
                    (3,519
                    )Total
      assets
                    
                    
                    64,413
                    
                    
                    
                    1,620,419
                    
                    
                    
                    473,235
                    
                    
                    
                    2,158,067




Comparison
of Year Ended December 31, 2009 to the Year Ended December 31, 2008




The
following discussion compares our operating results for the year ended December
31, 2009 to the comparable period in 2008.




Revenue.




Total
revenue decreased $4.1 million, or 2%, to $178.2 million.  The
decrease was primarily attributable to a decrease in interest
income.




Rental
revenue and property expense recoveries, in the aggregate, was basically
unchanged, as it decreased $0.5 million, or less than one percent, to $146.0
million.  While we had one tenant vacancy during 2009 (Johnston, Rhode
Island property), the impact on revenue during 2009 was modest as the tenant
held over for three months beyond the scheduled lease maturity in July and paid
higher rent during the holdover period.  We expect 2010 rental revenue
to be adversely impacted by the vacancy of the Johnston, Rhode Island property
during October 2009 and the lease termination and related sublease maturities at
the Omaha, Nebraska properties during 2009 and 2010.




Interest
income decreased $4.4 million, or 12%, to $30.7 million during 2009, primarily
as a result of lower loan balances and lower interest rates on cash
balances.




Other
revenue increased $0.8 million, or 100%, to $1.5 million, primarily reflecting
the lease termination payment we received on the Omaha, Nebraska properties
during 2009.




Expenses.




Total
expenses decreased $5.7 million, or 3%, to $202.3 million.  The
decrease in expenses was primarily attributable to lower interest expense and
various other expenses in the 2009 period, offset in part by higher investment
losses in the 2009 period.




Interest
expense decreased $7.9 million, or 8%, to $90.3 million, from $98.2
million.  The decrease in the 2009 period resulted primarily from $5.0
million of lower interest expense on floating rate borrowings (resulting from
lower borrowings and interest rates in the 2009 period), $1.6 million of lower
interest expense on convertible debt due to repurchases of the convertible debt,
$0.8 million of lower interest expense on property mortgages and $0.5 million of
lower interest expense on the secured term loan.  The Company’s average
balance outstanding and effective financing rate under its floating rate
borrowings was approximately $157 million at 3.71% during the 2009 period
(average 30-day LIBOR of 0.35%), compared with approximately $202 million at
5.44% during the 2008 period (average 30-day LIBOR of 2.91%).  Market
interest rates were low during 2009 but we cannot predict the level of market
interest rates in the future.




38




Depreciation
and amortization expense on real property decreased $1.7 million, or 3%, to
$51.4 million, primarily due to the value of our in place lease on the property
in Johnston, Rhode Island being fully amortized at the scheduled lease maturity
in July 2009.




Property
expense increased $0.9 million, or 5%, to $20.4 million, reflecting increased
expenses including costs paid to one of our tenants and real estate
taxes.  The net amount of property expenses we incurred in 2009 (net
of expense recoveries) was $9.0 million, compared to $8.1 million in 2008.




We had no
loss on derivatives in 2009, compared to a $19.5 million loss on derivatives in
the 2008 period.  The loss in the 2008 period relates primarily to
$18.1 million of losses we realized in November 2008 when we closed our only
open hedge position.  As of December 31, 2007 and during most of 2008,
we had a single open interest rate swap, intended to manage our exposure to
interest rate movements for a planned long-term financing of assets financed on
our credit agreement with Wachovia Bank.  During November 2008, we
closed the swap as a result of unprecedented credit market dislocations and
associated declines in the 10-Year Treasury and other benchmark market interest
rates.  The full amount of the realized loss on closing the swap of
$15.2 million, along with $2.9 million of related losses previously deferred in
Other Comprehensive Income/Loss on our Consolidated Balance Sheet, were charged
directly to our Consolidated Statement of Operations, as the swap position no
longer represented an effective cash flow hedge under applicable accounting
guidance.  We currently have no open hedge positions and did not have
any open hedge positions during 2009.




Loss on
investments was $26.9 million in 2009, compared to $3.7 million in
2008.  The 2009 losses reflect a $11.9 million impairment loss on the
Johnston, Rhode Island property that is now vacant (see Note 3), an aggregate of
$14.4 million of impairment losses on four assets that were sold during 2009
(two loans, one property and one security) and one asset that is expected to be
sold in 2010 (Cott property) (see Note 6), $444 of impairment losses on a
mezzanine loan investment (see Note 4), and $133 of impairment losses on a
security investment (see Note 5).  Losses in 2008 reflect a $1.1
million write-off of the investment in Matapeake in the fourth quarter, a $1.0
million impairment loss on securities investments in the fourth quarter (see
Note 6), a $0.7 million write-off of a development loan in the third quarter, a
$0.5 million general reserve for loan losses in the fourth quarter (see Note 4),
and a $0.4 million impairment loss on the Cott property in the third quarter
(see Note 6).




General
and administrative expense decreased $0.8 million, or 7%, from $11.7 million to
$10.9 million, primarily reflecting higher legal expenses in the 2008 period
related to our legal actions involving the real property we own in Johnston,
Rhode Island.




General
and administrative expense-stock based compensation increased $0.1
million.  The increase was primarily a result of an additional year of
stock awards and an increase in estimated vesting percentage in the 2009 period,
offset in part by reduced amortization expense related to the vesting of prior
year awards.  As of December 31, 2009, $3.3 million of unvested shares
(fair value at the grant dates) is expected to be charged to our Consolidated
Statement of Operations ratably over the remaining vesting period (through March
2014).  As of December 31, 2009, the grant date fair value for awards
of 23,557 restricted shares made in 2006, 62,700 restricted shares made in 2007,
118,035 restricted shares made in 2008 and 418,859 restricted shares made in
2009, has not yet been determined because the grant date (as defined under
relevant accounting guidance) had not yet occurred.




Gain
on extinguishment of debt.




We had
$9.8 million of non-cash gains on extinguishment of debt in 2009, compared to
$1.7 million in the 2008 period.  Gains in the 2009 period related to
the repurchase of our convertible senior notes and CDO debt (see Note
9).  Gains in the 2008 period related to the repurchase of our
convertible senior notes in December 2008 (see Note 9).




Net
(loss).




Net
(loss) decreased to $(14.0) million in
2009, from $(23.2) million in 2008, primarily as a result of lower interest
expense in the 2009 period.  Net (loss) allocable to common
stockholders was $(16.8) million in 2009, reflecting dividends to preferred
stockholders of $2.8 million.




Comparison
of Year Ended December 31, 2008 to the Year Ended December 31, 2007




The
following discussion compares our operating results for the year ended December
31, 2008 to the comparable period in 2007.




39




Revenue.




Total
revenue increased $12.5 million, or 7%, to $182.3 million.  The
increase was primarily attributable to increases in rental revenue.




Rental
revenue and property expense recoveries, in the aggregate, increased $12.7
million, or 9%, to $146.5 million.  The increase was driven by a full
year of rental revenue from the EntreCap portfolio which was acquired in April
2007.




Interest
income was basically unchanged, decreasing $0.3 million, or 1%, to $35.0
million.




Expenses.




Total
expenses increased $33.3 million, or 19%, to $208.0 million.  The
increase in expenses was primarily attributable to the large loss on
derivatives, and higher levels of depreciation and amortization expense on real
property, loss on investments, general and administrative expenses, property
expenses and interest expense.




Interest
expense increased $1.8 million, or 2%, to $98.2 million, from $96.4
million.  The increase was primarily the result of $7.3 million of
additional interest expense on the secured term loan we issued in December 2007,
$5.6 million of additional interest expense on the convertible senior notes we
issued in October 2007, and $3.1 million of additional interest expense on
property mortgages, partially offset by $14.3 million of lower interest expense
on floating rate borrowings (resulting from lower borrowings and interest rates
in 2008 and the impact in 2007 of $2.6 million of fees and $2.6 million of
interest expense under the bridge facility we entered into in connection with
the acquisition of the EntreCap portfolio in April 2007).  Our average
balance outstanding and effective financing rate under our floating rate
borrowings other than the bridge facility was approximately $202 million at
5.44% during 2008 (average 30-day LIBOR of 2.91%), compared with approximately
$329.4 million at 6.29% during 2007 (average 30-day LIBOR of
5.30%).




Depreciation
and amortization expense on real property increased $6.3 million, or 13%, to
$53.1 million, as a result of the additional real estate investments made during
2007.




Property
expense increased $1.0 million, or 5%, to $19.5 million.  The net
amount of property expenses we incurred in 2008 (net of expense recoveries) was
$8.1 million, compared to $7.3 million in 2007.




We had a
$19.5 million loss on derivatives in the 2008 period, compared to $0.2 of income
in the 2007 period.  The loss in the 2008 period is discussed in the
comparison of 2009 and 2008 results above.




Loss on
investments increased $3.3 million, to $3.7 million in 2008, from $0.4 million
in 2007.  The losses in 2008 are discussed in the comparison of 2009
and 2008 results above.  Losses in 2007 reflect impairment losses on
two CMBS securities during the second quarter of 2007 (see Note
5).  Management determined that other-than-temporary declines in the
fair value below cost basis had occurred on these two investments.




General
and administrative expense increased $1.0 million, or 9%, from $10.7 million to
$11.7 million, primarily reflecting higher legal expenses associated with
litigation, including the actions we brought related to the real property we own
in Johnston, Rhode Island.




General
and administrative expense-stock based compensation increased $0.4 million, as a
result of an additional year of stock awards amortizing to expense in 2008,
offset in part by a lower vesting percentage for performance based awards in
2008.  As of December 31, 2008, $4.3 million of unvested shares (fair
value at the grant dates) is expected to be charged to our Consolidated
Statement of Operations ratably over the remaining vesting period (through March
2013).  As of December 31, 2008, the grant date fair value for awards
of 24,886 shares made in 2005, 47,116 shares made in 2006, 94,050 shares made in
2007 and 157,380 shares made in 2008, had not yet been determined because the
grant date (as defined under relevant accounting guidance) had not yet
occurred.




Gain
on extinguishment of debt.




We had
$1.7 million of non-cash gains on extinguishment of debt in 2008, compared to
$1.4 million in the 2007 period.  Gains in the 2008 period related to
the repurchase of our convertible senior notes in December 2008, and the gains
in the 2007 period related to our retirement of debt we assumed when we
purchased the EntreCap portfolio.  The gains in the 2007 period
resulted from interest rate changes between the date we assumed the debt and the
date it was repaid.




Net
(loss).




Net
(loss) increased to $(23.2) million in 2008, from $(2.5) million in 2007,
primarily as a result of the loss on derivatives in the 2008
period.  Net (loss) allocable to common stockholders was $(26.0)
million in 2008, reflecting dividends to preferred stockholders of $2.8
million.




40




Funds
from Operations




Funds
from operations, or FFO, is a non-GAAP financial measure.  We believe
FFO is a useful additional measure of our performance because it facilitates an
understanding of our operating performance after adjustment for real estate
depreciation, a non-cash expense which assumes that the value of real estate
assets diminishes predictably over time.  In addition, we believe that
FFO provides useful information to the investment community about our financial
performance as compared to other REITs, since FFO is generally recognized as an
industry standard for measuring the operating performance of an equity
REIT.  FFO does not represent cash generated from operating activities
in accordance with GAAP and is not indicative of cash available to fund cash
needs.  FFO should not be considered as an alternative to net income
(loss) or earnings per share determined in accordance with GAAP as an indicator
of our operating performance or as an alternative to cash flow as a measure of
liquidity.  Since all companies and analysts do not calculate FFO in a
similar fashion, our calculation of FFO may not be comparable to similarly
titled measures reported by other companies.




We
calculate FFO in accordance with standards established by the National
Association of Real Estate Investment Trusts (“NAREIT”) which defines FFO as net
income (loss) (computed in accordance with GAAP) excluding gains (or losses)
from sales of property, plus depreciation and amortization, and after
adjustments for unconsolidated partnerships and joint ventures.




The
following table reconciles our net income (loss) allocable to common
stockholders to FFO for the years ended December 31, 2009, December 31, 2008 and
December 31, 2007.




Year ended December 31,(in thousands, except per share
      amounts)
                            
                            2009
                            
                            
                            2008
                            
                            
                            2007Net
      loss allocable to common stockholders
                            
                            $
                            (16,811
                            )
                            
                            $
                            (26,008
                            )
                            
                            $
                            (5,349
                            )Add
      (deduct)Non-controlling
      interest in consolidated subsidiaries
                            
                            
                            (51
                            )
                            
                            
                            (124
                            )
                            
                            
                            (33
                            )Depreciation
      and amortization expense on real property
                            
                            
                            51,410
                            
                            
                            
                            53,132
                            
                            
                            
                            46,866Depreciation
      and amortization expense on discontinued operations
                            
                            
                            282
                            
                            
                            
                            889
                            
                            
                            
                            639Funds
      from operations
                            
                            $
                            34,830
                            
                            
                            $
                            27,889
                            
                            
                            $
                            42,123Weighted
      average number of common shares outstanding, diluted
                            
                            
                            49,297
                            
                            
                            
                            45,526
                            
                            
                            
                            40,739Weighted
      average number of OP units outstanding
                            
                            
                            156
                            
                            
                            
                            230
                            
                            
                            
                            263Weighted
      average number of common shares and OP units outstanding,
      diluted
                            
                            
                            49,453
                            
                            
                            
                            45,756
                            
                            
                            
                            41,002Net
      loss per common share, basic and diluted
                            
                            $
                            (0.34
                            )
                            
                            $
                            (0.57
                            )
                            
                            $
                            (0.13
                            )Funds
      from operations per share
                            
                            $
                            0.70
                            
                            
                            $
                            0.61
                            
                            
                            $
                            1.03




Liquidity
and Capital Resources




We rely
on leverage to allow us to invest in a greater number of assets and enhance our
asset returns.  Leverage also exposes us to a variety of risks which
are discussed in more detail in this Annual Report on Form 10-K under the
heading “Risk Factors.”  Our overall portfolio leverage as of December
31, 2009 was approximately 75.7%.  We expect our leverage levels to
decrease over time, as a result of one or more of the following factors:
scheduled principal amortization on our debt, voluntary debt reduction including
through selected asset sales, and lower leverage on new asset
acquisitions.  As a result of market conditions, the focus of our
portfolio activity during 2009 and 2008 was reducing primarily recourse debt and
strengthening our balance sheet.   During 2010, we expect to
continue to strengthen our balance sheet through debt repayment and/or
repurchase and also opportunistically resume portfolio growth as market
conditions permit.




Our
portfolio financing strategy is to finance our assets with long-term fixed rate
debt as soon as practicable after we invest, generally on a secured,
non-recourse basis.  Through non-recourse debt, we seek to limit the
overall company exposure in the event we default on the debt to the amount we
have invested in the asset or assets financed.  We seek to finance our
assets with “match-funded” or substantially “match-funded” debt, meaning that we
seek to obtain debt whose maturity matches as closely as possible the maturity
of the asset financed.  Through December 31, 2009, our long-term fixed
rate asset financings have been in the form of traditional third party
non-recourse mortgage financings (on most of our owned real properties) and two
non-recourse term financings, including a secured term loan (completed in
December 2007) and one CDO (completed in March 2005).  As of December
31, 2009, we have financed on a long-term basis an aggregate of approximately
$1.79 billion of portfolio assets with third party mortgage debt of $943.8
million and term financings of $377.4 million.




As a
REIT, we are required to distribute at least 90% of our taxable income to our
stockholders on an annual basis, and we intend to distribute all or
substantially all of our REIT taxable income in order to comply with the
distribution requirements of the Code and to avoid federal income tax and the
nondeductible excise tax.  We declared total dividends of $0.21 per
share of common stock during the year ended December 31, 2009, including $0.05
per share in each of the first, second and third quarters, and $0.06 per share
in the fourth quarter.  We declared a dividend of $0.5078125 per share
of 8.125% Series A cumulative redeemable preferred stock in each of the first,
second, third and fourth quarters of 2009.  Our dividend policy is
subject to revision at the discretion of our board of directors.  All
distributions will be made at the discretion of our board of directors and will
depend on our cash available for distribution, our funds from operations, our
maintenance of REIT status, market conditions and such other factors as our
board of directors deems relevant.




41




Short-Term
Liquidity and Financing.




We define
our short-term liquidity as our ability to generate adequate amounts of cash to
meet day-to-day operating expenses and material cash commitments over the next
twelve months.  Our primary sources of short-term liquidity are
available cash and cash equivalents, cash provided by operations, and a portion
of the cash proceeds from issuances of debt and equity capital.  As of
December 31, 2009, we had $38.5 million in available cash and cash
equivalents.  As of March 3, 2010, we had $55.3 million in available
cash and cash equivalents.  We believe that our sources of short-term
liquidity will be sufficient to enable us to satisfy our short-term liquidity
requirements, including the payment of our dividend.




While we
believe we will be able to satisfy our short-term liquidity requirements, the
following are the primary factors that we believe could have a material adverse
effect on our plans:




·
            payment
      defaults on our assets which we expect could be triggered primarily in the
      event of the bankruptcy of the underlying tenant or
    tenants;




·
            unexpected
      capital expenditures on our owned
properties;




·
            margin
      calls on our Wachovia credit agreement;
or




·
            margin
      calls on any future risk management
  transactions.




Long-Term
Liquidity and Financing.




We define
our long-term liquidity as our ability to generate adequate amounts of cash to
meet cash demands and commitments beyond the next 12 months, including balloon
payments on our debt obligations and capital expenditures on our owned
properties.  Our primary sources of long-term liquidity are our cash
and cash equivalents, cash provided by operations, cash from long-term
financings on our asset investments and issuances of debt and equity
capital.  We have begun and may continue to selectively sell assets to
allow us to generate additional long-term liquidity.  We believe that
our various sources of long-term liquidity will be sufficient to enable us to
satisfy our long-term liquidity requirements.




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




We have
two recourse debt obligations that will mature over the next few
years.  Our credit agreement with Wachovia Bank is scheduled to mature
in April 2011 and our convertible senior notes can be called for repurchase at
the option of the note holders at 100% of the principal amount of the notes in
October 2012.  The credit agreement with Wachovia Bank is a secured
borrowing agreement and the convertible senior notes are unsecured
obligations.  With respect to the Wachovia Bank agreement, we have
begun and will continue to seek a longer-term extension or refinancing of this
facility with Wachovia.  We may also seek to refinance this facility
with a variety of other lenders.  With respect to the convertible
notes, we will continue to seek to opportunistically repurchase this debt over
time and then intend to repay or refinance any remaining obligation at or prior
to maturity.




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




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




42




Sources
of Equity Capital




We have
implemented a dividend reinvestment and direct stock purchase plan and an “at
the market offering” program (as defined in Rule 415 of the Securities Act of
1933, as amended), each of which may be utilized by us from time to time to sell
shares of our common stock and increase liquidity.




In March
2007, we implemented a dividend reinvestment and direct stock purchase
plan.  The plan allows interested stockholders to reinvest all or a
portion of their cash dividends in shares of our common stock and to make
monthly purchases of our common stock generally up to a maximum of $10,000
(unless a higher amount is approved by us in our sole
discretion).  Shares purchased through the plan may be either (i)
newly issued by us or (ii) purchased by the plan administrator in the open
market, at our discretion.  During the year ended December 31, 2009,
we issued 807,661 shares of common stock through the plan at an average price of
$3.60 per share.  During the year ended December 31, 2008, we issued
1,222,855 shares of common stock through the plan at an average price of $7.96
per share.  As of December 31, 2009, we have reserved an aggregate of
1,857,843 shares of common stock for future issuance pursuant to the dividend
reinvestment and direct stock purchase plan.  We filed a registration
statement with the SEC to increase the plan size by 5,000,000 shares (to
6,857,843 shares), during December 2009.  That registration statement
was declared effective by the SEC and the increased plan size became effective
during January 2010.    We are not currently issuing new
shares through the plan, although we reserve the right to elect to do so in our
sole discretion at any time in the future.




In
October 2009, we entered into a new sales agreement with Brinson Patrick
Securities Corporation that permits us to issue and sell through Brinson
Patrick, from time to time, up to 5,000,000 shares of our common stock, and
Brinson Patrick agrees to use its best efforts to sell such shares during the
term of the agreement and on the terms set forth therein.  We must pay
Brinson Patrick a commission ranging from 1.5% to 2.0% of the gross sales price
per share sold, depending upon the aggregate proceeds raised by
them.  The sales agreement replaces the sales agreement dated as of
August 15, 2005, between us and Brinson Patrick, which initially authorized the
issuance and sale by us of up to 2,400,000 shares of common stock and had been
fully utilized by us.   We began selling shares pursuant to the
new sales agreement during December 2009.  We may at any time suspend
solicitation and offers pursuant to the new sales agreement or terminate the new
sales agreement.




We sold
an aggregate of 171,700 shares of common stock through the “at the market
offering” program at an average price of $4.59 per share, during the quarter
ended December 31, 2009, and an aggregate of 2,410,800 shares of common stock at
an average price of $3.49 per share, during the year ended December 31,
2009.  Brinson Patrick acted as our agent for these sales and received
a sales commission on the sales.  We raised net proceeds of
approximately $8.2 million during the year ended December 31, 2009, and we used
the proceeds to replenish cash that had been used to fund repurchases of
outstanding debt.




We have
continued to utilize the “at the market offering” program during
2010.  Between January 1, 2010 and March 3, 2010, we have issued and
sold another 1,800,000 shares of common stock through the program at an average
price of $4.68 per share, generating net proceeds of approximately $8.3
million.




As of
December 31, 2009, we have an effective shelf registration statement under
which we can offer an aggregate of $481.6 million of common stock,
preferred stock and/or senior or subordinated debt securities from time to time,
including an aggregate of 4,828,300 shares of common stock reserved for sale
under the October 2009 Brinson Patrick sales agreement. We intend to continue to
raise additional capital from time to time to enable us to continue to implement
our strategy.  Our ability to raise capital is influenced by market
conditions, and we cannot assure you that conditions for raising capital will be
favorable for us at any time.




Long-Term
Mortgage Financings.




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




During
the year ended December 31, 2009, we did not obtain any new mortgage
financings.




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




43




Term
Financings.




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




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




We also
completed an entirely fixed rate CDO financing in March 2005.  We
aggregated approximately $300 million face amount of assets and then transferred
these assets into a wholly-owned securitization vehicle, and issued $285 million
face amount of multi-class notes and $15 million of preferred equity through the
securitization vehicle.  The assets serve as collateral for our
obligations under the notes.  The securitization vehicle is an SPE,
with its business limited to the issuance of the notes and the preferred equity,
the acquisition of the collateral and certain other matters related
thereto.  The net amount of the debt we initially issued was $268.1
million, inclusive of a $0.4 million discount to face, as we retained the three
most junior note classes aggregating a face amount of $16.5 million and the full
$15 million of preferred equity.  Each of the five note classes of the
CDO was and continues to be rated investment grade.  The reinvestment
period for the CDO which allowed us to reinvest principal payments on the
underlying assets into qualifying replacement collateral expired during October
2009.  The CDO notes have a stated maturity in January 2040, although
the actual life of the notes is expected to be substantially
shorter.  Our weighted average effective financing rate (inclusive of
original issue discount and debt issuance and hedge costs) on our CDO is
approximately 5.7%.  Our CDO debt is non-recourse to us but is secured
by the collateral assets.  We reduced the debt outstanding under our
CDO by repurchasing $5 million of our Class A CDO notes during the year ended
December 31, 2009.




We have
financed certain of our portfolio assets pursuant to a credit agreement we
entered into with Wachovia Bank in April 2008.  We drew a $210.4
million term loan under the agreement at closing which we have reduced to $126.3
million outstanding as of December 31, 2009.  Our borrowings are
scheduled to mature in April 2011.  The agreement is a floating rate
LIBOR based facility.  We are required to pay interest on our
borrowings at prevailing short-term rates (30-day LIBOR) plus a pricing spread
ranging from 200 to 250 basis points.




Our
borrowings under the facility are secured by a combination of first mortgage
loan investments, intercompany mortgage loans on our owned property investments,
commercial mortgage-backed securities and a first lien on our ownership interest
in the real property located in Johnston, Rhode Island.  Our
obligations under the credit agreement are also fully recourse to all of our
other assets and, pursuant to the margin call provisions in the agreement, we
may be obligated to prepay a portion of the debt if Wachovia determines the
value of our collateral has declined, including as a result of an underlying
tenant credit rating downgrade or other adverse tenant-credit event, Wachovia
may require us to prepay a portion of our borrowings, provided that Wachovia may
not reduce the value of any of our collateral other than CMBS securities due to
general credit spread or interest rate fluctuations.  As of December
31, 2009, we had $4.7 million borrowed against collateral classified as CMBS
securities by Wachovia.




We are
required to comply with the following financial covenants under the credit
agreement: minimum liquidity (as defined in the agreement) of at least $8
million, and minimum consolidated tangible net worth (as defined in the
agreement) of at least $180 million plus 75% of the aggregate net proceeds from
equity offerings or capital contributions after September 22, 2004.




We had
$126.3 million outstanding as of December 31, 2009 under our Wachovia credit
agreement, which borrowings were secured by loan investments with an aggregate
carry value of $11.5 million, intercompany mortgage loans and investments in our
CDO with an aggregate carry value of $141.3 million, CMBS investments with a
carry value of $11.5 million and a single owned property with a carry value of
$28.1 million.




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




Statement
of Cash Flows




Operating
activities provided $56.6 million of cash during the year ended December 31,
2009, primarily driven by net (loss) as adjusted by various non-cash gains,
losses, income and charges of $60.2 million, partially offset by increases in
other assets of $4.2 million.  Operating activities provided $64.4
million of cash during the year ended December 31, 2008, primarily driven by net
(loss) before the loss on derivatives and as adjusted by various non-cash gains,
income and charges of $52.5 million and decreases in other assets of $11.9
million.  Operating activities provided $30.9 million of cash during
the year ended December 31, 2007, primarily driven by net (loss) as adjusted by
various non-cash gains, income and charges of $33.1 million and increases in
accounts payable, accrued expenses and other liabilities of $4.9 million,
partially offset by increases in other assets of $7.8 million.




44




We
recognize rental income on our owned properties on a straight line basis in
accordance with generally accepted accounting principles.  As of
December 31, 2009, this has resulted in us accruing $35.3 million of rental
income in excess of actual rents due under the various leases.  During
the year ended December 31, 2009, rents on a straight-line basis exceeded actual
rents due under the leases by $1.4 million.  We expect the impact of
straight-lining of rents to fluctuate over time as contractual rents step up and
actual rents due increase under the various leases and we purchase additional
properties.  Certain of our owned properties are also subject to rents
which pay semi-annually, rather than monthly, and this also impacts the
quarter-to-quarter changes due to straight-lining of rents.




Investing
activities provided $70.3 million of cash during the year ended December 31,
2009, which primarily resulted from net proceeds from the sale of loans and
securities of $48.7 million, net proceeds from the sale of owned properties of
$6.5 million and net principal received on loans of $15.5 million and securities
of $3.1 million.  Investing activities provided $9.5 million of cash
during the year ended December 31, 2008, which primarily resulted from principal
received on loans of $6.9 million and securities of $2.5
million.  Investing activities used $309.1 million during the year
ended December 31, 2007, which primarily resulted from net investments in real
estate of $280.1 million, investments in securities available for sale of $37.9
million, investments in loans of $9.1 million and investments in partially-owned
entities of $1.1 million, partially offset by proceeds from sales of real estate
investments of $2.9 million and principal received on loans of $13.0 million and
securities of $2.4 million.




Cash used
in financing activities during the year ended December 31, 2009 was $96.8
million, which primarily resulted from net repayments of principal on debt of
$84.7 million ($63.0 million on the Wachovia credit facility, $12.1 million,
net, on property mortgages, and $9.6 million on the secured term loan with KBC
Bank), $12.5 million used to repurchase our convertible senior notes and
collateralized debt obligations, and dividends and distributions paid of $10.3
million, partially offset by proceeds from common stock issuances of $11.0
million.  Cash used in financing activities during the year ended
December 31, 2008 was $99.5 million, which primarily resulted from net
repayments of principal on debt of $59.6 million (net of $43.6 million on the
Wachovia repurchase agreement and credit facility, net of $10.1 million on
property mortgages and $5.8 million on the secured term loan with KBC Bank),
dividends and distributions paid of $39.3 million, and cash paid in hedging
activities of $17.9 million, partially offset by proceeds from common stock
issuances of $19.6 million.  Cash provided by financing activities
during the year ended December 31, 2007 was $307.7 million, which primarily
resulted from net borrowings of $243.7 million, including borrowings of $129.5
million under a secured term loan, $75.0 million under convertible senior notes,
$37.4 million under the repurchase agreement (net of repayments) and $1.8
million under mortgages on real estate investments, proceeds from common stock
issuances of $116.2 million and funds provided by hedging and risk management
activities of $2.4 million, partially offset by dividends and distributions paid
of $35.0 million, common stock repurchased of $15.0 million and debt issuance
costs of $4.7 million.




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




Contractual
Obligations




The
following table outlines the timing of payment requirements related to our
contractual obligations as of December 31, 2009 (in thousands):




Total
                  
                  
                  Less than 1
                    year
                  
                  
                  2-3 years
                  
                  
                  4-5 years
                  
                  
                  After 5 yearsMortgages
      on real estate investments
                  
                  $
                  943,811
                  
                  
                  $
                  15,382
                  
                  
                  $
                  167,415
                  
                  
                  $
                  137,123
                  
                  
                  $
                  623,891Collateralized
      debt obligations
                  
                  
                  263,310
                  
                  
                  
                  9,100
                  
                  
                  
                  21,215
                  
                  
                  
                  45,286
                  
                  
                  
                  187,709Credit
      facility
                  
                  
                  126,262
                  
                  
                  
                  9,760
                  
                  
                  
                  116,502Secured
      term loan
                  
                  
                  114,070
                  
                  
                  
                  12,191
                  
                  
                  
                  29,117
                  
                  
                  
                  25,951
                  
                  
                  
                  46,811Convertible
      senior notes
                  
                  
                  49,452
                  
                  
                  
                  (991
                  )
                  
                  
                  50,443Other
      long-term debt
                  
                  
                  30,930
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  30,930Operating
      leases
                  
                  
                  2,806
                  
                  
                  
                  735
                  
                  
                  
                  1,506
                  
                  
                  
                  565
                  
                  
                  
                  –Total
                  
                  $
                  1,530,641
                  
                  
                  $
                  46,177
                  
                  
                  $
                  386,198
                  
                  
                  $
                  208,925
                  
                  
                  $
                  889,341




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




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




45




Interest
Rate Exposure




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




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




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




Credit
Spread Curve Exposure




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




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




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




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




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




Market
conditions since the summer of 2007 have resulted in increases in credit spreads
and generally lower fair valuations for our securities.  If these
conditions continue or persist, we may be required to record impairment losses
on our securities, and these losses may be significant.




Tenant
Credit Rating Exposure




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




46




Equity
Price Risk Exposure




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




Fair
Value




For
certain of our financial instruments, fair values are not readily available
since there are no active trading markets as characterized by current exchanges
between willing parties.  Accordingly, we derive or estimate fair
values using various valuation techniques, such as computing the present value
of estimated future cash flows using discount rates commensurate with the risks
involved. However, the determination of estimated cash flows may be subjective
and imprecise.  Changes in assumptions or estimation methodologies can
have a material affect on these estimated fair values.  The fair
values indicated below are indicative of the interest rate and credit spread
environment as of December 31, 2009, and December 31, 2008, as the case may be,
and may not take into consideration the effects of subsequent interest rate or
credit spread fluctuations, or changes in the ratings of the underlying
tenants.




The
following summarizes certain data regarding our interest rate sensitive
instruments as of December 31, 2009, and December 31, 2008 (dollars in
thousands):




Carrying Amount
                      
                      
                      Notional Amount
                      
                      
                      Weighted
                        AverageEffective
                        Interest /
                        FinancingRate
                      
                      
                      MaturityDate
                      
                      
                      Fair Value12/31/2009
                      
                      
                      12/31/2008
                      
                      
                      12/31/2009
                      
                      
                      12/31/2008
                      
                      
                      12/31/2009
                      
                      
                      12/31/2009
                      
                      
                      12/31/2009
                      
                      
                      12/31/2008Assets:Loans
      held for investment (1)
                      
                      $
                      221,656
                      
                      
                      $
                      286,563
                      
                      
                      $
                      225,242
                      
                      
                      $
                      283,912
                      
                      
                      
                      6.8%
                      
                      
                      Various
                      
                      
                      $
                      219,185
                      
                      
                      $
                      262,647Commercial
      mortgage-backed securities (2)
                      
                      
                      153,056
                      
                      
                      
                      161,842
                      
                      
                      
                      191,876
                      
                      
                      
                      202,382
                      
                      
                      
                      7.5%
                      
                      
                      2012-2028
                      
                      
                      
                      113,306
                      
                      
                      
                      119,083Structuring
      fees receivable (2)
                      
                      
                      1,094
                      
                      
                      
                      1,863
                      
                      
                      
                      N/A
                      
                      
                      
                      N/A
                      
                      
                      
                      8.2%
                      
                      
                      2010-2020
                      
                      
                      
                      1,094
                      
                      
                      
                      1,863LiabilitiesMortgages
      on real estate investments (4)
                      
                      $
                      943,811
                      
                      
                      $
                      972,324
                      
                      
                      $
                      939,616
                      
                      
                      $
                      966,091
                      
                      
                      
                      5.6%
                      
                      
                      2011-2022
                      
                      
                      $
                      902,408
                      
                      
                      $
                      936,668Collateralized
      debt obligations (4)
                      
                      
                      263,310
                      
                      
                      
                      268,265
                      
                      
                      
                      263,500
                      
                      
                      
                      268,500
                      
                      
                      
                      5.7%
                      
                      
                      2015
                      
                      
                      
                      150,114
                      
                      
                      
                      116,592Credit
      facility (3)
                      
                      
                      126,262
                      
                      
                      
                      189,262
                      
                      
                      
                      126,262
                      
                      
                      
                      189,262
                      
                      
                      
                      3.2%
                      
                      
                      2011
                      
                      
                      
                      126,262
                      
                      
                      
                      189,262Secured
      term loan (4)
                      
                      
                      114,070
                      
                      
                      
                      123,719
                      
                      
                      
                      114,070
                      
                      
                      
                      123,719
                      
                      
                      
                      6.0%
                      
                      
                      2018
                      
                      
                      
                      98,641
                      
                      
                      
                      62,010Convertible
      senior notes (5)
                      
                      
                      49,452
                      
                      
                      
                      66,239
                      
                      
                      
                      52,444
                      
                      
                      
                      71,760
                      
                      
                      
                      11.5%
                      
                      
                      2012
                      
                      
                      
                      46,956
                      
                      
                      
                      28,329Other
      long-term debt (6)
                      
                      
                      30,930
                      
                      
                      
                      30,930
                      
                      
                      
                      30,930
                      
                      
                      
                      30,930
                      
                      
                      
                      8.3%
                      
                      
                      2016
                      
                      
                      
                      21,925
                      
                      
                      
                      11,152




47







(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 2010 through 2033.




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




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




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




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




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




Scheduled
maturities of interest rate sensitive instruments as of December 31, 2009 are as
follows:




Expected Maturity Dates2010
                  
                  
                  2011
                  
                  
                  2012
                  
                  
                  2013
                  
                  
                  2014
                  
                  
                  Thereafter(in
      thousands, notional amounts where appropriate,
                    otherwise
      carrying amounts)Loans held for
      investment
                  
                  $
                  12,637
                  
                  
                  $
                  12,277
                  
                  
                  $
                  12,884
                  
                  
                  $
                  10,034
                  
                  
                  $
                  7,520
                  
                  
                  $
                  169,890Commercial
      mortgage-backed securities
                  
                  
                  2,494
                  
                  
                  
                  3,248
                  
                  
                  
                  26,721
                  
                  
                  
                  4,252
                  
                  
                  
                  7,555
                  
                  
                  
                  147,606Structuring
      fees receivable
                  
                  
                  767
                  
                  
                  
                  72
                  
                  
                  
                  79
                  
                  
                  
                  86
                  
                  
                  
                  49
                  
                  
                  
                  41Mortgages
      on real estate investments
                  
                  
                  15,382
                  
                  
                  
                  35,929
                  
                  
                  
                  131,486
                  
                  
                  
                  69,445
                  
                  
                  
                  67,678
                  
                  
                  
                  623,891Collateralized
      debt obligations
                  
                  
                  9,100
                  
                  
                  
                  10,266
                  
                  
                  
                  10,949
                  
                  
                  
                  26,065
                  
                  
                  
                  19,221
                  
                  
                  
                  187,709Credit
      facility
                  
                  
                  9,760
                  
                  
                  
                  116,502Secured
      term loan
                  
                  
                  12,191
                  
                  
                  
                  13,737
                  
                  
                  
                  15,380
                  
                  
                  
                  13,602
                  
                  
                  
                  12,349
                  
                  
                  
                  46,811Convertible
      senior notes
                  
                  
                  (991
                  )
                  
                  
                  (1,099
                  )
                  
                  
                  51,542Other
      long-term debt
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  30,930




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




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


48


MANAGEMENT’S
ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING




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




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




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




·
            provide
      reasonable assurance regarding prevention or timely detection of
      unauthorized acquisition, use or disposition of the Company’s assets that
      could have a material effect on the financial
  statements.




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




Management
assessed the effectiveness of the Company’s internal control over financial
reporting as of December 31, 2009.  In making the assessment,
management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal Control—Integrated
Framework.




Based on
this assessment, management concluded that, as of December 31, 2009, the
Company’s internal control over financial reporting is designed and operating
effectively.




49




Item
8. Financial
Statements and Supplementary Data.




Index
To Financial Statements


and
Financial Statement Schedules


PageReferenceReport
      of Independent Registered Public Accounting Firm
                                  51Consolidated
      Balance Sheets as of December 31, 2009 and 2008
                                  52Consolidated
      Statements of Operations for the years ended December 31, 2009, 2008 and
      2007
                                  53Consolidated
      Statements of Changes in Equity for the years ended December 31, 2009,
      2008 and 2007
                                  54Consolidated
      Statements of Cash Flows for the years ended December 31, 2009, 2008 and
      2007
                                  55Notes
      to Consolidated Financial Statements
                                  57Schedule
      III – Schedule of Real Estate and Accumulated Depreciation at December 31,
      2009
                                  87Schedule
      IV – Schedule of Loans Held for Investment at December 31,
      2009
                                  90
  50
  REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 To the
Board of Directors and Stockholders
 CapLease,
Inc.
 
 We have
audited the accompanying consolidated balance sheets of CapLease, Inc. and
subsidiaries as of December 31, 2009 and 2008, and the related consolidated
statements of operations, changes in equity, and cash flows for each of the
three years in the period ended December 31, 2009.  Our audits also
included the financial statement schedules of CapLease, Inc. listed in the Index
at Item 8.  We also have audited CapLease, Inc.’s internal control
over financial reporting as of December 31, 2009, based on criteria established
in Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.  CapLease, Inc.'s management
is responsible for these financial statements and financial statement schedules,
for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting
included in the accompanying Management’s Annual Report on Internal Control over
Financial Reporting.  Our responsibility is to express an opinion on
these financial statements and an opinion on the Company's internal control over
financial reporting based on our audits.
 
 We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement and whether effective
internal control over financial reporting was maintained in all material
respects.  Our audits of the financial statements included examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial statement
presentation.  Our audit of internal control over financial reporting
included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and
evaluating the design and operating effectiveness of internal control based on
the assessed risk.  Our audits also included performing such other
procedures as we considered necessary in the circumstances.   We
believe that our audits provide a reasonable basis for our
opinions.
 
 A
company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles.  A company's internal
control over financial reporting includes those policies and procedures that (a)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the company;
(b) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (c) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial
statements.
 
 Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements.  Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
 
 In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of CapLease, Inc. and
subsidiaries as of December 31, 2009 and 2008, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2009, in conformity with accounting principles generally accepted
in the United States of America.  Also, in our opinion, the related
financial statement schedules, when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly the
information set forth therein.  Also in our opinion, CapLease, Inc.
maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2009, based on criteria established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission.
 
 /s/
McGladrey & Pullen LLP
 New York,
New York
 March 3,
2010
  51
  CapLease,
Inc. and Subsidiaries
 Consolidated Balance Sheets
  December 31,(Amounts in thousands, except share and per share amounts)
                                    
                                    2009
                                    
                                    
                                    2008AssetsReal
      estate investments, net
                                    
                                    $
                                    1,408,819
                                    
                                    
                                    $
                                    1,510,413Loans
      held for investment, net
                                    
                                    
                                    221,211
                                    
                                    
                                    
                                    285,779Commercial
      mortgage-backed securities
                                    
                                    
                                    153,056
                                    
                                    
                                    
                                    161,842Cash
      and cash equivalents
                                    
                                    
                                    38,546
                                    
                                    
                                    
                                    8,439Asset
      held for sale
                                    
                                    
                                    3,410
                                    
                                    
                                    
                                    –Structuring
      fees receivable
                                    
                                    
                                    1,094
                                    
                                    
                                    
                                    1,863Other
      assets
                                    
                                    
                                    78,279
                                    
                                    
                                    
                                    77,189Total
      Assets
                                    
                                    $
                                    1,904,415
                                    
                                    
                                    $
                                    2,045,525Liabilities
      and Stockholders' EquityMortgages
      on real estate investments
                                    
                                    $
                                    943,811
                                    
                                    
                                    $
                                    972,324Collateralized
      debt obligations
                                    
                                    
                                    263,310
                                    
                                    
                                    
                                    268,265Credit
      facility
                                    
                                    
                                    126,262
                                    
                                    
                                    
                                    189,262Secured
      term loan
                                    
                                    
                                    114,070
                                    
                                    
                                    
                                    123,719Convertible
      senior notes
                                    
                                    
                                    49,452
                                    
                                    
                                    
                                    66,239Other
      long-term debt
                                    
                                    
                                    30,930
                                    
                                    
                                    
                                    30,930Total
      debt obligations
                                    
                                    
                                    1,527,835
                                    
                                    
                                    
                                    1,650,739Intangible
      liabilities on real estate investments
                                    
                                    
                                    39,591
                                    
                                    
                                    
                                    49,277Accounts
      payable, accrued expenses and other liabilities
                                    
                                    
                                    18,700
                                    
                                    
                                    
                                    19,879Dividends
      and distributions payable
                                    
                                    
                                    3,822
                                    
                                    
                                    
                                    711Total
      Liabilities
                                    
                                    
                                    1,589,948
                                    
                                    
                                    
                                    1,720,606Commitments
      and contingenciesStockholders'
      equity:Preferred
      stock, $0.01 par value, 100,000,000 shares authorized, Series A cumulative
      redeemable preferred, liquidation preference $25.00 per share, 1,400,000
      shares issued and outstanding
                                    
                                    
                                    33,657
                                    
                                    
                                    
                                    33,657Common
      stock, $0.01 par value, 500,000,000 shares authorized, 51,709,511 and
      47,391,790 shares issued and outstanding, respectively
                                    
                                    
                                    517
                                    
                                    
                                    
                                    474Additional
      paid in capital
                                    
                                    
                                    303,368
                                    
                                    
                                    
                                    317,565Accumulated
      other comprehensive loss
                                    
                                    
                                    (24,332
                                    )
                                    
                                    
                                    (28,118
                                    )Total
      Stockholders' Equity
                                    
                                    
                                    313,210
                                    
                                    
                                    
                                    323,578Non-controlling
      interest in consolidated subsidiaries
                                    
                                    
                                    1,257
                                    
                                    
                                    
                                    1,341Total
      Equity
                                    
                                    
                                    314,467
                                    
                                    
                                    
                                    324,919Total
      Liabilities and Equity
                                    
                                    $
                                    1,904,415
                                    
                                    
                                    $
                                    2,045,525
 
 See notes
to consolidated financial statements.
  52
  CapLease,
Inc. and Subsidiaries
 Consolidated
Statements of Operations
  Year ended December 31,(Amounts in thousands, except per share amounts)
                                
                                2009
                                
                                
                                2008
                                
                                
                                2007Revenues:Rental
      revenue
                                
                                $
                                134,496
                                
                                
                                $
                                135,026
                                
                                
                                $
                                122,604Interest
      income from loans and securities
                                
                                
                                30,667
                                
                                
                                
                                35,040
                                
                                
                                
                                35,368Property
      expense recoveries
                                
                                
                                11,473
                                
                                
                                
                                11,457
                                
                                
                                
                                11,215Other
      revenue
                                
                                
                                1,532
                                
                                
                                
                                764
                                
                                
                                
                                583Total
      revenues
                                
                                
                                178,168
                                
                                
                                
                                182,287
                                
                                
                                
                                169,770Expenses:Interest
      expense
                                
                                
                                90,270
                                
                                
                                
                                98,217
                                
                                
                                
                                96,419Property
      expenses
                                
                                
                                20,442
                                
                                
                                
                                19,526
                                
                                
                                
                                18,556(Gain)
      loss on derivatives
                                
                                
                                –
                                
                                
                                
                                19,496
                                
                                
                                
                                (203
                                )Loss
      on investments
                                
                                
                                26,885
                                
                                
                                
                                3,663
                                
                                
                                
                                427General
      and administrative expenses
                                
                                
                                10,894
                                
                                
                                
                                11,669
                                
                                
                                
                                10,660General
      and administrative expenses-stock based compensation
                                
                                
                                2,118
                                
                                
                                
                                1,978
                                
                                
                                
                                1,621Depreciation
      and amortization expense on real property
                                
                                
                                51,410
                                
                                
                                
                                53,132
                                
                                
                                
                                46,866Loan
      processing expenses
                                
                                
                                309
                                
                                
                                
                                314
                                
                                
                                
                                306Total
      expenses
                                
                                
                                202,328
                                
                                
                                
                                207,995
                                
                                
                                
                                174,652Gain
      on extinguishment of debt
                                
                                
                                9,829
                                
                                
                                
                                1,713
                                
                                
                                
                                1,363Provision
      for income taxes
                                
                                
                                (201
                                )
                                
                                
                                –
                                
                                
                                
                                –Loss
      from continuing operations
                                
                                
                                (14,532
                                )
                                
                                
                                (23,995
                                )
                                
                                
                                (3,519
                                )Income
      from discontinued operations
                                
                                
                                514
                                
                                
                                
                                707
                                
                                
                                
                                981Net
      loss before non-controlling interest in consolidated
      subsidiaries
                                
                                
                                (14,018
                                )
                                
                                
                                (23,288
                                )
                                
                                
                                (2,538
                                )Non-controlling
      interest in consolidated subsidiaries
                                
                                
                                51
                                
                                
                                
                                124
                                
                                
                                
                                33Net
      loss
                                
                                
                                (13,967
                                )
                                
                                
                                (23,164
                                )
                                
                                
                                (2,505
                                )Dividends
      allocable to preferred shares
                                
                                
                                (2,844
                                )
                                
                                
                                (2,844
                                )
                                
                                
                                (2,844
                                )Net
      loss allocable to common stockholders
                                
                                $
                                (16,811
                                )
                                
                                $
                                (26,008
                                )
                                
                                $
                                (5,349
                                )Earnings
      per share:Net
      loss per common share, basic and diluted
                                
                                $
                                (0.34
                                )
                                
                                $
                                (0.57
                                )
                                
                                $
                                (0.13
                                )Weighted
      average number of common shares outstanding, basic and
    diluted
                                
                                
                                49,297
                                
                                
                                
                                45,526
                                
                                
                                
                                40,739Dividends
      declared per common share
                                
                                $
                                0.21
                                
                                
                                $
                                0.60
                                
                                
                                $
                                0.80Dividends
      declared per preferred share
                                
                                $
                                2.03
                                
                                
                                $
                                2.03
                                
                                
                                $
                                2.03
 
 See notes
to consolidated financial statements.
  53
  CapLease,
Inc. and Subsidiaries
 Consolidated
Statements of Changes in Equity
  Stockholders'
      Equity(Amounts
      in thousands)
                                        
                                        Preferred
                                          Stock
                                        
                                        
                                        Common
                                          Stock
                                          at
      Par
                                        
                                        
                                        Additional
                                          Paid-In
                                          Capital
                                        
                                        
                                        Accumulated
                                          Other
                                          Comprehensive
                                          Income
                                          (Loss)
                                        
                                        
                                        Non-controlling
                                          Interest
                                        
                                        
                                        Total
                                          EquityBalance
      at December 31, 2006
                                        
                                        $
                                        33,657
                                        
                                        
                                        $
                                        341
                                        
                                        
                                        $
                                        277,918
                                        
                                        
                                        $
                                        (4,260
                                        )
                                        
                                        $
                                        2,859
                                        
                                        
                                        $
                                        310,515Incentive
      stock plan compensation expense
                                        
                                        
                                        –
                                        
                                        
                                        
                                        –
                                        
                                        
                                        
                                        1,621
                                        
                                        
                                        
                                        –
                                        
                                        
                                        
                                        –
                                        
                                        
                                        
                                        1,621Incentive
      stock plan grants issued and forfeited
                                        
                                        
                                        –
                                        
                                        
                                        
                                        3
                                        
                                        
                                        
                                        (3
                                        )
                                        
                                        
                                        –
                                        
                                        
                                        
                                        –
                                        
                                        
                                        
                                        –Net
      income (loss)
                                        
                                        
                                        –
                                        
                                        
                                        
                                        –
                                        
                                        
                                        
                                        (2,505
                                        )
                                        
                                        
                                        –
                                        
                                        
                                        
                                        –
                                        
                                        
                                        
                                        (2,505
                                        )Non-controlling
      interest in consolidated subsidiaries
                                        
                                        
                                        –
                                        
                                        
                                        
                                        –
                                        
                                        
                                        
                                        –
                                        
                                        
                                        
                                        –
                                        
                                        
                                        
                                        (33
                                        )
                                        
                                        
                                        (33
                                        )Issuance
      of common stock
                                        
                                        
                                        –
                                        
                                        
                                        
                                        115
                                        
                                        
                                        
                                        116,104
                                        
                                        
                                        
                                        –
                                        
                                        
                                        
                                        –
                                        
                                        
                                        
                                        116,219Repurchase
      of common stock
                                        
                                        
                                        –
                                        
                                        
                                        
                                        (15
                                        )
                                        
                                        
                                        (14,985
                                        )
                                        
                                        
                                        –
                                        
                                        
                                        
                                        –
                                        
                                        
                                        
                                        (15,000
                                        )Issuance
      of convertible senior notes-equity component
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        7,024
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        –
                                        
                                        
                                        
                                        7,024Dividends
      declared - preferred
                                        
                                        
                                        –
                                        
                                        
                                        
                                        –
                                        
                                        
                                        
                                        (2,844
                                        )
                                        
                                        
                                        –
                                        
                                        
                                        
                                        –
                                        
                                        
                                        
                                        (2,844
                                        )Dividends
      declared - common
                                        
                                        
                                        –
                                        
                                        
                                        
                                        –
                                        
                                        
                                        
                                        (33,972
                                        )
                                        
                                        
                                        –
                                        
                                        
                                        
                                        –
                                        
                                        
                                        
                                        (33,972
                                        )Distributions
      declared-operating partnership units
                                        
                                        
                                        –
                                        
                                        
                                        
                                        –
                                        
                                        
                                        
                                        –
                                        
                                        
                                        
                                        –
                                        
                                        
                                        
                                        (210
                                        )
                                        
                                        
                                        (210
                                        )Increase
      (decrease) in fair value of securities available for sale
                                        
                                        
                                        –
                                        
                                        
                                        
                                        –
                                        
                                        
                                        
                                        –
                                        
                                        
                                        
                                        (20,412
                                        )
                                        
                                        
                                        –
                                        
                                        
                                        
                                        (20,412
                                        )Increase
      (decrease) in fair value of derivatives
                                        
                                        
                                        –
                                        
                                        
                                        
                                        –
                                        
                                        
                                        
                                        –
                                        
                                        
                                        
                                        (4,570
                                        )
                                        
                                        
                                        –
                                        
                                        
                                        
                                        (4,570
                                        )Reclassification
      of derivative items into earnings
                                        
                                        
                                        –
                                        
                                        
                                        
                                        –
                                        
                                        
                                        
                                        –
                                        
                                        
                                        
                                        788
                                        
                                        
                                        
                                        –
                                        
                                        
                                        
                                        788Realized
      gain (loss) on derivatives
                                        
                                        
                                        –
                                        
                                        
                                        
                                        –
                                        
                                        
                                        
                                        –
                                        
                                        
                                        
                                        2,434
                                        
                                        
                                        
                                        –
                                        
                                        
                                        
                                        2,434Balance
      at December 31, 2007
                                        
                                        
                                        33,657
                                        
                                        
                                        
                                        444
                                        
                                        
                                        
                                        348,359
                                        
                                        
                                        
                                        (26,020
                                        )
                                        
                                        
                                        2,616
                                        
                                        
                                        
                                        359,056Incentive
      stock plan compensation expense
                                        
                                        
                                        –
                                        
                                        
                                        
                                        –
                                        
                                        
                                        
                                        1,978
                                        
                                        
                                        
                                        –
                                        
                                        
                                        
                                        –
                                        
                                        
                                        
                                        1,978Incentive
      stock plan grants issued and forfeited
                                        
                                        
                                        –
                                        
                                        
                                        
                                        4
                                        
                                        
                                        
                                        (4
                                        )
                                        
                                        
                                        –
                                        
                                        
                                        
                                        –
                                        
                                        
                                        
                                        –Net
      income (loss)
                                        
                                        
                                        –
                                        
                                        
                                        
                                        –
                                        
                                        
                                        
                                        (23,164
                                        )
                                        
                                        
                                        –
                                        
                                        
                                        
                                        –
                                        
                                        
                                        
                                        (23,164
                                        )Non-controlling
      interest in consolidated subsidiaries
                                        
                                        
                                        –
                                        
                                        
                                        
                                        –
                                        
                                        
                                        
                                        –
                                        
                                        
                                        
                                        –
                                        
                                        
                                        
                                        (124
                                        )
                                        
                                        
                                        (124
                                        )Issuance
      of common stock
                                        
                                        
                                        –
                                        
                                        
                                        
                                        25
                                        
                                        
                                        
                                        19,624
                                        
                                        
                                        
                                        –
                                        
                                        
                                        
                                        –
                                        
                                        
                                        
                                        19,649Operating
      partnership units redeemed for common stock
                                        
                                        
                                        –
                                        
                                        
                                        
                                        1
                                        
                                        
                                        
                                        1,013
                                        
                                        
                                        
                                        –
                                        
                                        
                                        
                                        (1,014
                                        )
                                        
                                        
                                        –Dividends
      declared-preferred
                                        
                                        
                                        –
                                        
                                        
                                        
                                        –
                                        
                                        
                                        
                                        (2,844
                                        )
                                        
                                        
                                        –
                                        
                                        
                                        
                                        –
                                        
                                        
                                        
                                        (2,844
                                        )Dividends
      declared-common
                                        
                                        
                                        –
                                        
                                        
                                        
                                        –
                                        
                                        
                                        
                                        (27,397
                                        )
                                        
                                        
                                        –
                                        
                                        
                                        
                                        –
                                        
                                        
                                        
                                        (27,397
                                        )Distributions
      declared-operating partnership units
                                        
                                        
                                        –
                                        
                                        
                                        
                                        –
                                        
                                        
                                        
                                        –
                                        
                                        
                                        
                                        –
                                        
                                        
                                        
                                        (137
                                        )
                                        
                                        
                                        (137
                                        )Amortization
      of losses on securities previously classified asavailable
      for sale
                                        
                                        
                                        –
                                        
                                        
                                        
                                        –
                                        
                                        
                                        
                                        –
                                        
                                        
                                        
                                        505
                                        
                                        
                                        
                                        –
                                        
                                        
                                        
                                        505Increase
      (decrease) in fair value of securities available for sale
                                        
                                        
                                        –
                                        
                                        
                                        
                                        –
                                        
                                        
                                        
                                        –
                                        
                                        
                                        
                                        (9,398
                                        )
                                        
                                        
                                        –
                                        
                                        
                                        
                                        (9,398
                                        )Increase
      (decrease) in fair value of derivatives
                                        
                                        
                                        –
                                        
                                        
                                        
                                        –
                                        
                                        
                                        
                                        –
                                        
                                        
                                        
                                        4,522
                                        
                                        
                                        
                                        –
                                        
                                        
                                        
                                        4,522Reclassification
      of derivative items into earnings
                                        
                                        
                                        –
                                        
                                        
                                        
                                        –
                                        
                                        
                                        
                                        –
                                        
                                        
                                        
                                        20,126
                                        
                                        
                                        
                                        –
                                        
                                        
                                        
                                        20,126Realized
      gain (loss) on derivatives
                                        
                                        
                                        –
                                        
                                        
                                        
                                        –
                                        
                                        
                                        
                                        –
                                        
                                        
                                        
                                        (17,853
                                        )
                                        
                                        
                                        –
                                        
                                        
                                        
                                        (17,853
                                        )Balance
      at December 31, 2008
                                        
                                        
                                        33,657
                                        
                                        
                                        
                                        474
                                        
                                        
                                        
                                        317,565
                                        
                                        
                                        
                                        (28,118
                                        )
                                        
                                        
                                        1,341
                                        
                                        
                                        
                                        324,919Incentive
      stock plan compensation expense
                                        
                                        
                                        –
                                        
                                        
                                        
                                        –
                                        
                                        
                                        
                                        2,118
                                        
                                        
                                        
                                        –
                                        
                                        
                                        
                                        –
                                        
                                        
                                        
                                        2,118Incentive
      stock plan grants issued and forfeited
                                        
                                        
                                        –
                                        
                                        
                                        
                                        11
                                        
                                        
                                        
                                        (11
                                        )
                                        
                                        
                                        –
                                        
                                        
                                        
                                        –
                                        
                                        
                                        
                                        –Net
      income (loss)
                                        
                                        
                                        –
                                        
                                        
                                        
                                        –
                                        
                                        
                                        
                                        (13,967
                                        )
                                        
                                        
                                        –
                                        
                                        
                                        
                                        –
                                        
                                        
                                        
                                        (13,967
                                        )Non-controlling
      interest in consolidated subsidiaries
                                        
                                        
                                        –
                                        
                                        
                                        
                                        –
                                        
                                        
                                        
                                        –
                                        
                                        
                                        
                                        –
                                        
                                        
                                        
                                        (51
                                        )
                                        
                                        
                                        (51
                                        )Issuance
      of common stock
                                        
                                        
                                        –
                                        
                                        
                                        
                                        32
                                        
                                        
                                        
                                        11,014
                                        
                                        
                                        
                                        –
                                        
                                        
                                        
                                        –
                                        
                                        
                                        
                                        11,046Dividends
      declared-preferred
                                        
                                        
                                        –
                                        
                                        
                                        
                                        –
                                        
                                        
                                        
                                        (2,844
                                        )
                                        
                                        
                                        –
                                        
                                        
                                        
                                        –
                                        
                                        
                                        
                                        (2,844
                                        )Dividends
      declared-common
                                        
                                        
                                        –
                                        
                                        
                                        
                                        –
                                        
                                        
                                        
                                        (10,507
                                        )
                                        
                                        
                                        –
                                        
                                        
                                        
                                        –
                                        
                                        
                                        
                                        (10,507
                                        )Distributions
      declared-operating partnership units
                                        
                                        
                                        –
                                        
                                        
                                        
                                        –
                                        
                                        
                                        
                                        –
                                        
                                        
                                        
                                        –
                                        
                                        
                                        
                                        (33
                                        )
                                        
                                        
                                        (33
                                        )Amortization
      of losses on securities previously classified asavailable
      for sale
                                        
                                        
                                        –
                                        
                                        
                                        
                                        –
                                        
                                        
                                        
                                        –
                                        
                                        
                                        
                                        562
                                        
                                        
                                        
                                        –
                                        
                                        
                                        
                                        562Increase
      (decrease) in fair value of securities available for sale
                                        
                                        
                                        –
                                        
                                        
                                        
                                        –
                                        
                                        
                                        
                                        –
                                        
                                        
                                        
                                        2,463
                                        
                                        
                                        
                                        –
                                        
                                        
                                        
                                        2,463Reclassification
      of derivative items into earnings
                                        
                                        
                                        –
                                        
                                        
                                        
                                        –
                                        
                                        
                                        
                                        –
                                        
                                        
                                        
                                        761
                                        
                                        
                                        
                                        –
                                        
                                        
                                        
                                        761Balance
      at December 31, 2009
                                        
                                        $
                                        33,657
                                        
                                        
                                        $
                                        517
                                        
                                        
                                        $
                                        303,368
                                        
                                        
                                        $
                                        (24,332
                                        )
                                        
                                        $
                                        1,257
                                        
                                        
                                        $
                                        314,467
  See notes
to consolidated financial statements.
  54
  
 CapLease,
Inc. and Subsidiaries
 Consolidated
Statements of Cash Flows
  Year ended December 31,(Amounts in thousands)
                                            
                                            2009
                                            
                                            
                                            2008
                                            
                                            
                                            2007Operating
      activitiesNet
      loss
                                            
                                            $
                                            (13,967
                                            )
                                            
                                            $
                                            (23,164
                                            )
                                            
                                            $
                                            (2,505
                                            )Adjustments
      to reconcile net loss to cash provided by operating
      activities:Depreciation
      and amortization
                                            
                                            
                                            51,936
                                            
                                            
                                            
                                            54,349
                                            
                                            
                                            
                                            47,860Stock
      based compensation
                                            
                                            
                                            2,118
                                            
                                            
                                            
                                            1,978
                                            
                                            
                                            
                                            1,621Amortization
      of above and below market leases
                                            
                                            
                                            1,344
                                            
                                            
                                            
                                            1,436
                                            
                                            
                                            
                                            742Gain
      attributable to non-controlling interest in consolidated
      subsidiaries
                                            
                                            
                                            (51
                                            )
                                            
                                            
                                            (124
                                            )
                                            
                                            
                                            (33
                                            )Gain
      on extinguishment of debt
                                            
                                            
                                            (9,829
                                            )
                                            
                                            
                                            (1,713
                                            )
                                            
                                            
                                            (1,363
                                            )Loss
      on investments
                                            
                                            
                                            26,885
                                            
                                            
                                            
                                            3,663
                                            
                                            
                                            
                                            427(Gain)
      loss on derivatives
                                            
                                            
                                            –
                                            
                                            
                                            
                                            19,496
                                            
                                            
                                            
                                            (203
                                            )Straight-lining
      of rents
                                            
                                            
                                            (1,377
                                            )
                                            
                                            
                                            (6,145
                                            )
                                            
                                            
                                            (13,756
                                            )Amortization
      of discounts/premiums, and origination fees/costs, net
                                            
                                            
                                            (495
                                            )
                                            
                                            
                                            (376
                                            )
                                            
                                            
                                            (399
                                            )Amortization
      of debt issuance costs, leasing commissions and fair market value of debt
      issued or assumed
                                            
                                            
                                            3,603
                                            
                                            
                                            
                                            3,069
                                            
                                            
                                            
                                            703Changes
      in operating assets and liabilities:Structuring
      fees receivable
                                            
                                            
                                            770
                                            
                                            
                                            
                                            712
                                            
                                            
                                            
                                            677Other
      assets
                                            
                                            
                                            (4,216
                                            )
                                            
                                            
                                            11,928
                                            
                                            
                                            
                                            (7,820
                                            )Accounts
      payable, accrued expenses and other liabilities
                                            
                                            
                                            (59
                                            )
                                            
                                            
                                            (257
                                            )
                                            
                                            
                                            4,892Deposits
      and escrows
                                            
                                            
                                            (48
                                            )
                                            
                                            
                                            (492
                                            )
                                            
                                            
                                            283Amounts
      due to servicer
                                            
                                            
                                            –
                                            
                                            
                                            
                                            (1
                                            )
                                            
                                            
                                            (181
                                            )Net cash provided by operating
      activities
                                            
                                            
                                            56,614
                                            
                                            
                                            
                                            64,359
                                            
                                            
                                            
                                            30,945Investing
      activitiesProceeds
      from sale of loans
                                            
                                            
                                            41,206
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            –Additions
      to loans held for investment
                                            
                                            
                                            (790
                                            )
                                            
                                            
                                            –
                                            
                                            
                                            
                                            (9,107
                                            )Principal
      received from borrowers
                                            
                                            
                                            15,458
                                            
                                            
                                            
                                            6,863
                                            
                                            
                                            
                                            12,961Origination
      costs on lending investments
                                            
                                            
                                            –
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            22Purchase
      of commercial mortgage-backed securities
                                            
                                            
                                            (496
                                            )
                                            
                                            
                                            –
                                            
                                            
                                            
                                            (37,919
                                            )Proceeds
      from sale of securities
                                            
                                            
                                            7,475
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            –Repayments
      of commercial mortgage-backed securities
                                            
                                            
                                            3,134
                                            
                                            
                                            
                                            2,480
                                            
                                            
                                            
                                            2,415Proceeds
      from sale of real estate investments
                                            
                                            
                                            6,544
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            2,887Purchases
      of real estate investments
                                            
                                            
                                            –
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            (276,457
                                            )Real
      estate improvements, additions, rebates and construction in
      progress
                                            
                                            
                                            (1,389
                                            )
                                            
                                            
                                            224
                                            
                                            
                                            
                                            (3,658
                                            )Leasing
      commission costs
                                            
                                            
                                            (794
                                            )
                                            
                                            
                                            –
                                            
                                            
                                            
                                            –Deposits
      on potential equity investments
                                            
                                            
                                            –
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            (20,800
                                            )Return
      of deposits on potential equity investments
                                            
                                            
                                            –
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            21,800Investments
      in partially-owned entities
                                            
                                            
                                            –
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            (1,139
                                            )Purchases
      of furniture, fixtures, equipment and leasehold
    improvements
                                            
                                            
                                            (6
                                            )
                                            
                                            
                                            (20
                                            )
                                            
                                            
                                            (67
                                            )Net cash provided by (used in) investing
      activities
                                            
                                            
                                            70,342
                                            
                                            
                                            
                                            9,547
                                            
                                            
                                            
                                            (309,062
                                            )Financing
      activitiesBorrowings
      under repurchase agreement obligations
                                            
                                            
                                            –
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            322,913Repayments
      of repurchase agreement obligations
                                            
                                            
                                            –
                                            
                                            
                                            
                                            (232,870
                                            )
                                            
                                            
                                            (285,528
                                            )Borrowings
      under bridge-financing facility
                                            
                                            
                                            –
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            210,273Repayments
      under bridge-financing facility
                                            
                                            
                                            –
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            (210,273
                                            )Borrowings
      from mortgages on real estate investments
                                            
                                            
                                            1,574
                                            
                                            
                                            
                                            1,414
                                            
                                            
                                            
                                            160,076Repayments
      of mortgages on real estate investments
                                            
                                            
                                            (13,650
                                            )
                                            
                                            
                                            (11,560
                                            )
                                            
                                            
                                            (158,258
                                            )Borrowings
      from secured term loan
                                            
                                            
                                            –
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            129,521Repayments
      on secured term loan
                                            
                                            
                                            (9,649
                                            )
                                            
                                            
                                            (5,801
                                            )
                                            
                                            
                                            –Borrowings
      from credit facility
                                            
                                            
                                            –
                                            
                                            
                                            
                                            210,392
                                            
                                            
                                            
                                            –Repayments
      on credit facility
                                            
                                            
                                            (63,000
                                            )
                                            
                                            
                                            (21,131
                                            )
                                            
                                            
                                            –Convertible
      senior notes issued, net of offering costs
                                            
                                            
                                            –
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            75,000Convertible
      senior notes repurchased
                                            
                                            
                                            (9,583
                                            )
                                            
                                            
                                            (1,272
                                            )
                                            
                                            
                                            –Collateralized
      debt obligations repurchased
                                            
                                            
                                            (2,881
                                            )
                                            
                                            
                                            –
                                            
                                            
                                            
                                            –Debt
      issuance costs
                                            
                                            
                                            (645
                                            )
                                            
                                            
                                            (1,783
                                            )
                                            
                                            
                                            (4,662
                                            )Escrows
      held with mortgage lender
                                            
                                            
                                            212
                                            
                                            
                                            
                                            600
                                            
                                            
                                            
                                            –Funds
      provided by (used in) hedging and risk management
    activities
                                            
                                            
                                            –
                                            
                                            
                                            
                                            (17,853
                                            )
                                            
                                            
                                            2,434Common
      stock issued, net of offering costs
                                            
                                            
                                            11,046
                                            
                                            
                                            
                                            19,649
                                            
                                            
                                            
                                            116,219Common
      stock repurchased
                                            
                                            
                                            –
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            (15,000
                                            )Distributions
      to non-controlling interest
                                            
                                            
                                            (23
                                            )
                                            
                                            
                                            (189
                                            )
                                            
                                            
                                            (211
                                            )Dividends
      paid on common and preferred stock
                                            
                                            
                                            (10,250
                                            )
                                            
                                            
                                            (39,110
                                            )
                                            
                                            
                                            (34,765
                                            )Net cash provided by (used in) financing
      activities
                                            
                                            
                                            (96,849
                                            )
                                            
                                            
                                            (99,514
                                            )
                                            
                                            
                                            307,739Net
      increase (decrease) in cash and cash equivalents
                                            
                                            
                                            30,107
                                            
                                            
                                            
                                            (25,608
                                            )
                                            
                                            
                                            29,622Cash
      and cash equivalents at beginning of period
                                            
                                            
                                            8,439
                                            
                                            
                                            
                                            34,047
                                            
                                            
                                            
                                            4,425Cash
      and cash equivalents at end of period
                                            
                                            $
                                            38,546
                                            
                                            
                                            $
                                            8,439
                                            
                                            
                                            $
                                            34,047
  See notes
to consolidated financial statements.
  55
  CapLease,
Inc. and Subsidiaries
 Consolidated
Statements of Cash Flows – continued
  Year ended December 31,(Amounts in thousands)
                  
                  2009
                  
                  
                  2008
                  
                  
                  2007Supplemental
      disclosure of cash flow informationCash
      paid during the year for interest expense (excluding capitalized
      interest)
                  
                  $
                  86,332
                  
                  
                  $
                  95,312
                  
                  
                  $
                  93,103Cash
      paid during the year for income taxes
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –Distributions
      declared but not paid
                  
                  
                  9
                  
                  
                  
                  –
                  
                  
                  
                  53Dividends
      declared but not paid
                  
                  
                  3,813
                  
                  
                  
                  711
                  
                  
                  
                  9,581Supplemental
      disclosure of noncash operating, investing and financing
      informationValue
      of in-place leases and above-market leases acquired
                  
                  $
                  –
                  
                  
                  $
                  –
                  
                  
                  $
                  64,086Value
      of below-market leases acquired
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  34,326Securities
      transferred to loans held for investment
                  
                  
                  –
                  
                  
                  
                  24,453
                  
                  
                  
                  –Mortgage
      notes payable assumed on properties acquired
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  189,996Mortgage
      notes payable transferred on properties sold
                  
                  
                  14,400
                  
                  
                  
                  –
                  
                  
                  
                  –Operating
      partnership units redeemed in exchange for common shares
                  
                  
                  –
                  
                  
                  
                  1,014
                  
                  
                  
                  –
  See notes
to consolidated financial statements.
  56
  CapLease,
Inc. and Subsidiaries
 Notes to
Consolidated Financial Statements
 (Dollar
amounts in thousands, except per share amounts)
 
 December
31, 2009, 2008 and 2007
 1.
              Organization
  CapLease,
Inc. (“CapLease” and collectively with its majority-owned subsidiaries, the
“Company”) is a diversified real estate investment trust, or REIT, that invests
primarily in single tenant commercial real estate assets subject to long-term
leases to high credit quality tenants.  The Company focuses on
properties that are subject to a net lease, or a lease that requires the tenant
to pay all or substantially all expenses normally associated with the ownership
of the property, such as utilities, real estate taxes, insurance and routine
maintenance.  The Company also has made and expects to continue to
make investments in single tenant properties where the owner has exposure to
property expenses when it determines it can sufficiently underwrite that
exposure and isolate a predictable cash flow.
  The
Company has two complementary business lines:  owning single tenant
properties and making first mortgage loans and other debt investments on single
tenant properties.
  CapLease
has made an election to qualify, and believes it is operating so as to qualify,
as a REIT for federal income tax purposes.  As such, it will generally
not be subject to federal income tax on that portion of its taxable income that
is distributed to stockholders if it distributes at least 90% of its taxable
income to its stockholders by prescribed dates and complies with various other
requirements.
  CapLease
conducts its business through a variety of subsidiaries.  CapLease
owns most of its owned properties through its predecessor and operating
partnership, Caplease, LP (the “Operating Partnership”).  CapLease is
the indirect sole general partner of, and owns approximately 99.6% of the common
equity of, the Operating Partnership.
  CapLease
completed its initial public offering of common stock in March 2004, and issued
its 8.125% Series A cumulative redeemable preferred stock in a public offering
in October 2005.  As of December 31, 2009, CapLease had 51,709,511
shares of common stock and 1,400,000 shares of 8.125% Series A cumulative
redeemable preferred stock outstanding.  See Note 14.
  2.
              Summary
      of Significant Accounting Policies
  Basis
of Presentation and Principles of Consolidation
  The
accompanying consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States, or GAAP, and
include the assets, liabilities, and results of operations of the
Company.  Results of operations of properties acquired are included in
the Consolidated Statements of Operations from the date of
acquisition.  The Company accounts for properties that it intends to
dispose of in accordance with the Financial Accounting Standards Board (“FASB”)
Accounting Codification Statement (“ASC”) 360-10-45 (formerly Statement of
Financial Accounting Standards (“SFAS”) No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets).  All significant intercompany
transactions, balances and accounts have been eliminated in
consolidation.
  Use
of Estimates
  Management
of the Company has made a number of estimates and assumptions relating to the
reporting of assets and liabilities, revenues and expenses and the disclosure of
contingent assets and liabilities to prepare these consolidated financial
statements in conformity with GAAP.  Actual results could differ from
those estimates.
  Risks
and Uncertainties
  In the
normal course of business, among the risks the Company encounters are credit
risk and market risk.  Credit risk is the risk of default on the
Company’s leases, loans, securities and any derivative instruments that results
from a lessee’s, borrower’s or derivative counterparty’s inability or
unwillingness to make contractually required payments.  Market risk
reflects changes in the value of investments in real estate, loans, securities
or derivative instruments due to changes in interest rates or other market
factors, including the value of real estate held by the Company, and the
collateral underlying loans and securities.  Management believes that
the carrying values of its investments are reasonable taking into consideration
these risks along with estimated collateral values, payment histories, and other
relevant information.
  Accounting
for Real Estate
  Real
estate is carried on the Company’s Consolidated Balance Sheet at cost, net of
accumulated depreciation and amortization.  Depreciation and
amortization are determined by the straight-line method over the remaining
estimated economic useful lives of the properties.  The Company
generally depreciates buildings and building improvements over periods not
exceeding 40 years.  Direct costs incurred in acquiring properties are
capitalized.  Expenditures for maintenance and repairs are charged to
operations as incurred.  Significant renovations which extend the
useful life of the properties are capitalized.
  57
  CapLease,
Inc. and Subsidiaries
 Notes to
Consolidated Financial Statements
 (Dollar
amounts in thousands, except per share amounts)
 
 December
31, 2009, 2008 and 2007
 The
Company reviews its owned real properties for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable, in accordance with FASB ASC 360-10-35-21 (formerly SFAS No.
144).  Upon determination of impairment, the Company would record a
write-down of the asset, which would be charged to
earnings.  Significant judgment is required both in determining
impairment and in estimating the resulting write-down, including an evaluation
of factors such as the credit quality of the tenant, the anticipated cash flows
of the property, based on current leases in place, and an estimate of what lease
rents will be if the property is vacated coupled with an estimate of proceeds to
be realized upon sale.  These estimates are highly subjective and
could differ materially from actual results.  The Company recognized
$15,999 of impairment losses on long-lived assets during the year ended December
31, 2009, including a $11,923 write-down to estimated fair value during the
fourth quarter of 2009 on a property that is now vacant (see Note 3), a $2,853
loss on an owned property sold in the second quarter of 2009 (see Note 6), and a
$1,223 loss on an owned property expected to be sold in the first quarter of
2010 (see Note 6).  The Company recognized $354 of impairment losses
on long-lived assets during the year ended December 31, 2008, related to the
property it expects to sell in the first quarter of 2010 (see Note
6).  The Company recognized no impairment losses on long-lived assets
during the year ended December 31, 2007.
  FASB ASC
360-10-45-9 and 360-10-45-14 (formerly SFAS No. 144) also requires that
long-lived assets and related liabilities that meet various criteria be
classified as held for sale and presented separately in the Consolidated Balance
Sheet.  The operating results of these assets are reflected as
discontinued operations in the Consolidated Statement of
Operations.  The Company reclassified the owned property it sold in
the second quarter of 2009 as held for sale at March 31, 2009, and as a result
the operating results from this property have been reclassified as discontinued
operations.  See Note 6.
 The
Company’s purchase price of rental real estate acquired is allocated to the
following based on estimated fair values on the acquisition date:
  ·
              acquired
      tangible assets, consisting of land, building and improvements;
      and
  ·
              identified
      intangible assets and liabilities, consisting of above-market and
      below-market leases, in-place leases and tenant
    relationships.
  In
estimating the fair value of the tangible and intangible assets acquired, the
Company considers information obtained about each property as a result of its
due diligence activities and other market data, and utilizes various valuation
methods, such as estimated cash flow projections utilizing appropriate discount
and capitalization rates, estimates of replacement costs, and available market
information.  The fair value of the tangible assets of an acquired
property considers the value of the property as if it were vacant (the “dark
value”).
  Above-market
and below-market lease values for acquired properties are recorded based on the
present value of the differences between (i) the contractual amounts to be paid
pursuant to each in-place lease and (ii) management’s estimate of fair market
lease rates for each corresponding in-place lease.  Fair market lease
rates are measured over a period equal to the remaining term of the lease for
above-market leases and the initial term plus the term of any below-market rate
renewal options for below-market leases.  In computing present value,
the Company considers the costs which would need to be invested to achieve the
fair market lease rates.  The Company uses a discount rate which
reflects the risks associated with the leases acquired.  The
capitalized above-market lease values are amortized as a reduction of base
rental revenue over the remaining term of the respective leases, and the
capitalized below-market lease values are amortized as an increase to base
rental revenue over the remaining initial terms plus the terms of any
below-market renewal options of the respective leases.
  Other
intangible assets acquired include amounts for in-place lease values and tenant
relationship values which are based on management’s evaluation of the specific
characteristics of each tenant’s lease and the Company’s overall relationship
with the respective tenant.  Factors considered by management in its
analysis of in-place lease values include estimates of the dark value of the
property, carrying costs during the hypothetical expected time it would take
management to find a tenant to lease the space for the existing lease term (a
“lease-up period”) considering current market conditions, and costs to execute
similar leases.  Management estimates carrying costs, including such
factors as real estate taxes, insurance and other operating expenses during the
expected lease-up period, considering current market conditions and costs to
execute similar leases.  In estimating costs to execute similar
leases, management considers leasing commissions and other related
expenses.  Characteristics considered by management in estimating the
value of tenant relationships include the nature and extent of the Company’s
existing business relationships with the tenant, growth prospects for developing
new business with the tenant, the tenant’s credit quality and expectations of
lease renewals.  The value of in-place leases is amortized as a
component of depreciation expense over the remaining initial terms of the
respective leases.  The value of tenant relationship intangibles, if
any, is amortized as a component of depreciation expense over the anticipated
life of the relationships.  Through December 31, 2009, the Company has
assigned no value to tenant relationships on any of its
acquisitions.
  58
 CapLease,
Inc. and Subsidiaries
 Notes to
Consolidated Financial Statements
 (Dollar
amounts in thousands, except per share amounts)
 
 December
31, 2009, 2008 and 2007
 When a
lease is terminated, the net impact, if any, of (i) writing-off all related
intangible assets and liabilities and any straight-line rent adjustment, (ii)
any lease termination payments received, and (iii) recording the property at its
lower of the carry amount and estimated fair value, is recognized through the
Company’s Consolidated Statement of Operations.  Any net gain is
included as a component of “Other revenue” and any net loss is included as a
component of “Loss on investments.”
  For
property acquisitions where the Company assumes existing mortgage debt, the debt
is recorded at its estimated fair value, based on management’s estimate of
current market yields available for comparable financing.  The Company
amortizes any discount or premium as part of interest expense on the related
debt using the effective interest method.
  Loan
Investments
  The
Company classifies its loans as long-term investments, as its strategy is to
hold the loans for the foreseeable future or until maturity.  Loan
investments are carried on the Company's Consolidated Balance Sheet at amortized
cost (unpaid principal balance adjusted for unearned discount or premium and
loan origination fees), net of any allowance for loan
losses.  Unearned discounts or premiums and loan origination fees are
amortized as a component of interest income using the effective interest method
over the life of the loan.
  From time
to time, the Company may determine to sell a loan in which case it must
reclassify the asset as held for sale.  Loans held for sale are
carried at lower of cost or market value.  As of December 31, 2009,
the Company had not classified any of its loans as held for sale.
  The
Company evaluates its loan investments for possible impairment on a quarterly
basis.  The Company's impairment analysis includes both a general
reserve component under FASB ASC 310-10-35-10 (formerly SFAS No. 5, Accounting
for Contingencies), and an asset-specific component under FASB ASC 310-10-35-16
(formerly SFAS No. 114, Accounting by Creditors for Impairments of a
Loan).  The general reserve component covers performing loans and in
accordance with FASB ASC 310-10-35-10 provisions for loan losses are recorded
when (i) available information as of each balance sheet date indicates that it
is probable a loss has occurred in the portfolio and (ii) the amount of the loss
can be reasonably estimated.  Actual loan losses are then charged
against the allowance when management believes that uncollectibility of a loan
balance is confirmed.  Subsequent recoveries, if any, are credited to
the allowance.  Significant judgment is required in determining
reserve balances for the performing loan portfolio, including estimates of the
likelihood of default and lease rejection given the credit characteristics of
the tenant, and estimates of stressed collateral values and potential bankruptcy
claim recoveries.  These estimates are highly subjective and could
differ materially from actual results.  As of December 31, 2009, the
Company has a general loan loss reserve in accordance with FASB ASC 310-10-35-10
of $500.  See Note 4.
  The
asset-specific component of the loan loss impairment analysis is conducted in
accordance with FASB ASC 310-10-35-16, and covers specific loans where the
Company has deemed it probable that it will not be able to collect all amounts
due according to the contractual terms of the loan.  Any resulting
loan specific loss is measured based on the present value of expected future
cash flows from the loan or the fair value of the loan collateral, if the loan
is collateral dependent.  Significant judgment is required in
determining any resulting loan specific loss, including factors such as the
status of the loans (i.e., current or actual or expected payment or other
defaults), the credit quality of the underlying tenants, the present value of
expected future cash flows on the loans, the fair value of any collateral, and
the amount and status of any senior debt.  These estimates are highly
subjective and could differ materially from actual results.  The
Company's accounting policy is to continue to accrue interest income on specific
impaired loans as long as it concludes it is likely to collect it.  As
of December 31, 2009, the Company had an asset-specific loan loss reserve of
$444 on a single impaired loan.  See Note 4.
  Commercial
Mortgage-Backed Securities
  The
Company designates its commercial mortgage-backed securities and other real
estate securities (“CMBS”) investments pursuant to FASB ASC 320-10 (formerly
SFAS No. 115, Accounting
for Certain Investments in Debt and Equity Securities).  FASB
ASC 320-10 creates two classifications that are relevant with respect to the
Company’s securities investments:
  ·
              “Held
      to maturity” are those securities that the Company has the positive intent
      and ability to hold until maturity.  Under FASB ASC 320-10-25-1,
      securities classified as held to maturity are presented at cost plus the
      amortization of any premiums or discounts.  For a security
      transferred into the held to maturity category, the security is recorded
      at estimated fair value on the date of transfer, with any unrealized gain
      or loss amortized against the related fair value adjustment recorded as a
      component of Other Comprehensive Income (Loss) within Stockholders’ Equity
      over the expected term of the security using the effective interest
      method.
  59
  CapLease,
Inc. and Subsidiaries
 Notes to
Consolidated Financial Statements
 (Dollar
amounts in thousands, except per share amounts)
 
 December
31, 2009, 2008 and 2007
 ·
              “Available
      for sale” are those securities that the Company does not hold for the
      purpose of selling in the near-term, but may dispose of prior to
      maturity.  They are presented on the Consolidated Balance Sheet
      at fair value with the net unrealized gains or losses included in
      Accumulated Other Comprehensive Income (Loss), a component of
      Stockholders’ Equity on the Company’s Consolidated Balance
      Sheet.
  In
January 2008, the Company reclassified a total of 11 securities that are
financed in its March 2005 collateralized debt obligation or in the December
2007 secured term loan transaction discussed at Note 9, from “available for
sale” to “held to maturity,” as the Company has the positive intent and ability
to hold all of those securities until maturity and the terms of the financings
significantly restrict or prohibit a sale.  As of the date of
transfer, the unrealized loss on the securities reclassified as held to maturity
included in Other Comprehensive Income (Loss) was
$(9,722).
 Since January 2008, as
part of the reinvestment option of the Company's
collateralizedobligation, the
Company transferred additional face amount of one of the 11 securities
into the collateralized debt obligation and in connection with the transfer
reclassified the security as "held to maturity." As of the date of transfer, the
unrealizedloss on the security
reclassified as held to maturity included in Other Comprehensive
income (Loss) was
$1,217.
 During
2009, also as part of the reinvestment option of the Company's collateralized
debt obligation, the Company purchased five other securities through the
collateralized debtobligation and
classified all of the securities as "held to
maturity."
    Any
premiums or discounts on securities are amortized as a component of interest
income using the effective interest method.
  The
Company estimates fair value on all securities investments quarterly based on a
variety of inputs.  The Company is then required under GAAP to assess
whether any unrealized losses on securities below the Company’s carry value
reflect a decline in value which is other-than-temporary.  If an
other-than-temporarily impaired security is intended to be sold or required to
be sold prior to the recovery of its carrying amount, the full amount of the
impairment loss is charged to earnings.  Otherwise, losses on the
security must be separated into two categories, the portion which is considered
credit loss, which is charged to earnings, and the portion due to other factors,
which is charged to other comprehensive income (loss), a component of balance
sheet equity.  In estimating other-than-temporary impairment losses,
management considers a variety of factors including (1) the financial condition
and near-term prospects of the credit, including credit rating of the security
and the underlying tenant and an estimate of the likelihood and expected timing
of any default, (2) whether the Company expects to hold the investment for a
period of time sufficient to allow for anticipated recovery in fair value, (3)
the length of time and the extent to which the fair value has been below cost,
(4) current market conditions, (5) expected cash flows from the underlying
collateral and an estimate of underlying collateral values, and (6)
subordination levels within the securitization pool.  These estimates
are highly subjective and could differ materially from actual
results.  The Company had losses on securities charged to the
Statement of Operations of $133 during the year ended December 31, 2009, $1,000
during the year ended December 31, 2008, and $372 during the year ended December
31, 2007.  See Note 5.
  Structuring
Fees Receivable
  Structuring
fees receivable represent fees which the Company is entitled to receive over
time for structuring, originating and/or selling loans and are initially
recorded at the discounted value of expected cash receipts, and are periodically
evaluated for impairment.  The Company amortizes the receivable
balance as cash is collected, allocating the cash received to principal and
interest.
  Deferred
Origination Fees and Costs
  In
accordance with applicable accounting guidance, the Company defers the
recognition of fees and expenses associated with the origination of its loans
held for investment.  These items include lender fee income, rate lock
income, direct loan origination costs, certain legal fees, insurance costs,
rating agency fees and certain other expenses.  Deferred fees and
costs are recognized as an adjustment to the effective yield over the life of
the related asset.
  Risk
Management Transactions
  The
Company may enter into risk management transactions as part of its overall
portfolio financing strategy.  These transactions are intended to
manage the Company’s exposure to changes in interest rates associated with its
expected future debt issuances.
  To the
extent the Company employs risk management transactions, they will be treated as
cash flow hedges under applicable accounting guidance to the extent they have
been designated and qualify as such, which basically means so long as the
Company has satisfied a variety of technical requirements, such as hedge
documentation requirements and initial and subsequent quarterly hedge
effectiveness tests.  To the extent the cash flow hedge criteria are
met, the transactions are marked to fair value at each reporting date and
recorded as an asset or liability, depending on the Company’s rights or
obligations under the applicable contract.  The effective portion of
the Company’s realized and unrealized gains and losses on such transactions are
treated as a component of “Other Comprehensive Income (Loss)” on the Company’s
Consolidated Balance Sheet and are not reported as a component of current income
or loss on the Company’s Consolidated Statement of Operations.  The
effective portion of the Company’s realized gains and losses, which generally
represent the net payments the Company makes or receives on the interest rate
swaps, are then reclassified and amortized as part of interest expense on the
Company’s Consolidated Statement of Operations beginning at issuance of the
related debt and continuing over the expected term of such
debt.
  60
 CapLease,
Inc. and Subsidiaries
 Notes to
Consolidated Financial Statements
 (Dollar
amounts in thousands, except per share amounts)
 
 December
31, 2009, 2008 and 2007
 To the
extent cash flow hedge criteria are not met or the hedge is deemed ineffective,
some or all of the realized and unrealized gains and losses on such transactions
are treated as a component of current income or loss on the Company’s Statement
of Operations.
  To the
extent the Company employs risk management transactions, no assurance can be
made that the Company will satisfy the cash flow hedge requirements and as to
the portion of the Company’s gains and losses that will be deemed effective
under applicable accounting guidance.  Changes in management’s initial
assumptions regarding any proposed debt issuance (e.g., timing and the amount
and type of debt) and changes in the shape of the swap curve (which represents
the market’s expectations for future LIBOR rates) are among the factors that
could cause the Company to include a greater portion of its gains and losses
from the associated risk management transactions as current income or
loss.
  Cash
and Cash Equivalents
  The
Company defines cash equivalents as highly liquid investments purchased with
maturities of three months or less at date of purchase.  From time to
time, the Company’s account balance held at financial institutions exceeds
Federal Depository Insurance Corporation (“FDIC”) insurance coverage and, as a
result, there is a concentration of credit risk related to the balance on
deposit in excess of FDIC insurance coverage.  The Company believes
that the risk of loss is not significant.
  Revenue
Recognition
  Rental
revenue on real estate is recognized on a straight-line basis over the
non-cancelable term of the lease unless another systematic and rational basis is
more representative of the time pattern in which the use benefit is derived from
the leased property.  This includes the effects of rent steps and rent
abatements under the leases.
  Interest
income from loans, securities, and structuring fees receivable, is recognized on
the accrual basis of accounting.  Interest income from securities
(including interest-only strips) is recognized over the life of the investment
using the effective interest method.  The cost basis of interest-only
strips is adjusted to reflect any prepayments from underlying assets, using the
initial yield-to-maturity at the purchase date.  The Company has
adopted the cost-recovery method, in which all receipts are applied to reduce
the Company’s cost basis, on a limited number of its securities
investments.
  On
occasion, the Company may consider a loan to be non-performing and place the
loan on non-accrual status. While on non-accrual status, the loan is accounted
for on either a cash basis, in which case interest income is recognized only
upon actual receipt, or on a cost-recovery basis based upon management’s
judgment as to the collectibility of the investment.
  The
Company may periodically receive breakup fees on contracts in connection with
its investments in real estate.  The Company recognizes revenues from
contract breakup fees when the contractual conditions have occurred to trigger
the receipt of such a fee, when the amounts of such revenue can be reasonably
determined, and when collection is probable.
  Lease
Enhancement Mechanisms
  The
Company utilizes the following lease enhancement mechanisms, primarily as part
of its lending programs:
  ·
              casualty
      and condemnation insurance policies that protect the Company from any
      right the tenant may have to terminate the underlying net lease or abate
      rent as a result of a casualty or condemnation;
  and
  ·
              with
      respect to a double net lease, borrower reserve funds that protect the
      Company from any rights the tenant may have to terminate the underlying
      net lease or abate rent as a result of the failure of the property owner
      to maintain and repair the property or related common
    areas.
  Costs
incurred by the Company for lease enhancement mechanisms as part of the
Company’s lending programs are typically charged to the borrowers. In instances
where not fully absorbed by the borrower, costs are treated as a cost of loan
origination under applicable accounting guidance.  Costs for lease
enhancement mechanisms for the Company’s owned real properties are treated as a
cost of financing and are amortized as part of interest expense over the
expected term of the related financing.
  61
  CapLease,
Inc. and Subsidiaries
 Notes to
Consolidated Financial Statements
 (Dollar
amounts in thousands, except per share amounts)
 
 December
31, 2009, 2008 and 2007
 Marketing
and Advertising Costs
  The
Company expenses marketing and advertising costs as
incurred.  Marketing and advertising expense totaled $145, $431, and
$512, in 2009, 2008, and 2007, respectively.
  Income
Taxes
  CapLease
has made an election to qualify, and believes it is operating so as to qualify,
as a REIT for federal income tax purposes.  As such, it will generally
not be subject to federal income tax on that portion of its taxable income that
is distributed to stockholders if it distributes at least 90% of its taxable
income to its stockholders by prescribed dates and complies with various other
requirements.  From time to time, the Company may conduct a portion of
its business through a taxable REIT subsidiary (“TRS”), and the income from the
activities of the TRS is subject to federal and state taxation at the applicable
corporate rates.
  Other
Comprehensive Income (Loss)
  In
accordance with applicable accounting guidance, the Company recognizes the
change in fair value of its securities available for sale as a component of
“Other Comprehensive Income (Loss)” on the Company’s Consolidated Balance
Sheet.  The Company also recognizes the change in fair value, and
realized gains and losses from the effective portion of its cash flow hedges as
a component of “Other Comprehensive Income (Loss)” on the Company’s Consolidated
Balance Sheet.  Realized gains and losses from the effective portion
of the cash flow hedges are then amortized as a component of interest expense on
the Company’s Consolidated Statement of Operations over the term of the related
financing, using the constant interest method.
  Earnings
per Share
  In
accordance with FASB ASC 260-10-15 (formerly SFAS No. 128, Earnings per Share), the
Company presents both basic and diluted earnings per share
(“EPS”).  Basic EPS excludes dilution and is computed by dividing net
income (loss) allocable to common stockholders by the weighted average number of
shares outstanding for the period.  Diluted earnings per share
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock,
where such exercise or conversion would result in a lower EPS
amount.  The Company’s computation of diluted earnings per share does
not include shares of common stock that may be issued in the future upon
conversion of the convertible senior notes issued in October 2007, as the impact
would not be dilutive.  The number of weighted average common shares
not included was 5,014,100, 6,627,296 and 1,507,155, respectively, for the years
ended December 31, 2009, December 31, 2008 and December 31, 2007.
  The
following summarizes the Company’s EPS computations for the years ended December
31, 2009, December 31, 2008, and December 31, 2007 (in thousands, except per
share amounts):
  December 31,2009
                      
                      
                      2008
                      
                      
                      2007Net
      loss allocable to common stockholders
                      
                      $
                      (16,811
                      )
                      
                      $
                      (26,008
                      )
                      
                      $
                      (5,349
                      )Weighted
      average number of common shares outstanding, basic and
    diluted
                      
                      
                      49,297
                      
                      
                      
                      45,526
                      
                      
                      
                      40,739Loss
      per share, basic and diluted
                      
                      $
                      (0.34
                      )
                      
                      $
                      (0.57
                      )
                      
                      $
                      (0.13
                      )Non-vested
      shares included in weighted average number of shares outstanding
      above
                      
                      
                      1,801
                      
                      
                      
                      930
                      
                      
                      
                      693
  Subsequent
Events
  In
accordance with FASB ASC 855-10 (formerly SFAS No. 165, Subsequent Events), the
Company performed an evaluation of subsequent events through March 3, 2010,
which is the date the financial statements were issued.
  62
 CapLease,
Inc. and Subsidiaries
 Notes to
Consolidated Financial Statements
 (Dollar
amounts in thousands, except per share amounts)
 
 December
31, 2009, 2008 and 2007
 Recently
Issued Accounting Pronouncements
  In
April 2009, the FASB issued an amendment to the guidance for other than
temporary impairments (“OTTI”) of investments in debt securities, which changes
the presentation of OTTI in financial statements.  Under this
guidance, if an OTTI debt security is intended to be sold or required to be sold
prior to the recovery of its carrying amount, the full amount of the impairment
loss is charged to earnings.  Otherwise, losses on debt securities
must be separated into two categories, the portion which is considered credit
loss, which is charged to earnings, and the portion due to other factors, which
is charged to other comprehensive income (loss), a component of balance sheet
equity.  When an unrealized loss on a fixed maturity security is not
considered OTTI, the unrealized loss continues to be charged to other
comprehensive income (loss) and not to earnings. The adoption of this guidance
on April 1, 2009 did not have a material effect on the Company’s consolidated
financial statements.
  In
June 2009, the FASB approved the FASB Accounting Standards
Codification (“Codification”) as the single source of authoritative
nongovernmental U.S. GAAP beginning on July 1, 2009.  The
Codification does not change current U.S. GAAP, but is intended to simplify user
access to all authoritative U.S. GAAP by providing all the authoritative
literature related to a particular topic in one place.  All existing
accounting standard documents have been superseded and all other accounting
literature not included in the Codification is considered
non-authoritative.  The Codification was effective for the Company on
September 30, 2009.  The Company’s adoption of the Codification did
not have an impact on its financial condition or results of
operations.  However, because the Codification completely replaced
existing standards, it did affect the way U.S. GAAP is referenced within the
Company’s consolidated financial statements.
  In
June 2009, the FASB issued new accounting guidance (formerly SFAS
No. 166, Accounting for
Transfers of Financial Assets — an amendment of FASB Statement
No. 140) which requires additional information regarding transfers
of financial assets, including securitization transactions, and where companies
have continuing exposure to the risks related to transferred financial assets.
The guidance eliminates the concept of a “qualifying special-purpose entity,”
changes the requirements for derecognizing financial assets, and requires
additional disclosures.  The guidance will be effective for the
Company on January 1, 2010.  The Company is currently evaluating the
impact that the guidance will have on its financial condition and results of
operations.
  In
June 2009, the FASB issued new accounting guidance (formerly SFAS
No. 167, Amendments to
FASB Interpretation No. 46(R)) which modifies how a company
determines when an entity that is insufficiently capitalized or is not
controlled through voting (or similar rights) should be
consolidated.  The guidance clarifies that the determination of
whether a company is required to consolidate an entity is based on, among other
things, an entity’s purpose and design and a company’s ability to direct the
activities of the entity that most significantly impact the entity’s economic
performance.  The guidance requires an ongoing reassessment of whether
a company is the primary beneficiary of a variable interest
entity.  The guidance also requires additional disclosures about a
company’s involvement in variable interest entities and any significant changes
in risk exposure due to that involvement.  The guidance will be
effective for the Company on January 1, 2010.  The Company is
currently evaluating the impact that the guidance will have on its financial
condition and results of operations.
  Reclassifications
  Certain
prior year amounts have been reclassified to conform to the current
presentation.  There was no effect on net income (loss) or equity
related to these reclassifications.
  3.
              Real
      Estate Investments
  Real
estate held for investment and related intangible liabilities on real estate
investments consisted of the following at December 31, 2009 and December 31,
2008:
  63
 CapLease,
Inc. and Subsidiaries
 Notes to
Consolidated Financial Statements
 (Dollar
amounts in thousands, except per share amounts)
 
 December
31, 2009, 2008 and 2007
 December 31,2009
                              
                              
                              2008Real
      estate investments, at cost:Land
                              
                              $
                              189,021
                              
                              
                              $
                              192,321Building
      and improvements
                              
                              
                              1,237,559
                              
                              
                              
                              1,278,025Intangible
      assets
                              
                              
                              180,722
                              
                              
                              
                              186,568Less:
      Accumulated depreciation and amortization
                              
                              
                              (198,483
                              )
                              
                              
                              (146,501
                              )Real estate investments, net
                              
                              $
                              1,408,819
                              
                              
                              $
                              1,510,413Intangible
      liabilities on real estate investments:Intangible
      liabilities
                              
                              $
                              47,908
                              
                              
                              $
                              56,000Less:
      Accumulated amortization
                              
                              
                              (8,317
                              )
                              
                              
                              (6,723
                              )Intangible liabilities on real estate investments, net
                              
                              $
                              39,591
                              
                              
                              $
                              49,277
 
 During
the year ended December 31, 2009, the Company did not complete any new real
estate acquisitions.  The Company did sell one owned real property
during the year ended December 31, 2009.  See Note
6.
  Acquisition
costs capitalized as part of buildings and improvements were $0 for the years
ended December 31, 2009 and December 31, 2008, and $1,398 for the year ended
December 31, 2007.  Interest capitalized as part of buildings and
improvements was $0 for each of the years ended December 31, 2009, December 31,
2008, and December 31, 2007.
  The
impact on rental revenue of the straight-line rent adjustment under FASB ASC
840-20-25-1 (formerly SFAS No. 13, Accounting for Leases) is
recorded on the Company’s Consolidated Balance Sheet through accrued rental
income and deferred rental income.  Amounts for accrued rental income
and deferred rental income as of December 31, 2009 and December 31, 2008, were
as follows:
  December 31,2009
                      
                      
                      2008Accrued
      Rental Income
                      
                      $
                      35,317
                      
                      
                      $
                      35,883Deferred
      Rental Income
                      
                      
                      -
                      
                      
                      
                      1,072
  Accrued
rental income is included in “Other assets” on the Company’s Consolidated
Balance Sheet.  See Note 8.  Deferred rental income is
included in “Accounts payable, accrued expenses and other liabilities” on the
Company’s Consolidated Balance Sheet.  See Note 10.
  Depreciation
expense and amortization of intangible assets and liabilities on real estate
investments for the years ended December 31, 2009, December 31, 2008 and
December 31, 2007, were as follows:
  December 31,2009
                              
                              
                              2008
                              
                              
                              2007Depreciation
      on real estate (included in depreciation and amortization
      expense)
                              
                              $
                              32,804
                              
                              
                              $
                              32,783
                              
                              
                              $
                              29,562Amortization
      of in-place leases (included in  depreciation and amortization
      expense)
                              
                              
                              18,530
                              
                              
                              
                              20,349
                              
                              
                              
                              17,304Amortization
      of above-market leases (included as a reduction of rental
      revenue)
                              
                              
                              3,849
                              
                              
                              
                              3,849
                              
                              
                              
                              2,826Amortization
      of below-market leases (included as a component of rental
      revenue)
                              
                              
                              1,593
                              
                              
                              
                              2,535
                              
                              
                              
                              2,207
  As of
December 31, 2009, Company’s weighted average amortization period on intangible
assets was 7.7 years, and the weighted average amortization period on intangible
liabilities was 26.5 years.
  64
  CapLease,
Inc. and Subsidiaries
 Notes to
Consolidated Financial Statements
 (Dollar
amounts in thousands, except per share amounts)
 
 December
31, 2009, 2008 and 2007
 Scheduled
amortization on existing intangible assets and liabilities on real estate
investments as of December 31, 2009 on real estate investments is as
follows:
  Intangible
                          Assets
                        
                        
                        Intangible
                          Liabilities2010
                        
                        $
                        19,832
                        
                        
                        $
                        2,1862011
                        
                        
                        19,120
                        
                        
                        
                        2,1862012
                        
                        
                        14,702
                        
                        
                        
                        2,1862013
                        
                        
                        9,030
                        
                        
                        
                        2,0512014
                        
                        
                        8,672
                        
                        
                        
                        1,954Thereafter
                        
                        
                        31,241
                        
                        
                        
                        29,028$
                        102,597
                        
                        
                        $
                        39,591
 
 Substantially
all of the Company’s owned properties are pledged as collateral to the Company’s
lender that has provided financing on the property.  The Company’s
strategy is to own and finance on a long-term basis each property through a
separate and distinct single purpose entity, or SPE, with each property and the
related lease or leases on the property generally representing the sole assets
of the SPE and the sole collateral available to the Company’s lender in the
event the Company defaults on the debt that finances the
property.  Also see Note 9.
  Johnston,
Rhode Island Property
  The
Company performed an impairment analysis of this property in connection with the
former tenant’s vacancy on October 31, 2009.  The Company estimated
the fair value of the property based on a variety of assumptions, including the
time expected to lease up the building, expected rents and operating expenses,
an estimate of amounts the Company expects to invest to improve the building,
and an estimate of sale proceeds in connection with a potential sale of the
property at a future date.  These estimates are highly subjective and
could differ materially from actual results.  Based on the Company’s
impairment analysis, it recognized an impairment loss of $11,923 on this
property which is included in “Loss on investments” in the Consolidated
Statement of Operations.
  Omaha,
Nebraska Properties
  At
December 31, 2009, the Company terminated two leases with Qwest Corporation
(both buildings in Omaha, Nebraska) which were scheduled to expire in June 2010
and assumed the subleases that had been previously entered into by
Qwest.
  In
connection with the lease termination, the Company received $812 from Qwest to
settle various obligations under the lease.  This payment was included
as a component of “Other revenue” on the Company's Consolidated Statement of
Operations.
  Prior to
the lease termination, the Company had the following lease-related
liabilities:
  ·
              $7,150
      of intangible liabilities on the properties (representing below market
      lease intangibles);
  ·
              $1,430
      of deferred rental income on the properties (representing the aggregate
      straight-line rent adjustment for rent received in
    advance).
  In
addition to the lease termination payment, the Company recorded the following
items of income (expense) on its Consolidated Statement of Operations as a
component of “Other revenue”:
  Extinguishment
      of intangible liabilities
                    
                    $
                    7,150Recognition
      of deferred rental income
                    
                    
                    1,430Write-down
      of building to fair value
                    
                    
                    (8,580
                    )Total
                    
                    $
                    –
  The
Company performed an impairment analysis of the properties in connection with
the lease termination.  As it did with the Johnston, Rhode Island
property, the Company estimated the fair value of the properties based on a
variety of assumptions.  Based on the analysis, management concluded
that a write-down to fair value was appropriate for the two Qwest properties, as
reflected above.  Inclusive of the related income items from the
extinguishment of the lease liabilities, there was no net impairment charge on
the properties.
  65
 CapLease,
Inc. and Subsidiaries
 Notes to
Consolidated Financial Statements
 (Dollar
amounts in thousands, except per share amounts)
 
 December
31, 2009, 2008 and 2007
 4.
              Loans
      Held for Investment
  Loans
held for investment at December 31, 2009 and December 31, 2008, are summarized
in the following table.  These investments consist predominantly of
mortgage loans on properties subject to leases to investment grade
tenants.  As of December 31, 2009, the weighted average credit rating
of the underlying tenants was BBB+ from Standard & Poor’s.  Except
as described below, as of December 31, 2009, none of the Company’s loans held
for investment were on non-accrual status or past due 90 days or
more.
  December 31,2009
                            
                            
                            2008Principal
                            
                            $
                            225,242
                            
                            
                            $
                            283,912(Discount)
      Premium
                            
                            
                            (2,642
                            )
                            
                            
                            3,151Cost
      basis
                            
                            
                            222,600
                            
                            
                            
                            287,063Allowance
      for loan losses
                            
                            
                            (944
                            )
                            
                            
                            (500
                            )Carrying
      amount of loans
                            
                            
                            221,656
                            
                            
                            
                            286,563Deferred
      origination fees, net
                            
                            
                            (445
                            )
                            
                            
                            (784
                            )Total
                            
                            $
                            221,211
                            
                            
                            $
                            285,779
  During
the year ended December 31, 2009, the Company sold a long-term mortgage loan
backed by a property leased to Koninklijke Ahold, N.V. and recorded a loss on
sale of $3,807.  See Note 6.  The decision to sell the loan
was driven primarily by the Company’s desire to reduce recourse
debt.  The Company used the proceeds from the sale to repay principal
outstanding under its credit agreement with Wachovia Bank by $14,314 and
increase its cash on hand by $5,503.
  As of
December 31, 2009, the Company has a general loan loss reserve in accordance
with FASB ASC 310-10-35-10 (formerly SFAS No. 5) of $500, reflecting
management’s estimate of losses that have probably occurred in its mortgage loan
portfolio.  The loan loss reserve was established at December 31,
2008, and to date the Company has not had any actual losses charged against the
allowance.
  At each
of December 31, 2009 and December 31, 2008, the Company’s loan investments
carried interest rates ranging from 5.28% to 10.00%.  At December 31,
2009 and December 31, 2008, the weighted average effective interest rate on the
Company’s loan investments, as measured against its cost basis, was 6.8% and
6.8%, respectively.
  66
  CapLease,
Inc. and Subsidiaries
 Notes to
Consolidated Financial Statements
 (Dollar
amounts in thousands, except per share amounts)
 
 December
31, 2009, 2008 and 2007
 As of
December 31, 2009, the Company had one loan investment which is on non-accrual
status and past due more than 90 days.  The loan has been classified
as impaired in accordance with FASB ASC 310-10-35-16 (formerly SFAS No.
114).  The Company intends to account for any interest income it
collects on the impaired loan on a cost-recovery basis.  A second loan
which was classified as impaired at December 31, 2008, was paid off at an amount
approximately equal to the loan’s carry value during the year ended December 31,
2009.  The Company performed an impairment analysis for the impaired
loan as of December 31, 2009, and concluded that no loss reserve beyond a
reserve of $444 recorded at June 30, 2009, was warranted.
  The
following tables summarize certain financial information with respect to the
Company’s impaired loans, including the loan that was paid off during the year
ended December 31, 2009:
  Carrying Amount
                      
                      
                      Average carrying amountBorrower
                      
                      12/31/2009
                      
                      
                      12/31/2008
                      
                      
                      2009
                      
                      
                      2008Eden
      Hylan Seaview LLC
                      
                      $
                      –
                      
                      
                      $
                      650
                      
                      
                      $
                      436
                      
                      
                      $
                      650West
      End Mortgage Finance Fund I L.P.
                      
                      
                      1,000
                      
                      
                      
                      6,154
                      
                      
                      
                      1,987
                      
                      
                      
                      6,499
  Interest Income RecognizedFor the year
                      ended December 31,2009
                    
                    
                    For the year
                      ended December 31,2008Borrower
                    
                    Accrual
                    
                    
                    Cash
                    
                    
                    Accrual
                    
                    
                    CashEden
      Hylan Seaview LLC
                    
                    $
                    56
                    
                    
                    $
                    171
                    
                    
                    $
                    16
                    
                    
                    $
                    7West
      End Mortgage Finance Fund I L.P.
                    
                    
                    115
                    
                    
                    
                    115
                    
                    
                    
                    317
                    
                    
                    
                    317
  The above
table includes interest income on each loan only for the period the loan was
classified as impaired.  The loans were not classified as impaired
during 2007.
  5.
              Commercial
      Mortgage-Backed Securities and Structuring Fees
  Receivable
  The
following is a summary of the Company’s securities investments at December 31,
2009:
  Description
                      
                      Number of
                        Securities
                      
                      
                      Face
                        Value
                      
                      
                      Carry
                        Value
                      
                      
                      Amortized
                        Cost
                      
                      
                      Fair
                        Value
                      
                      
                      Gross
                        Unrecognized
                        Gain
                      
                      
                      Gross
                        Unrecognized
                        LossHeld
      to Maturity
                      
                      
                      16
                      
                      
                      $
                      155,556
                      
                      
                      $
                      140,013
                      
                      
                      $
                      149,885
                      
                      
                      $
                      100,262
                      
                      
                      $
                      433
                      
                      
                      $
                      (50,056
                      )Available
      For Sale
                      
                      
                      8
                      
                      
                      
                      36,320
                      
                      
                      
                      13,043
                      
                      
                      
                      22,760
                      
                      
                      
                      13,044
                      
                      
                      
                      -
                      
                      
                      
                      (9,717
                      )Total
                      
                      
                      24
                      
                      
                      $
                      191,876
                      
                      
                      $
                      153,056
                      
                      
                      $
                      172,645
                      
                      
                      $
                      113,306
                      
                      
                      $
                      433
                      
                      
                      $
                      (59,773
                      )
  The
following is a summary of the Company’s securities investments at December 31,
2008:
  Description
                      
                      Number of
                        Securities
                      
                      
                      Face
                        Value
                      
                      
                      Carry
                        Value
                      
                      
                      Amortized
                        Cost
                      
                      
                      Fair
                        Value
                      
                      
                      Gross
                        Unrecognized
                        Gain
                      
                      
                      Gross
                        Unrecognized
                        LossHeld
      to Maturity
                      
                      
                      11
                      
                      
                      $
                      150,742
                      
                      
                      $
                      136,261
                      
                      
                      $
                      145,480
                      
                      
                      $
                      93,504
                      
                      
                      $
                      245
                      
                      
                      $
                      (52,221
                      )Available
      For Sale
                      
                      
                      9
                      
                      
                      
                      51,640
                      
                      
                      
                      25,581
                      
                      
                      
                      38,975
                      
                      
                      
                      25,579
                      
                      
                      
                      1
                      
                      
                      
                      (13,397
                      )Total
                      
                      
                      20
                      
                      
                      $
                      202,382
                      
                      
                      $
                      161,842
                      
                      
                      $
                      184,455
                      
                      
                      $
                      119,083
                      
                      
                      $
                      246
                      
                      
                      $
                      (65,618
                      )
  67
  CapLease,
Inc. and Subsidiaries
 Notes to
Consolidated Financial Statements
 (Dollar
amounts in thousands, except per share amounts)
 
 December
31, 2009, 2008 and 2007
 A
detailed schedule of the Company’s securities investments at December 31, 2009
follows:
  Scheduled
                              
                              December 31,Description
                              
                              2009 Classification
                              
                              Maturity Date
                              
                              2009
                              
                              
                              2008BSCMS
      1999 CLF1, Class E (rated D) Face Amount
                              
                              Available For
      Sale
                              
                              May
      2028
                              
                              $
                              3,326
                              
                              
                              $
                              3,326BSCMS
      1999 CLF1, Class F (not rated) Face Amount
                              
                              Available
      For Sale
                              
                              Sep
      2025
                              
                              
                              251
                              
                              
                              
                              251CMLBC
      2001-CMLB-1, Class H (rated B-) Face Amount
                              
                              Available
      For Sale
                              
                              Mar
      2024
                              
                              
                              11,907
                              
                              
                              
                              11,907CMLBC
      2001-CMLB-1, Class J (rated D) Face Amount
                              
                              Available
      For Sale
                              
                              Oct
      2025
                              
                              
                              6,383
                              
                              
                              
                              6,383NLFC
      1999-LTL-1, Class X (IO) (rated AAA) Carry Value
                              
                              Available
      For Sale
                              
                              Jan
      2024
                              
                              
                              5,055
                              
                              
                              
                              5,662WBCMT
      2004-C15 180E (rated B) Face Amount
                              
                              Available
      For Sale
                              
                              Nov
      2012
                              
                              
                              8,000
                              
                              
                              
                              8,000BACMS
      2002-2, Class V-1 (7-Eleven, Inc.) (rated A) Face Amount
                              
                              Available
      For Sale
                              
                              Sep
      2019
                              
                              
                              553
                              
                              
                              
                              508BACMS
      2002-2, Class V-2 (Sterling Jewelers) (not rated) Face
    Amount
                              
                              Available
      For Sale
                              
                              Jan
      2021
                              
                              
                              845
                              
                              
                              
                              776BACM
      2006-4, Class H (rated B) Face Amount
                              
                              Held
      To Maturity
                              
                              Aug
      2016
                              
                              
                              8,000
                              
                              
                              
                              8,000Banc
      of America 2007-1, Class C (rated BB) Face
      Amount  (1)
                              
                              Held
      To Maturity
                              
                              Feb
      2017
                              
                              
                              500
                              
                              
                              
                              –CALFS
      1997-CTL1, Class D (rated B-) Face Amount
                              
                              Held
      To Maturity
                              
                              Jan
      2016
                              
                              
                              6,000
                              
                              
                              
                              6,000CMLBC
      2001-CMLB-1, Class E (rated BBB+) Face Amount
                              
                              Held
      To Maturity
                              
                              Jul
      2022
                              
                              
                              9,526
                              
                              
                              
                              9,526CMLBC
      2001-CMLB-1, Class G (rated BB-) Face Amount
                              
                              Held
      To Maturity
                              
                              Feb
      2023
                              
                              
                              9,526
                              
                              
                              
                              9,526JP
      Morgan 2006-LDP9 (rated BB-) Face Amount  (1)
                              
                              Held
      To Maturity
                              
                              Dec
      2016
                              
                              
                              200
                              
                              
                              
                              –NLFC
      1999-LTL-1, Class E (rated BB) Face Amount
                              
                              Held
      To Maturity
                              
                              Jan
      2022
                              
                              
                              11,081
                              
                              
                              
                              11,081Wachovia
      2007-C30, Class AJ (rated B) Face Amount  (1)
                              
                              Held
      To Maturity
                              
                              Feb
      2017
                              
                              
                              200
                              
                              
                              
                              –Wachovia
      2007-C31, Class AJ (rated B+) Face Amount  (1)
                              
                              Held
      To Maturity
                              
                              Apr
      2017
                              
                              
                              200
                              
                              
                              
                              –Wachovia
      2007-C33, Class AJ (rated B+) Face Amount  (1)
                              
                              Held
      To Maturity
                              
                              Jul
      2017
                              
                              
                              200
                              
                              
                              
                              –WBCMT
      2004-C15 180D (rated B+) Face Amount
                              
                              Held
      To Maturity
                              
                              Nov
      2012
                              
                              
                              15,000
                              
                              
                              
                              15,000WBCMT
      2006-C27, Class C (rated BB) Face Amount
                              
                              Held
      To Maturity
                              
                              Aug
      2016
                              
                              
                              11,000
                              
                              
                              
                              11,000CVS
      Corporation (rated BBB+) Face Amount
                              
                              Held
      To Maturity
                              
                              Jan
      2028
                              
                              
                              18,058
                              
                              
                              
                              18,604Koninklijke
      Ahold, N.V. 7.82% Jan 2020 (rated BBB) Face Amount
                              
                              Held
      To Maturity
                              
                              Jan
      2020
                              
                              
                              8,283
                              
                              
                              
                              8,586Lucent
      6.70% due 9/1/2020 (rated B) Face Amount
                              
                              Held
      To Maturity
                              
                              Sep
      2020
                              
                              
                              35,754
                              
                              
                              
                              36,616Yahoo,
      Inc. (rated BBB-) Face Amount
                              
                              Held
      To Maturity
                              
                              Aug
      2026
                              
                              
                              22,028
                              
                              
                              
                              22,241Yahoo,
      Inc. (rated BBB-) Face Amount
                              
                              N/A
                              
                              Aug
      2026
                              
                              
                              -
                              
                              
                              
                              9,391Unearned
      Discount
                              
                              
                              
                              
                              
                              
                              (19,231
                              )
                              
                              
                              (17,929
                              )Cost
      Basis
                              
                              
                              
                              
                              
                              
                              172,645
                              
                              
                              
                              184,455Net
      unrealized gain (loss) on securities
                              
                              
                              
                              
                              
                              
                              (19,589
                              )
                              
                              
                              (22,613
                              )Total
                              
                              
                              
                              
                              
                              $
                              153,056
                              
                              
                              $
                              161,842
 
 (1)
                Purchased
      during the year ended December 31, 2009, for an aggregate purchase price
      of $496, plus accrued
interest.
  All
credit ratings in the above table are as of December 31, 2009.
  During
the year ended December 31, 2009, the Company sold $9,500 face amount of
available for sale securities backed by loans on two office buildings leased to
Yahoo!, Inc. and recorded a loss on sale of $2,105.  See Note
6.  The decision to sell the securities was driven primarily by the
Company’s desire to reduce recourse debt.  The Company used the
proceeds from the sale to repay principal outstanding under its credit agreement
with Wachovia Bank by $7,521.
 During
the three months and year ended December 31, 2009, the Company recognized
impairment losses on securities investments of $0 and $133,
respectively.  During the year ended December 31, 2008, the Company
recognized impairment losses on securities investments of $1,000.  The
2009 and 2008 losses are included in “Loss on investments” in the Company’s
Consolidated Statement of Operations and were recorded on one CMBS investment:
BSCMS Class E.  These losses represent management’s determination that
other-than-temporary declines in the fair value of the security below its cost
basis had occurred.  The loss reflects management’s estimate of
expected losses from underlying credits in the collateral pool (including
Circuit City Stores, Inc.).  The loss estimate is highly subjective
and reflects a variety of assumptions, including estimates of the likelihood of
default and lease rejection given the credit characteristics of the tenant, and
estimates of appraised values and/or stressed collateral values and potential
bankruptcy claim recoveries.
  During
the year ended December 31, 2007, the Company recognized impairment losses on
securities investments of $372.  The 2007 losses are also included in
“Loss on investments” in the Company’s Consolidated Statement of Operations and
were recognized in the quarter ended June 30, 2007, on two CMBS investments:
BSCMS Class E ($172) and CMLBC Class J ($200).  These losses represent
management’s determination that other-than-temporary declines in the fair value
of the securities below its cost basis had occurred on these two
investments.  Key factors that management relied on in determining the
decline was other-than-temporary include:
  68
  CapLease,
Inc. and Subsidiaries
 Notes to
Consolidated Financial Statements
 (Dollar
amounts in thousands, except per share amounts)
 
 December
31, 2009, 2008 and 2007
 ·
              an
      analysis of the impact of changes in credit
  spreads;
  ·
              subordination
      levels within the CMBS capital structure;
and
  ·
              the
      ratings or changes in ratings of the security and underlying
      collateral.
  Unrealized
gains and losses on securities at December 31, 2009 and December 31, 2008,
included as a component of Other Comprehensive Income (Loss) on the Company’s
Consolidated Balance Sheet, consisted of the following
  December 31,2009
                      
                      
                      2008Unrealized
      gains on securities previously available for sale
                      
                      $
                      801
                      
                      
                      $
                      900Unrealized
      losses on securities previously available for sale
                      
                      
                      (10,673
                      )
                      
                      
                      (10,117
                      )Unrealized
      gains on securities available for sale
                      
                      
                      –
                      
                      
                      
                      1Unrealized
      losses on securities available for sale
                      
                      
                      (9,717
                      )
                      
                      
                      (13,397
                      )
 
 The
following table summarizes the Company’s securities in an unrealized loss
position as of December 31, 2009.
  Aggregate
                      Fair Value
                    
                    
                    Aggregate
                      Unrealized
                      Loss
                    
                    
                    Number of
                      SecuritiesIn
      unrealized loss position less than 12 months
                    
                    $
                    354
                    
                    
                    $
                    66
                    
                    
                    
                    4In
      unrealized loss position 12 or more months
                    
                    
                    102,925
                    
                    
                    
                    59,707
                    
                    
                    
                    15
 
 The
following table summarizes the Company’s securities in an unrealized loss
position as of December 31, 2008.
  Aggregate
                      Fair Value
                    
                    
                    Aggregate
                      Unrealized
                      Loss
                    
                    
                    Number of
                      SecuritiesIn
      unrealized loss position less than 12 months
                    
                    $
                    23,391
                    
                    
                    $
                    10,549
                    
                    
                    
                    4In
      unrealized loss position 12 or more months
                    
                    
                    85,745
                    
                    
                    
                    55,068
                    
                    
                    
                    11
  The
collateral backing our securities investments is primarily net lease loan assets
and loss experience on the assets has historically been de
minimis.  Credit ratings on the 15 securities in a continuous
unrealized loss position for more than 12 months as of December 31,
2009 range
from  AAA   to  D  with a weighted
average of  BB  and those securities have a weighted average
maturity of approximately 8.3 years.  The Company believes that none
of the unrealized losses on investment securities are other than temporary
because substantially all of the unrealized losses relate to market interest
rate changes, and the Company expects to hold these securities for a period of
time sufficient to allow for a full recovery in fair value.  In
addition, management considers the underlying credits to be financially sound
and believes the Company will receive all contractual principal and interest
related to these investments.
  At
December 31, 2009 and December 31, 2008, the weighted average effective interest
rate (yield to maturity on adjusted cost basis) on securities was approximately
7.5% and 7.5%, respectively.
  Structuring
fees receivable were $1,094 and $1,863 at December 31, 2009 and December 31,
2008, respectively, and represented fees earned by the Company in conjunction
with the structuring and subsequent sale of certain net lease
loans.  Such fees are payable to the Company monthly without interest
through March 2020 and, accordingly, have been discounted based on imputed
interest rates estimated by management to approximate
market.  Structuring fees receivable are shown at their amortized
cost.
  69
  CapLease,
Inc. and Subsidiaries
 Notes to
Consolidated Financial Statements
 (Dollar
amounts in thousands, except per share amounts)
 
 December
31, 2009, 2008 and 2007
 
 6.
                Assets
      Sold and Discontinued
Operations
  Quarter
Ended December 31, 2009
  As of
December 31, 2009, the Company reclassified the property it owns in Wyomissing,
Pennsylvania and leases to Cott Corporation to discontinued operations in
accordance with FASB ASC 205-20-45-1 (formerly SFAS No. 144). The lease with
Cott is scheduled to run until June 2017 although Cott ceased operations and
vacated the property during 2006. The Company expects to terminate the lease
with Cott during the first quarter of 2010. In a separate transaction with an
unrelated third party, the Company also expects to sell the property during the
first quarter of 2010. In connection with the reclassification, the Company
recorded an impairment charge of $1,223, representing its estimate of the loss
on termination of the lease and sale of the property. The impairment charge is
included in “Loss on investments” on the Company’s Consolidated Statement of
Operations. The Company also recognized $354 of impairment losses on this
property during the year ended December 31, 2008 (included in “Loss on
investments”), representing the Company’s estimate at that time of the decline
in the fair value of the property below the Company’s carry value.
  Quarter
Ended September 30, 2009
  During
August 2009, the Company sold $9,500 of face amount of 6.65% pass through
certificates backed by loans on two office buildings in Sunnyvale, California
leased to Yahoo!, Inc. At the time of the sale, the security was classified as
available for sale.  In connection with the sale of this asset, the Company
recognized a loss of $2,105 during the quarter ended September 30, 2009. The
loss was included in “Loss on investments” in the Company’s Consolidated
Statement of Operations.
  During
September 2009, the Company sold a $22,244 outstanding principal balance 7.90%
long-term mortgage loan on a property in Danvers, Massachusetts backed by a
Koninklijke Ahold N.V. lease. In connection with the sale of this asset, the
Company recognized a loss of $3,807 during the quarter ended September 30, 2009.
The loss was included in “Loss on investments” in the Company’s Consolidated
Statement of Operations.
  Quarters
Ended June 30, 2009 and March 31, 2009
  During
April 2009, the Company sold the OSHA technological laboratory facility in
Sandy, Utah leased to the United States Government. In connection with the sale
of this property, the Company recognized a loss of $2,853 during the quarter
ended March 31, 2009. The loss was included in “Loss on investments” in the
Company’s Consolidated Statement of Operations. Operating results from this
property are reflected as discontinued operations in the Company’s Consolidated
Statement of Operations.
  During
April 2009, the Company sold a majority participation interest in a long-term
mortgage loan on a property in Framingham, Massachusetts backed by a Lowe’s
Companies Inc. lease. During the quarter ended March 31, 2009, the Company
recorded a loss of $4,397 in connection with the sale of this loan. The loss was
included in “Loss on investments” in the Company’s Consolidated Statement of
Operations.
  7.
                Fair
      Value
  The
Company is required under GAAP to disclose information about the fair value of
all of the Company’s financial instruments, whether or not these instruments are
measured at fair value on the Company’s Consolidated Balance Sheet. For purposes
of these rules, substantially all of the Company’s assets and liabilities other
than its owned property investments are classified as financial
instruments.
  The
Company estimates that the fair values of cash and cash equivalents, other
assets, accounts payable, accrued expenses and other liabilities, and dividends
payable approximate their carrying values due to the short-term maturities of
these items.
  70
  CapLease,
Inc. and Subsidiaries
 Notes to
Consolidated Financial Statements
 (Dollar
amounts in thousands, except per share amounts)
 
 December
31, 2009, 2008 and 2007
 
 The
carrying amounts and estimated fair values of the Company’s other financial
instruments at December 31, 2009 and December 31, 2008 are as
follows:
  Carrying Amount
                  
                  
                  Notional Amount
                  
                  
                  Estimated Fair Value12/31/2009
                  
                  
                  12/31/2008
                  
                  
                  12/31/2009
                  
                  
                  12/31/2008
                  
                  
                  12/31/2009
                  
                  
                  12/31/2008Assets:Loans
      held for investment
                  
                  $
                  221,656
                  
                  
                  $
                  286,563
                  
                  
                  $
                  225,242
                  
                  
                  $
                  283,912
                  
                  
                  $
                  219,185
                  
                  
                  $
                  262,647Commercial
      mortgage-backed securities
                  
                  
                  153,056
                  
                  
                  
                  161,842
                  
                  
                  
                  191,876
                  
                  
                  
                  202,382
                  
                  
                  
                  113,306
                  
                  
                  
                  119,083Structuring
      fees receivable
                  
                  
                  1,094
                  
                  
                  
                  1,863
                  
                  
                  
                  N/A
                  
                  
                  
                  N/A
                  
                  
                  
                  1,094
                  
                  
                  
                  1,863Liabilities:Mortgages
      on real estate investments
                  
                  $
                  943,811
                  
                  
                  $
                  972,324
                  
                  
                  $
                  939,616
                  
                  
                  $
                  966,091
                  
                  
                  $
                  902,408
                  
                  
                  $
                  936,668Collateralized
      debt obligations
                  
                  
                  263,310
                  
                  
                  
                  268,265
                  
                  
                  
                  263,500
                  
                  
                  
                  268,500
                  
                  
                  
                  150,114
                  
                  
                  
                  116,592Credit
      facility
                  
                  
                  126,262
                  
                  
                  
                  189,262
                  
                  
                  
                  126,262
                  
                  
                  
                  189,262
                  
                  
                  
                  126,262
                  
                  
                  
                  189,262Secured
      term loan
                  
                  
                  114,070
                  
                  
                  
                  123,719
                  
                  
                  
                  114,070
                  
                  
                  
                  123,719
                  
                  
                  
                  98,641
                  
                  
                  
                  62,010Convertible
      senior notes
                  
                  
                  49,452
                  
                  
                  
                  66,239
                  
                  
                  
                  52,444
                  
                  
                  
                  71,760
                  
                  
                  
                  46,956
                  
                  
                  
                  28,329Other
      long-term debt
                  
                  
                  30,930
                  
                  
                  
                  30,930
                  
                  
                  
                  30,930
                  
                  
                  
                  30,930
                  
                  
                  
                  21,925
                  
                  
                  
                  11,152
 
 The fair
values indicated above are indicative of the interest rate and credit spread
environment as of December 31, 2009 and December 31, 2008, respectively,
and may not take into consideration the effects of subsequent interest rate,
credit spread fluctuations, or changes in the ratings of the underlying tenants
on the related leases. The methodologies used and key assumptions made to
estimate fair values are as follows:
  Loans held for investment—The
fair value of the Company’s fixed-rate loan portfolio is estimated with a
discounted cash flow analysis, utilizing scheduled cash flows and discount rates
estimated by management to approximate those that a willing buyer and seller
might use.
  Commercial mortgage-backed
securities—The fair values of the securities reflect management’s best
estimate and require a considerable amount of judgment and assumptions.
Management evaluates a variety of inputs and then estimates fair value based on
those inputs. The primary inputs evaluated by management are broker quotations,
index pricing, market yields and credit spreads on securities with similar
credit ratings and duration, collateral values, and liquidity of the
security.
  Structuring fees
receivable—The fair value of structuring fees receivable is estimated
with a discounted cash flow analysis, utilized scheduled cash flows and discount
rates estimated by management to approximate those that a willing buyer and
seller might use.
  Credit facility—Management
believes that the stated interest rate (which floats based on short-term
interest rates) approximates market rates (when compared to similar credit
facilities with similar credit risk). As such, the fair value of these
obligations is estimated to be equal to the outstanding principal
amount.
  Mortgages on real estate
investments, collateralized debt obligations and secured term loan—The
fair value of mortgages payable on real estate investments, collateralized debt
obligations and the secured term loan is estimated using a discounted cash flow
analysis, based on management’s estimates of market interest rates. For
mortgages where the Company has an early prepayment right, management also
considers the prepayment amount to evaluate the fair value.
  Convertible senior notes—The
carry value of convertible senior notes reflects the impact of new accounting
guidance for the notes. See Note 9. The fair value is estimated using a
discounted cash flow analysis, based on management’s estimates of market
interest rates, and indications of market yields, where available.
  Other long-term debt—The fair
value of the Company’s other long-term debt is estimated using a discounted cash
flow analysis, based on management’s estimates of market interest
rates.
  On
January 1, 2008, the Company adopted new accounting guidance (codified at FASB
ASC 820 and formerly Statement No. 157, Fair Value Measurements) that
defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles, and expands disclosures about fair
value measurements. The guidance does not impose any new requirements around
which assets and liabilities are to be measured at fair value, and instead
applies to asset and liability balances required or permitted to be measured at
fair value under existing accounting pronouncements. The Company measures its
securities available for sale and any derivative assets and liabilities at fair
value. As of December 31, 2009, the Company had no derivative assets or
liabilities.
  71
  CapLease,
Inc. and Subsidiaries
 Notes to
Consolidated Financial Statements
 (Dollar
amounts in thousands, except per share amounts)
 
 December
31, 2009, 2008 and 2007
 
 FASB ASC
820-10-35-37 (formerly SFAS No. 157) establishes a valuation hierarchy based on
the transparency of inputs used in the valuation of an asset or liability.
Classification is based on the lowest level of inputs that is significant to the
fair value measurement. The valuation hierarchy contains three
levels:
  ·
              Level
      1 – Quoted prices are available in active markets for identical assets or
      liabilities at the reporting date. As of December 31, 2009, the
      Company has not classified any of its securities available for sale as
      Level 1.
  ·
              Level
      2 – Pricing inputs other than quoted prices included within Level 1 that
      are observable for substantially the full term of the asset or liability.
      Level 2 assets include quoted prices for similar assets or liabilities in
      active markets; quoted prices for identical or similar assets or
      liabilities that are not active; and inputs other than quoted prices that
      are observable, such as models or other valuation methodologies. As of
      December 31, 2009, the Company has not classified any of its
      securities available for sale as Level
2.
  ·
              Level
      3 – Inputs reflect management’s best estimate of what market participants
      would use in pricing the asset or liability at the measurement date. These
      valuations require a considerable amount of judgment and assumptions. As
      of December 31, 2009, the Company has classified all of its
      securities available for sale as Level 3. Management evaluates a variety
      of inputs and then estimates fair value based on those inputs. The primary
      inputs evaluated by management are broker quotations (observable), index
      pricing (observable), market yields and credit spreads on securities with
      similar credit ratings and duration (observable), collateral values
      (observable), and liquidity of the security (unobservable). These inputs
      are the factors employed by management and to its knowledge other parties
      in determining where to price actual transactions. Broker quotes generally
      reflect expected pricing rather than actual trades and may also reflect
      distressed transactions in inactive and dislocated
  markets.
  The table
below presents the fair value of the Company’s securities available for sale as
of December 31, 2009, aggregated by the level in the fair value hierarchy
within which those measurements fall.
  Quoted Prices in
                        Active Markets for
                        Identical Assets
                        and Liabilities
                        (Level 1)
                      
                      
                      Significant Other
                        Observable
                        Inputs
                        (Level 2)
                      
                      
                      Significant
                        Unobservable
                        Inputs
                        (Level 3)
                      
                      
                      Balance at
                        December 31,2009AssetsSecurities
      available for sale
                      
                      $
                      –
                      
                      
                      $
                      –
                      
                      
                      $
                      13,044
                      
                      
                      $
                      13,044
  The
following table summarizes the change in the fair value for Level 3 items for
the years ended December 31, 2009 and December 31, 2008:
  Year ended
                              December 31,
                              2009
                            
                            
                            Year ended
                              December 31,
                              2008Securities available for
    saleBeginning
      balance
                            
                            $
                            13,483
                            
                            
                            $
                            -Gains
      (losses) included in net income (loss)
                            
                            
                            (133
                            )
                            
                            
                            (1,000
                            )Gains
      (losses) included in other comprehensive income
                            
                            
                            559
                            
                            
                            
                            (2,771
                            )Amortization
      included in interest income
                            
                            
                            (236
                            )
                            
                            
                            86Settlements
      or repayments
                            
                            
                            (629
                            )
                            
                            
                            (130
                            )Transfers
      in (out) of Level 3
                            
                            
                            -
                            
                            
                            
                            17,298Ending
      balance
                            
                            $
                            13,044
                            
                            
                            $
                            13,483
  72
  CapLease,
Inc. and Subsidiaries
 Notes to
Consolidated Financial Statements
 (Dollar
amounts in thousands, except per share amounts)
 
 December
31, 2009, 2008 and 2007
 
 8.
                Other
      Assets
  Other
assets as of December 31, 2009 and December 31, 2008 consisted of the
following:
  December 31,2009
                    
                    
                    2008Receivables
      and accrued interest
                    
                    $
                    11,304
                    
                    
                    $
                    10,024Prepaid
      expenses and deposits
                    
                    
                    1,267
                    
                    
                    
                    1,198Reserve
      accounts
                    
                    
                    14,868
                    
                    
                    
                    12,889Escrow
      held with mortgage lender
                    
                    
                    -
                    
                    
                    
                    212Funds
      with CDO trustee pending distribution or reinvestment
                    
                    
                    4,697
                    
                    
                    
                    3,947Restricted
      cash
                    
                    
                    276
                    
                    
                    
                    44Amounts
      held by servicer
                    
                    
                    261
                    
                    
                    
                    356Accrued
      rental income
                    
                    
                    35,317
                    
                    
                    
                    35,883Debt
      issuance costs, net
                    
                    
                    7,653
                    
                    
                    
                    10,404Deferred
      leasing costs, net
                    
                    
                    718
                    
                    
                    
                    -Investment
      in statutory trust
                    
                    
                    930
                    
                    
                    
                    930Other
                    
                    
                    988
                    
                    
                    
                    1,302Total
                    
                    $
                    78,279
                    
                    
                    $
                    77,189
  9.
                Debt
      Obligations
  Credit
Agreement
  The
Company has financed certain of its portfolio assets pursuant to a credit
agreement it entered into with Wachovia Bank in April 2008. The Company drew a
$210,392 term loan under the agreement at closing which it has reduced to
$126,262outstanding
as of December 31, 2009. The Company’s borrowings are scheduled to mature in
April 2011. The agreement is a floating rate LIBOR based facility. The Company
is required to pay interest on its borrowings at prevailing short-term rates
(30-day LIBOR) plus a pricing spread ranging from 200 to 250 basis points. As of
December 31, 2009, the Company’s effective financing rate on the credit
agreement was 3.2%.
  On
December 31, 2008, Wells Fargo & Company acquired Wachovia Bank, N.A.,
through a merger of Wachovia Bank’s parent company, Wachovia Corporation, with
and into Wells Fargo & Company.
  The
Company’s borrowings under the facility are secured by a combination of first
mortgage loan investments, intercompany mortgage loans on owned property
investments, commercial mortgage backed securities and a first lien on the
Company’s ownership interest in the real property located in Johnston, Rhode
Island. The Company’s obligations under the credit agreement are also fully
recourse to all of its other assets. In the event Wachovia determines in its
sole discretion that the value of the Company’s collateral assets has declined,
including as a result of an underlying tenant credit rating downgrade or other
adverse tenant-credit event, Wachovia may require the Company to prepay a
portion of its borrowings, provided that Wachovia may not reduce the value of
any of the Company’s collateral other than CMBS securities due to general credit
spread or interest rate fluctuations.
  The
Company is required to comply with the following financial covenants under the
credit agreement: minimum liquidity (as defined in the agreement) of at least
$8,000, and minimum consolidated tangible net worth (as defined in the
agreement) of at least $180,000 plus 75% of the aggregate net proceeds from
equity offerings or capital contributions after September 22,
2004.
  73
  CapLease,
Inc. and Subsidiaries
 Notes to
Consolidated Financial Statements
 (Dollar
amounts in thousands, except per share amounts)
 
 December
31, 2009, 2008 and 2007
 
 Amounts
related to the Company’s credit agreement as of December 31, 2009 and December
31, 2008, were as follows:
  At December 31, 2009
                      
                      
                      At December 31, 2008Borrowings
                      
                      
                      Collateral
                        Carry Value
                      
                      
                      Borrowings
                      
                      
                      Collateral
                        Carry ValueCredit AgreementLoans
      held for investment
                      
                      $
                      6,757
                      
                      
                      $
                      11,481
                      
                      
                      $
                      55,434
                      
                      
                      $
                      78,071Intercompany
      mortgage loans and investments in CapLease CDO
                      
                      
                      115,857
                      
                      
                      
                      141,332
                      
                      
                      
                      119,119
                      
                      
                      
                      145,816Commercial
      mortgage-backed securities
                      
                      
                      3,648
                      
                      
                      
                      11,485
                      
                      
                      
                      14,709
                      
                      
                      
                      19,390Owned
      property
                      
                      
                      –
                      
                      
                      
                      28,131
                      
                      
                      
                      –
                      
                      
                      
                      44,398Total
                      
                      $
                      126,262
                      
                      
                      $
                      192,429
                      
                      
                      $
                      189,262
                      
                      
                      $
                      287,675
  For the
years ended December 31, 2009, December 31, 2008 and December 31, 2007, the
following interest rates applied with respect to the Company’s credit agreement
borrowings (including the predecessor repurchase agreement):
  December 31,2009
                    
                    
                    2008
                    
                    
                    2007Weighted
      average effective financing rate
                    
                    
                    3.71
                    %
                    
                    
                    5.44
                    %
                    
                    
                    6.29
                    %Average
      30-Day LIBOR rate
                    
                    
                    0.35
                    %
                    
                    
                    2.91
                    %
                    
                    
                    5.30
                    %
  74
  CapLease,
Inc. and Subsidiaries
 Notes to
Consolidated Financial Statements
 (Dollar
amounts in thousands, except per share amounts)
 
 December
31, 2009, 2008 and 2007
 
 Mortgages
Notes on Real Estate Investments
  The
Company has financed most of its owned real properties with third party mortgage
debt. The Company’s mortgage notes payable are summarized in the following
table:
  Dec 31, 2009
                              
                              
                              Dec 31, 2008
                              
                              
                              
                              
                              
                              Effective
                                FinancingProperty Level Debt - Fixed Rate
                              
                              Face
                              
                              
                              Carry Value
                              
                              
                              Face
                              
                              
                              Carry Value
                              
                              
                              Coupon
                              
                              
                              Rate (1)
                              
                              MaturityAbbott Laboratories,
      Waukegan, IL
                              
                              $
                              14,920
                              
                              
                              $
                              14,920
                              
                              
                              $
                              15,120
                              
                              
                              $
                              15,120
                              
                              
                              
                              5.11
                              %
                              
                              
                              5.2
                              %
                              Aug
      2015Aetna
      Life Insurance Company, Fresno, CA
                              
                              
                              16,043
                              
                              
                              
                              16,043
                              
                              
                              
                              16,043
                              
                              
                              
                              16,043
                              
                              
                              
                              5.63
                              %
                              
                              
                              5.7
                              %
                              Dec
      2016Allstate
      Insurance Company, Charlotte, NC
                              
                              
                              19,981
                              
                              
                              
                              19,981
                              
                              
                              
                              20,209
                              
                              
                              
                              20,209
                              
                              
                              
                              5.68
                              %
                              
                              
                              5.7
                              %
                              Jan
      2016Allstate
      Insurance Company, Roanoke, VA
                              
                              
                              21,273
                              
                              
                              
                              21,273
                              
                              
                              
                              21,516
                              
                              
                              
                              21,516
                              
                              
                              
                              5.68
                              %
                              
                              
                              5.8
                              %
                              Jan
      2016AmeriCredit
      Corp., Arlington, TX
                              
                              
                              27,682
                              
                              
                              
                              27,395
                              
                              
                              
                              28,148
                              
                              
                              
                              27,828
                              
                              
                              
                              5.28
                              %
                              
                              
                              5.5
                              %
                              Sep
      2017AMVESCAP
      PLC, Denver, CO
                              
                              
                              43,700
                              
                              
                              
                              43,700
                              
                              
                              
                              43,700
                              
                              
                              
                              43,700
                              
                              
                              
                              6.03
                              %
                              
                              
                              6.1
                              %
                              Jul
      2016Aon
      Corporation, Glenview, IL
                              
                              
                              62,313
                              
                              
                              
                              62,313
                              
                              
                              
                              63,613
                              
                              
                              
                              63,613
                              
                              
                              
                              5.23
                              %
                              
                              
                              5.8
                              %
                              Nov
      2014Bunge
      North America, Inc., Fort Worth, TX
                              
                              
                              6,262
                              
                              
                              
                              6,262
                              
                              
                              
                              6,262
                              
                              
                              
                              6,262
                              
                              
                              
                              5.45
                              %
                              
                              
                              5.5
                              %
                              May
      2017Cadbury
      Schweppes Plc, Whippany, NJ
                              
                              
                              33,881
                              
                              
                              
                              33,881
                              
                              
                              
                              34,491
                              
                              
                              
                              34,491
                              
                              
                              
                              5.26
                              %
                              
                              
                              5.3
                              %
                              Mar
      2015Capital
      One Financial Corporation, Plano, TX
                              
                              
                              20,277
                              
                              
                              
                              20,277
                              
                              
                              
                              20,630
                              
                              
                              
                              20,630
                              
                              
                              
                              5.24
                              %
                              
                              
                              5.3
                              %
                              May
      2013Choice
      Hotels International, Inc., Silver Spring, MD
                              
                              
                              29,094
                              
                              
                              
                              29,094
                              
                              
                              
                              30,080
                              
                              
                              
                              30,080
                              
                              
                              
                              5.30
                              %
                              
                              
                              5.3
                              %
                              May
      2013County
      of Yolo, California, Woodland, CA
                              
                              
                              10,332
                              
                              
                              
                              10,332
                              
                              
                              
                              10,332
                              
                              
                              
                              10,332
                              
                              
                              
                              5.68
                              %
                              
                              
                              5.7
                              %
                              Feb
      2017Farmers
      Group, Inc., Simi Valley, CA
                              
                              
                              25,620
                              
                              
                              
                              25,620
                              
                              
                              
                              25,620
                              
                              
                              
                              25,620
                              
                              
                              
                              5.81
                              %
                              
                              
                              5.8
                              %
                              Jan
      2017Farmers
      New World Life Insurance Company, Mercer Island, WA
                              
                              
                              30,200
                              
                              
                              
                              30,200
                              
                              
                              
                              30,200
                              
                              
                              
                              30,200
                              
                              
                              
                              5.69
                              %
                              
                              
                              5.7
                              %
                              Jan
      2016ITT
      Industries, Inc., Herndon, VA
                              
                              
                              40,902
                              
                              
                              
                              40,902
                              
                              
                              
                              41,301
                              
                              
                              
                              41,301
                              
                              
                              
                              5.33
                              %
                              
                              
                              5.4
                              %
                              Jun
      2015Johnson
      Controls, Inc., Largo, FL
                              
                              
                              16,200
                              
                              
                              
                              16,200
                              
                              
                              
                              16,200
                              
                              
                              
                              16,200
                              
                              
                              
                              5.48
                              %
                              
                              
                              5.5
                              %
                              Jan
      2017Koninklijke
      Ahold, N.V., Levittown, PA
                              
                              
                              14,246
                              
                              
                              
                              14,246
                              
                              
                              
                              14,441
                              
                              
                              
                              14,441
                              
                              
                              
                              6.05
                              %
                              
                              
                              6.1
                              %
                              Jul
      2016Lowes
      Companies, Inc., Aliso Viejo, CA
                              
                              
                              42,125
                              
                              
                              
                              42,125
                              
                              
                              
                              42,125
                              
                              
                              
                              42,125
                              
                              
                              
                              5.10
                              %
                              
                              
                              5.4
                              %
                              Jul
      2015Nestle
      Holdings, Inc., Breinigsville, PA; Fort Wayne, IN; and Lathrop,
      CA
                              
                              
                              117,000
                              
                              
                              
                              117,000
                              
                              
                              
                              117,000
                              
                              
                              
                              117,000
                              
                              
                              
                              6.32
                              %
                              
                              
                              5.7
                              %
                              Aug
      2012Omnicom
      Group, Inc., Irving, TX
                              
                              
                              13,080
                              
                              
                              
                              13,080
                              
                              
                              
                              13,361
                              
                              
                              
                              13,361
                              
                              
                              
                              5.24
                              %
                              
                              
                              5.3
                              %
                              May
      2013Pearson
      Plc., Lawrence, KS
                              
                              
                              16,009
                              
                              
                              
                              16,009
                              
                              
                              
                              16,025
                              
                              
                              
                              16,025
                              
                              
                              
                              5.84
                              %
                              
                              
                              5.9
                              %
                              May
      2016T-Mobile
      USA, Inc., Nashville, TN
                              
                              
                              10,885
                              
                              
                              
                              10,885
                              
                              
                              
                              10,885
                              
                              
                              
                              10,885
                              
                              
                              
                              5.59
                              %
                              
                              
                              5.7
                              %
                              Dec
      2016The
      Travelers Corporation, Hartford, CT
                              
                              
                              10,298
                              
                              
                              
                              10,674
                              
                              
                              
                              15,074
                              
                              
                              
                              15,950
                              
                              
                              
                              9.80
                              %
                              
                              
                              5.5
                              %
                              Sep
      2011The
      Travelers Corporation, Hartford, CT
                              
                              
                              15,499
                              
                              
                              
                              16,360
                              
                              
                              
                              13,925
                              
                              
                              
                              15,159
                              
                              
                              
                              10.76
                              %
                              
                              
                              7.7
                              %
                              Oct
      2011Tiffany
      & Co., Parsippany, NJ
                              
                              
                              58,400
                              
                              
                              
                              58,400
                              
                              
                              
                              58,400
                              
                              
                              
                              58,400
                              
                              
                              
                              5.33
                              %
                              
                              
                              5.3
                              %
                              Oct
      2015Time
      Warner Entertainment Company, L.P., Milwaukee, WI
                              
                              
                              17,500
                              
                              
                              
                              17,500
                              
                              
                              
                              17,500
                              
                              
                              
                              17,500
                              
                              
                              
                              5.55
                              %
                              
                              
                              5.6
                              %
                              Dec
      2016TJX
      Companies, Inc., Philadelphia, PA
                              
                              
                              70,209
                              
                              
                              
                              70,209
                              
                              
                              
                              70,805
                              
                              
                              
                              70,805
                              
                              
                              
                              5.57
                              %
                              
                              
                              5.6
                              %
                              Mar
      2016United
      States Government (DEA), Birmingham, AL
                              
                              
                              11,242
                              
                              
                              
                              11,242
                              
                              
                              
                              11,280
                              
                              
                              
                              11,280
                              
                              
                              
                              5.23
                              %
                              
                              
                              5.4
                              %
                              Sep
      2015United
      States Government (EPA), Kansas City, KS
                              
                              
                              19,676
                              
                              
                              
                              22,535
                              
                              
                              
                              20,245
                              
                              
                              
                              23,328
                              
                              
                              
                              7.57
                              %
                              
                              
                              5.4
                              %
                              Oct
      2022United
      States Government (FBI), Albany, NY
                              
                              
                              10,137
                              
                              
                              
                              10,137
                              
                              
                              
                              10,137
                              
                              
                              
                              10,137
                              
                              
                              
                              5.50
                              %
                              
                              
                              5.7
                              %
                              Nov
      2016United
      States Government (FBI), Birmingham, AL
                              
                              
                              18,747
                              
                              
                              
                              18,747
                              
                              
                              
                              18,800
                              
                              
                              
                              18,800
                              
                              
                              
                              5.23
                              %
                              
                              
                              5.3
                              %
                              Sep
      2015United
      States Government (NIH), N. Bethesda, MD
                              
                              
                              60,929
                              
                              
                              
                              60,929
                              
                              
                              
                              62,322
                              
                              
                              
                              62,322
                              
                              
                              
                              5.32
                              %
                              
                              
                              5.6
                              %
                              Sep
      2015United
      States Government (OSHA), Sandy, UT
                              
                              
                              –
                              
                              
                              
                              –
                              
                              
                              
                              14,470
                              
                              
                              
                              15,361
                              
                              
                              
                              6.28
                              %
                              
                              
                              5.5
                              %
                              Jan
      2024United
      States Government (SSA), Austin, TX
                              
                              
                              5,372
                              
                              
                              
                              5,372
                              
                              
                              
                              5,391
                              
                              
                              
                              5,391
                              
                              
                              
                              5.23
                              %
                              
                              
                              5.5
                              %
                              Sep
      2015United
      States Government (VA), Ponce, PR
                              
                              
                              5,308
                              
                              
                              
                              5,477
                              
                              
                              
                              5,867
                              
                              
                              
                              6,078
                              
                              
                              
                              7.30
                              %
                              
                              
                              6.4
                              %
                              Apr
      2016Walgreen
      Co., Pennsauken, NJ
                              
                              
                              1,478
                              
                              
                              
                              1,554
                              
                              
                              
                              1,636
                              
                              
                              
                              1,733
                              
                              
                              
                              7.65
                              %
                              
                              
                              6.0
                              %
                              Oct
      2016Walgreen Co., Portsmouth,
      VA
                              
                              
                              2,796
                              
                              
                              
                              2,937
                              
                              
                              
                              2,937
                              
                              
                              
                              3,098
                              
                              
                              
                              7.20
                              %
                              
                              
                              6.2
                              %
                              Jul
      2018Total
                              
                              $
                              939,616
                              
                              
                              $
                              943,811
                              
                              
                              $
                              966,091
                              
                              
                              $
                              972,324
 
 (1)
              The
      effective rate is the Company’s approximate borrowing cost, including the
      effect of hedge gains or losses and other deferred financing costs
      associated with the related
borrowing.
  The
mortgage notes are non-recourse to the Company subject to limited non-recourse
exceptions and are secured by the respective properties and an assignment of the
relevant leases on the properties. See Note 3 regarding the separate and
distinct nature of the Company’s SPEs. The Company’s book value before
accumulated depreciation and amortization on owned properties encumbered with
mortgage debt aggregated $1,431,947 at December 31, 2009 and $1,455,527 at
December 31, 2008.
  75
  CapLease,
Inc. and Subsidiaries
 Notes to
Consolidated Financial Statements
 (Dollar
amounts in thousands, except per share amounts)
 
 December
31, 2009, 2008 and 2007
 
 Collateralized
Debt Obligations
  During
March 2005, the Company issued a collateralized debt obligation, or CDO. The CDO
is an entirely fixed rate on-balance sheet financing. The Company aggregated
approximately $300,000 face amount of assets and then transferred these assets
into a wholly-owned securitization vehicle, and initially issued $285,000 face
amount of multi-class notes and $15,000 of preferred equity through the
securitization vehicle. The assets serve as collateral for the Company’s
obligations under the notes. The securitization vehicle is an SPE, with its
business limited to the issuance of the notes and the preferred equity, the
acquisition of the collateral and certain other related matters. The net amount
of the debt the Company issued was $268,130, inclusive of a $370 discount to
face, as the Company retained the three most junior note classes aggregating a
face amount of $16,500 and the full $15,000 of preferred equity. Each of the
five note classes of the CDO was and continues to be rated investment grade. The
reinvestment period for the CDO which allowed the Company to reinvest principal
payments on the underlying assets into qualifying replacement collateral expired
during October 2009. The CDO notes have a stated maturity in January 2040,
although the actual life of the notes could be substantially shorter. The
Company’s weighted average effective financing rate (inclusive of original issue
discount and debt issuance and hedge costs) on its CDO is approximately 5.7%.
The CDO debt is non-recourse to the Company but is secured by the collateral
assets. The following table summarizes the type and carry value of the assets
posted as CDO collateral as of December 31, 2009.
  Carry ValueLoans held for investment
                    
                    $
                    169,348Intercompany
      mortgage loans on CapLease properties
                    
                    
                    36,301Commercial
      mortgage-backed securities
                    
                    
                    82,492Total
                    
                    $
                    288,141
  During
the year ended December 31, 2009, the Company repurchased $5,000 of the
Class A CDO notes at a price of $2,825, plus accrued interest, or a 43.5%
discount from the face of the notes. The Company recorded a gain on
extinguishment of the CDO debt during the year ended December 31, 2009 of
$2,012.
  Secured
Term Loan
  During
December 2007, the Company completed a $129,521 secured term loan with KBC Bank,
N.V. Upon closing of the financing, the Company pledged approximately $163,145
principal amount of collateral to secure its obligations under the loan. The
interest coupon on the loan is fixed at 5.81% annually until the loan matures in
January 2018. The Company’s effective financing rate on the loan is
approximately 6.0% annually (inclusive of hedge and closing costs). The loan is
non-recourse to the Company, subject to limited non-recourse exceptions. The
following table summarizes the type and carry value of the assets pledged as
collateral for the Company’s obligations under the loan as of December 31,
2009.
  Carry ValueLoans held for investment
                    
                    $
                    40,328Intercompany
      mortgage loans on CapLease properties
                    
                    
                    46,904Commercial
      mortgage-backed securities
                    
                    
                    57,520Total
                    
                    $
                    144,752
  Convertible
Senior Notes
  During
October 2007, CapLease issued $75,000 principal amount of 7.50% convertible
senior notes due 2027. The notes represent general unsecured recourse
obligations of CapLease and rank equally in right of payment with all of its
other existing and future obligations that are unsecured and unsubordinated. The
notes are jointly and severally, fully and unconditionally guaranteed, on a
senior unsecured basis by four of CapLease’s subsidiaries, Caplease, LP,
Caplease Debt Funding, LP, Caplease Services Corp. and Caplease Credit
LLC.
  As of
January 1, 2009, the Company adopted new accounting guidance (codified primarily
at FASB ASC 470 and formerly FASB Staff Position No. Accounting Principles Board
14-1, Accounting for
Convertible Debt Instruments That May be Settled in Cash upon Conversion
(Including Partial Cash Settlement)) that retrospectively changed the
accounting for the convertible senior notes. The guidance affected the
accounting for the Company’s convertible senior notes by requiring the initial
proceeds from their sale to be allocated between a liability component and an
equity component in a manner that results in interest expense on the liability
component at the Company’s estimated nonconvertible debt borrowing rate on the
date of issue. The initial bifurcation between the liability and equity
components of the convertible senior notes at January 1, 2009, was $67,761 and
$7,239, respectively. The equity component carry value remains unchanged at
December 31, 2009.
    76
  CapLease,
Inc. and Subsidiaries
 Notes to
Consolidated Financial Statements
 (Dollar
amounts in thousands, except per share amounts)
 
 December
31, 2009, 2008 and 2007
    December 31,2009
                      
                      
                      2008Convertible
      notes - principal
                      
                      $
                      52,444
                      
                      
                      $
                      71,760Unamortized
      debt discount
                      
                      
                      (2,992
                      )
                      
                      
                      (5,521
                      )Convertible
      senior notes - net
                      
                      $
                      49,452
                      
                      
                      $
                      66,239
  The
remaining debt discount will be amortized over the next 34 months, ending in
October 2012.
  During
December 2008, the Company agreed to repurchase $8,740 of principal of the
convertible senior notes at a price of $3,269, plus accrued interest on the
notes, or a 62.6% discount from the face amount of the notes. The repurchase of
a total of $3,240 of notes was closed in December at a price of $1,179.
Inclusive of the impact of the new accounting guidance, the Company recorded a
gain on extinguishment of debt of $1,713 in the year ended December 31, 2008.
The repurchase of the remaining $5,500 was closed in January at a price of
$2,090. The Company recorded a gain on extinguishment of debt in the quarter
ended March 31, 2009 of $2,821.
  During
the quarter ended June 30, 2009, the Company repurchased $12,316 of
principal of the convertible senior notes at a price of $6,512, plus accrued
interest on the notes, or a 47.1% discount from the face of the
notes.  The Company recorded a gain on extinguishment of the
convertible senior notes in the quarter ended June 30, 2009 of
$4,581.
  During
the quarter ended September 30, 2009, the Company repurchased $1,500 of
principal of the convertible senior notes at a price of $949, plus accrued
interest on the notes, or a 36.8% discount from the face of the
notes.  The Company recorded a gain on extinguishment of the
convertible senior notes in the quarter ended September 30, 2009 of
$415.
  The notes
bear interest at an annual fixed rate of 7.50% and are scheduled to mature on
October 1, 2027, unless earlier converted, redeemed or
repurchased.  The Company’s effective financing rate on the notes,
which includes the effect of the offering discount and expenses of the
transaction, is approximately 7.9%.  The Company’s effective interest
rate on the liability component of the instrument as measured under the new
accounting guidance was 11.5%,11.6% and 11.6%, respectively, at December 31,
2009, December 31, 2008 and December 31, 2007.  The Company recorded
interest expense relating to the convertible senior notes under the new
accounting guidance of $5,666, $7,159 and $1,600, respectively, for the years
ended December 31, 2009, December 31, 2008 and December 31, 2007.
  Holders
may require CapLease to repurchase their notes, in whole or in part, on October
1, 2012, October 1, 2017 and October 1, 2022, for a cash price equal to 100% of
the principal amount of the notes to be repurchased, plus any accrued and unpaid
interest.
  Holders
will also have the right to require CapLease to repurchase their notes, in whole
or in part for cash, if a change of control or termination of trading occurs
prior to October 1, 2012.  The repurchase price will be 100% of the
principal amount of the notes to be repurchased, plus any accrued and unpaid
interest.
  The
holders may convert their notes into cash, shares of CapLease common stock, or
any combination thereof, at CapLease’s option, under certain circumstances,
including in connection with certain change of control events defined in the
note indenture (each, a “change of control”) or a transaction that results in
CapLease’s common stock or other securities into which the notes are convertible
not being approved for listing on a U.S. national securities exchange (a
“termination of trading”).  Upon conversion, if CapLease does not
elect otherwise, it will settle its conversion obligation in shares of its
common stock.
  The
initial conversion rate for each $1 principal amount of notes is 88.3704 shares
of CapLease’s common stock, which is equivalent to an initial conversion price
of approximately $11.32 per share.  As of December 31, 2009, the
if-converted value of the convertible senior notes does not exceed the principal
amount of the notes. The initial conversion rate will be adjusted for certain
events, including in the event CapLease makes any quarterly cash dividend in
excess of $0.20 per share.
  CapLease
has the right to redeem the notes in whole or in part, for cash at any time or
from time to time on or after October 5, 2012.  Prior to
October 5, 2012, CapLease may also redeem the notes to preserve its status
as a real estate investment trust.  The redemption price will be 100%
of the principal amount of the notes to be redeemed, plus any accrued and unpaid
interest.
  77
  CapLease,
Inc. and Subsidiaries
 Notes to
Consolidated Financial Statements
 (Dollar
amounts in thousands, except per share amounts)
 
 December
31, 2009, 2008 and 2007
 
 Trust
Preferred Securities
  In
December 2005, the Operating Partnership issued $30,000 in aggregate principal
amount of fixed/floating rate preferred securities through its wholly-owned
subsidiary, Caplease Statutory Trust I.  The trust preferred
securities represent an unsecured subordinated recourse debt obligation of the
Company and require quarterly interest payments calculated at a fixed interest
rate equal to 7.68% per annum through January 30, 2016, and subsequently at a
variable interest rate equal to LIBOR plus 2.60% per annum.  The
securities must be redeemed on January 30, 2036, and may be redeemed, in whole
or in part, at par, at the Company’s option, beginning on January 30,
2011.  The Company’s effective financing rate on the trust preferred
securities, inclusive of deferred issuance costs, is approximately 8.3% per
annum.
  Scheduled
principal amortization and balloon payments for all of the Company’s outstanding
debt obligations as of December 31, 2009, for the next five years and thereafter
are as follows:
  Scheduled
                        Amortization
                      
                      
                      Balloon
                        Payments
                      
                      
                      Total2010
                      
                      $
                      45,441
                      
                      
                      $
                      –
                      
                      
                      $
                      45,4412011
                      
                      
                      43,306
                      
                      
                      
                      132,029
                      
                      
                      
                      175,3352012
                      
                      
                      39,913
                      
                      
                      
                      169,444
                      
                      
                      
                      209,3572013
                      
                      
                      54,128
                      
                      
                      
                      54,984
                      
                      
                      
                      109,1122014
                      
                      
                      45,769
                      
                      
                      
                      53,479
                      
                      
                      
                      99,248Thereafter
                      
                      
                      64,023
                      
                      
                      
                      825,319
                      
                      
                      
                      889,342$
                      292,580
                      
                      
                      $
                      1,235,255
                      
                      
                      $
                      1,527,835
  10.
                Accounts
      payable, accrued expenses and other
liabilities
  Accounts
payable, accrued expenses and other liabilities as of December 31, 2009 and
December 31, 2008 consisted of the following:
  December 31,2009
                      
                      
                      2008Accounts
      payable and other liabilities
                      
                      $
                      1,039
                      
                      
                      $
                      1,458Accrued
      interest
                      
                      
                      7,623
                      
                      
                      
                      8,571Accrued
      expenses
                      
                      
                      5,487
                      
                      
                      
                      4,862Deferred
      rental income
                      
                      
                      -
                      
                      
                      
                      1,072Unearned
      rental income
                      
                      
                      4,551
                      
                      
                      
                      3,916Total
                      
                      $
                      18,700
                      
                      
                      $
                      19,879
 
 11.
                Risk
      Management Transactions
  As part
of its financing strategy, the Company may use interest rate swap transactions
to manage its exposure to interest rate fluctuations on assets not yet financed
with long-term fixed rate debt.  As of December 31, 2009 and during
all of 2009, the Company had no open interest rate swap positions.
  During
most of 2008, the Company had a single open interest rate swap, intended to
manage the Company’s exposure to interest rate movements for a planned long-term
financing of assets financed on its credit agreement with Wachovia
Bank.  During November 2008, the Company closed the swap as a result
of unprecedented credit market dislocations and associated declines in the
10-Year Treasury and other benchmark market interest rates.
  During
the quarter ended December 31, 2008, the full amount of the realized loss on
closing the swap of $15,216, along with $2,862 of related losses previously
deferred in Other Comprehensive Income/Loss on the Company’s Consolidated
Balance Sheet, was charged directly to the Company’s Consolidated Statement of
Operations, as the swap position no longer represented an effective cash flow
hedge under applicable accounting guidance.  See Note 2.  In
addition, during 2008 and prior to closing the swap position as described above,
the Company had another $1,418 of losses on the position recorded through the
Company’s Consolidated Statements of Operations.  These losses
primarily include hedge ineffectiveness resulting from changes in (i)
management’s estimates of when the related hedged debt was expected to be
issued, and (ii) the shape of the yield curve. The above losses are included in
“(Gain) loss on derivatives” on the Company’s Consolidated Statements of
Operations.
  78
  CapLease,
Inc. and Subsidiaries
 Notes to
Consolidated Financial Statements
 (Dollar
amounts in thousands, except per share amounts)
 
 December
31, 2009, 2008 and 2007
 
 As of
December 31, 2009, the Company had $4,744 of net realized losses on derivatives
deferred on the Company’s Consolidated Balance Sheet as a component of
Accumulated Other Comprehensive Income/(Loss).  Within the next twelve
months, the Company estimates that $592 of these losses will be reclassified to
the Company's Consolidated Statements of Operations as additional interest
expense.
  The
Company classifies the cash flows from derivatives as a financing activity on
the Consolidated Statements of Cash Flows.
  12.
                Related
      Party Transactions
  In
February 2001, the Company originated a net lease loan on a real property owned
by a limited partnership in which certain executive officers of the Company have
an indirect ownership interest.  The loan was sold to Wachovia Bank in
February 2001, and the limited partnership agreed to pay the Company an advisory
fee from the rent payable by the tenant at the real property in the amount of
approximately $66 a month until November 2010.  An affiliate of the
limited partnership is also a party to a management agreement with the tenant
for the operation of the property, and another affiliate of the limited
partnership subleases a portion of the leased building from the tenant at a
nominal amount.  No failure to perform under the management agreement
or sublease entitles the tenant to any rent abatement or termination under the
lease.  Interest income earned on the structuring fee receivable
totaled approximately $85, $138 and $187, during the years ended December 31,
2009, December 31, 2008, and December 31, 2007, respectively, and is included in
interest income in the Consolidated Statements of Operations.
  13.
                Commitments
      and Contingencies
  The
Company is involved from time to time in litigation arising in the ordinary
course of business.  The Company is not currently involved in any
matter which management believes will have a material adverse effect on the
Company’s business, results of operations or financial
condition.  However, periodic settlements and/or professional or other
fees and expenses related to any matter could have an adverse impact on our
results of operations in the quarterly or annual period in which they are
recognized.
  As an
owner of commercial real estate, the Company is subject to potential
environmental costs.  At December 31, 2009, the Company was not aware
of any environmental concerns that would have a material adverse effect on the
Company’s business, results of operations or financial condition.
  As of
December 31, 2009, the Company was obligated under non-cancelable operating
lease agreements for office space and copy machines.  The future
minimum lease payments under these lease agreements at December 31, 2009
were:
  2010
                        
                        $
                        7352011
                        
                        
                        7532012
                        
                        
                        7532013
                        
                        
                        5652014
                        
                        
                        –Thereafter
                        
                        
                        –$
                        2,806
  Included
in general and administrative expense is rent expense of approximately $657,
$669 and $688 for the years ended December 31, 2009, December 31, 2008 and
December 31, 2007, respectively.
  14.
                Stockholders’
      Equity
  Stock
Issuances
  CapLease’s
authorized capital stock consists of 500,000,000 shares of common stock, $0.01
per share, and 100,000,000 shares of preferred stock, $0.01 per
share.  As of December 31, 2009, CapLease had 51,709,511 shares of
common stock, and 1,400,000 shares of 8.125% Series A cumulative redeemable
preferred stock outstanding.
  79
  CapLease,
Inc. and Subsidiaries
 Notes to
Consolidated Financial Statements
 (Dollar
amounts in thousands, except per share amounts)
 
 December
31, 2009, 2008 and 2007
 
 During
the quarter ended December 31, 2009, CapLease issued an aggregate of 171,700
shares of common stock through its “at the market offering” program with Brinson
Patrick Securities Corporation at an average price of $4.59 per share, for net
proceeds of $772. During the year ended December 31, 2009, CapLease issued an
aggregate of 2,410,800 shares of common stock through the “at the market
offering” program at an average price of $3.49 per share, for net proceeds of
$8,169. During the quarter and year ended December 31, 2006, CapLease also
issued an aggregate of 160,900 shares of common stock through the “at the market
offering” program an average price to the public of $11.91 per share, for net
proceeds of approximately $1,851.
  During
the year ended December 31, 2009, CapLease issued 807,661 shares of common stock
through its dividend reinvestment and stock purchase plan at a price of $3.60
per share. During the year ended December 31, 2008, CapLease issued 1,222,855
shares of common stock through its dividend reinvestment and stock purchase plan
at an average price of $7.96 per share. During the year ended December 31, 2007,
CapLease issued 1,111,641 shares of common stock through its dividend
reinvestment and stock purchase plan at an average price of $10.38 per
share.
  During
September 2008, CapLease issued 1,317,524 shares of common stock to an existing
greater than 5% stockholder for a price of $7.59 per share. CapLease used the
net proceeds of the offering of $10,000 to voluntarily pay down debt and for
general corporate purposes.
  During
September 2008, CapLease issued 107,131 shares of common stock upon redemption
of the same number of units of the Operating Partnership. See Note
17.
  During
October 2007, CapLease used $15,000 of the proceeds from the sale of the
convertible senior notes described in Note 9 above to repurchase 1,524,390
shares of its common stock on the open market at $9.84 per share.
  During
May and June 2007, CapLease issued 10,350,000 shares of common stock in a public
offering at a price to the public of $10.75 per share, for net proceeds of
approximately $104,773. The Company used the net proceeds to repay a portion of
our borrowings under the short-term borrowing facility the Company entered into
to initially finance its April 2007 acquisition of the EntreCap
portfolio.
  During
May 2006, CapLease issued 5,747,000 shares of common stock in a public offering
at a price to the public of $10.55 per share, for net proceeds of approximately
$57,282.
  In March
2004, CapLease issued 23,000,000 shares of common stock in an initial public
offering at a price to the public of $10.50 per share, for net proceeds of
approximately $222,000. Also in March 2004, in connection with CapLease’s
acquisition of the Operating Partnership, CapLease issued 3,968,800 shares of
its common stock to the former owners of the Operating Partnership.
  In
November 2003, CapLease issued 139,134 shares of its common stock to certain
current and former employees of the Operating Partnership.
  Since
CapLease’s initial public offering and through December 31, 2009, it has issued
an aggregate of 2,890,455 shares of common stock (net of forfeitures) to its
directors, executive officers and other employees pursuant to the Company’s
stock incentive plan (see Note 15 below).
  In
October 2005, CapLease issued 1,400,000 shares of 8.125% Series A cumulative
redeemable preferred stock in a public offering at a price to the public of
$25.00 per share. The Company received net proceeds in the transaction (after
deducting underwriting discounts and commissions and estimated offering
expenses) of approximately $33,657.
  The
Series A preferred stock ranks senior to CapLease’s common stock and junior to
all of the Company’s existing and future indebtedness. Investors in the Series A
preferred stock are entitled to receive cumulative cash distributions at a rate
of 8.125% per annum of the $25.00 liquidation preference per share (equivalent
to $2.03125 per annum per share). The annual dividend rate will increase to
9.125% if the Series A preferred stock is delisted from the New York Stock
Exchange following a change of control of CapLease.
  If
CapLease liquidates, dissolves or wind ups its operations, the Series A
preferred stock holders will have the right to receive $25.00 per share, plus
all accrued and unpaid dividends (whether or not declared) to the date of
payment, before any payment is made to CapLease’s common stock holders. The
Series A preferred stock does not have any stated maturity date and is not
subject to any sinking fund or mandatory redemption provisions. CapLease may not
redeem the Series A preferred stock prior to October 19, 2010, except in certain
limited circumstances relating to the ownership limitation necessary to preserve
CapLease’s qualification as a REIT. On and after October 19, 2010, CapLease may
redeem the Series A preferred stock for cash at its option, in whole or from
time to time in part, at a redemption price of $25.00 per share, plus accrued
and unpaid dividends (whether or not declared) to the redemption
date.
 
 80
 
 CapLease,
Inc. and Subsidiaries
 Notes to
Consolidated Financial Statements
 (Dollar
amounts in thousands, except per share amounts)
 
 December
31, 2009, 2008 and 2007
 
 Holders
of Series A preferred stock generally have no voting rights. However, Series A
preferred stock holders will have limited voting rights if CapLease fails to pay
dividends on the Series A preferred stock for six or more quarterly periods
(whether or not consecutive), or if CapLease issues shares of capital stock
senior to the Series A preferred stock or makes changes to the terms of the
Series A preferred stock that would be materially adverse to the rights of
holders of Series A preferred stock.
  The
Series A preferred stock is not convertible into or exchangeable for CapLease’s
common stock or any of the Company’s other securities or property.
  Dividends
  The
following table summarizes the dividend history on shares of CapLease common
stock for the periods indicated.
  QuarterEnded
                              
                              Record
                                Date
                              
                              Payment
                                Date
                              
                              
                              Dividend
                                Per Share
                              
                              
                              Total
                                Amount12/31/2006
                              
                              12/29/2006
                              
                              1/16/2007
                              
                              
                              $
                              0.20
                              
                              
                              $
                              6,8183/31/2007
                              
                              3/30/2007
                              
                              4/16/2007
                              
                              
                              
                              0.20
                              
                              
                              
                              6,8836/30/2007
                              
                              6/29/2007
                              
                              7/16/2007
                              
                              
                              
                              0.20
                              
                              
                              
                              9,0469/30/2007
                              
                              9/28/2007
                              
                              10/15/2007
                              
                              
                              
                              0.20
                              
                              
                              
                              9,17512/31/2007
                              
                              12/31/2007
                              
                              1/15/2008
                              
                              
                              
                              0.20
                              
                              
                              
                              8,8703/31/2008
                              
                              3/31/2008
                              
                              4/15/2008
                              
                              
                              
                              0.20
                              
                              
                              
                              8,9496/30/2008
                              
                              6/30/2008
                              
                              7/15/2008
                              
                              
                              
                              0.20
                              
                              
                              
                              8,9739/30/2008
                              
                              9/30/2008
                              
                              10/15/2008
                              
                              
                              
                              0.20
                              
                              
                              
                              9,4753/31/2009
                              
                              3/31/2009
                              
                              4/15/2009
                              
                              
                              
                              0.05
                              
                              
                              
                              2,3966/30/2009
                              
                              6/30/2009
                              
                              7/15/2009
                              
                              
                              
                              0.05
                              
                              
                              
                              2,4339/30/2009
                              
                              9/30/2009
                              
                              10/15/2009
                              
                              
                              
                              0.05
                              
                              
                              
                              2,57712/31/2009
                              
                              12/31/2009
                              
                              1/15/2010
                              
                              
                              
                              0.06
                              
                              
                              
                              3,103
  The
Company did not declare a dividend on CapLease common stock during the fourth
quarter of 2008.
  The
following table summarizes the dividend history on shares of CapLease Series A
preferred stock for the periods indicated.
  QuarterEnded
                              
                              Record
                                Date
                              
                              Payment
                                Date
                              
                              
                              Dividend
                                Per Share
                              
                              
                              Total
                                Amount12/31/2006
                              
                              12/29/2006
                              
                              1/16/2007
                              
                              
                              $
                              0.5078125
                              
                              
                              $
                              7113/31/2007
                              
                              3/30/2007
                              
                              4/16/2007
                              
                              
                              
                              0.5078125
                              
                              
                              
                              7116/30/2007
                              
                              6/29/2007
                              
                              7/16/2007
                              
                              
                              
                              0.5078125
                              
                              
                              
                              7119/30/2007
                              
                              9/28/2007
                              
                              10/15/2007
                              
                              
                              
                              0.5078125
                              
                              
                              
                              71112/31/2007
                              
                              12/31/2007
                              
                              1/15/2008
                              
                              
                              
                              0.5078125
                              
                              
                              
                              7113/31/2008
                              
                              3/31/2008
                              
                              4/15/2008
                              
                              
                              
                              0.5078125
                              
                              
                              
                              7116/30/2008
                              
                              6/30/2008
                              
                              7/15/2008
                              
                              
                              
                              0.5078125
                              
                              
                              
                              7119/30/2008
                              
                              9/30/2008
                              
                              10/15/2008
                              
                              
                              
                              0.5078125
                              
                              
                              
                              71112/31/2008
                              
                              12/31/2008
                              
                              1/15/2009
                              
                              
                              
                              0.5078125
                              
                              
                              
                              7113/31/2009
                              
                              3/31/2009
                              
                              4/15/2009
                              
                              
                              
                              0.5078125
                              
                              
                              
                              7116/30/2009
                              
                              6/30/2009
                              
                              7/15/2009
                              
                              
                              
                              0.5078125
                              
                              
                              
                              7119/30/2009
                              
                              9/30/2009
                              
                              10/15/2009
                              
                              
                              
                              0.5078125
                              
                              
                              
                              71112/31/2009
                              
                              12/31/2009
                              
                              1/15/2010
                              
                              
                              
                              0.5078125
                              
                              
                              
                              711
 
 81
 
 CapLease,
Inc. and Subsidiaries
 Notes to
Consolidated Financial Statements
 (Dollar
amounts in thousands, except per share amounts)
 
 December
31, 2009, 2008 and 2007
 
 15.
                Stock
      Based Compensation
  The
Company adopted a stock incentive plan for its employees and directors during
March 2004 in connection with its initial public offering. 5,123,000 shares of
common stock are authorized for issuance under the stock plan. As of December
31, 2009, the Company had awarded 2,890,455 shares of common stock under the
stock plan, all in the form of stock awards to executive officers, other
employees and directors of the Company. The Company has not awarded any options,
stock appreciation rights or other stock based compensation under the stock
plan.
  A summary
of the Company’s activity under the stock plan from January 1, 2008 through
December 31, 2009, is presented below:
  Number of
                        SharesStock
      Awards at January 1, 2008
                      
                      
                      1,397,245Granted
      During the Year Ended December 31, 2008
                      
                      
                      393,950
                      (1)Stock
      Awards at January 1, 2009
                      
                      
                      1,791,195Granted
      During the Year Ended December 31, 2009
                      
                      
                      1,107,600
                      (2)Forfeited
      During the Year Ended December 31, 2009
                      
                      
                      (8,340
                      )Stock
      Awards at December 31, 2009
                      
                      
                      2,890,455
 
 (1)
              Shares
      are scheduled to vest between March 2009 and March 2013, but will
      generally be forfeited if the recipient either terminates his employment
      with the Company or ceases to be a member of CapLease’s Board of Directors
      at any time prior to the vesting date. Vesting of an aggregate of 196,725
      shares is also subject to satisfaction of objective and subjective
      performance criteria, to be determined by CapLease’s Compensation
      Committee.
 (2)
              Shares
      are scheduled to vest between March 2010 and March 2014, but will
      generally be forfeited if the recipient either terminates his employment
      with the Company or ceases to be a member of CapLease’s Board of Directors
      at any time prior to the vesting date. Vesting of an aggregate of 523,572
      shares is also subject to satisfaction of objective and subjective
      performance criteria, to be determined by CapLease’s Compensation
      Committee.
 
 A summary
of the status of unvested shares from January 1, 2008 through December 31, 2009,
is presented below:
  Shares
                          Awarded
                          Under Plan
                        
                        
                        SharesPriced
                          Under SFAS
                          123 and123R
                        
                        
                        Weighted
                          AverageFair
                          ValueNonvested
      at January 1, 2008
                        
                        
                        692,582
                        
                        
                        
                        446,731
                        
                        
                        $
                        10.99Current
      period awards
                        
                        
                        393,950
                        
                        
                        
                        236,570
                        
                        
                        
                        8.43Prior
      period awards
                        
                        
                        N/A
                        
                        
                        
                        79,799
                        
                        
                        
                        8.43Vested
                        
                        
                        (156,300
                        )
                        
                        
                        (156,300
                        )
                        
                        
                        11.00Nonvested
      at January 1, 2009
                        
                        
                        930,232
                        
                        
                        
                        606,800
                        
                        
                        
                        9.66Current
      period awards
                        
                        
                        1,107,600
                        
                        
                        
                        688,741
                        
                        
                        
                        2.23Prior
      period awards
                        
                        
                        N/A
                        
                        
                        
                        119,140
                        
                        
                        
                        1.88Vested
                        
                        
                        (228,476
                        )
                        
                        
                        (228,476
                        )
                        
                        
                        6.77Forfeited
                        
                        
                        (8,340
                        )
                        
                        
                        (8,340
                        )
                        
                        
                        4.31Nonvested
      at December 31, 2009
                        
                        
                        1,801,016
                        
                        
                        
                        1,177,865
                        
                        
                        
                        4.17
 
 The
Company uses the closing stock price on the grant date as its estimate of the
fair value of the award.
  As the
immediately preceding table indicates, not all Company share awards have been
valued for purposes of FASB ASC 718-10-30 (formerly SFAS 123R (Revised 2004) −
Share-Based Payment),
as the Company’s stock awards include shares awarded with vesting dependent upon
satisfaction of performance criteria and with the performance criteria on a
portion of the shares to be determined in the future. “Prior period awards”
represent share awards made in a prior period which have been valued for
purposes of FASB ASC 718-10-30 in the current period when the CapLease
Compensation Committee determined the performance criteria.
  As of
December 31, 2009, $3,344 of unvested shares (fair value at the grant dates) is
expected to be charged to the Company’s Consolidated Statement of Operations
ratably over the remaining vesting period (through March 2014). As of December
31, 2009, the grant date fair value for awards of 23,557 restricted shares made
in 2006, 62,700 restricted shares made in 2007, 118,035 restricted shares made
in 2008 and 418,859 restricted shares made in 2009, has not yet been determined
because the grant date (as defined under at FASB ASC 718-10-20 (formerly SFAS
123R (Revised 2004) − Share-Based Payment)) has not
yet occurred.
 
 82
 
 CapLease,
Inc. and Subsidiaries
 Notes to
Consolidated Financial Statements
 (Dollar
amounts in thousands, except per share amounts)
 
 December
31, 2009, 2008 and 2007
 
 16.
                Other
      Comprehensive Income
  Comprehensive
income (loss) is defined as the change in equity of a business enterprise during
a period from transactions and other events and circumstances, excluding those
resulting from investments by and distributions to owners. For the Company’s
purposes, comprehensive income (loss) represents net income (loss), as presented
in the Company’s Consolidated Statements of Operations, adjusted for unrealized
gains or losses on securities available for sale, unrealized gains or losses on
derivatives designated as cash flow hedges, and realized gains and losses on
derivatives designated as cash flow hedges (net of amortization of those
realized gains and losses reclassified into interest expense).
  The
Company’s comprehensive income (loss) for the years ended December 31, 2009,
December 31, 2008, and December 31, 2007, is summarized below.
  2009
                    
                    
                    2008
                    
                    
                    2007Net
      loss
                    
                    $
                    (13,967
                    )
                    
                    $
                    (23,164
                    )
                    
                    $
                    (2,505
                    )Increase
      (decrease) in fair value of securities available for sale
                    
                    
                    2,463
                    
                    
                    
                    (9,398
                    )
                    
                    
                    (20,412
                    )Increase
      (decrease) in fair value of derivatives
                    
                    
                    –
                    
                    
                    
                    4,522
                    
                    
                    
                    (4,570
                    )Amortization
      of unrealized loss on securities previously classified as available for
      sale
                    
                    
                    562
                    
                    
                    
                    505
                    
                    
                    
                    –Reclassification
      of derivative items into earnings
                    
                    
                    761
                    
                    
                    
                    20,126
                    
                    
                    
                    788Realized
      income (loss) on derivatives
                    
                    
                    –
                    
                    
                    
                    (17,853
                    )
                    
                    
                    2,434Comprehensive
      income (loss)
                    
                    $
                    (10,181
                    )
                    
                    $
                    (25,262
                    )
                    
                    $
                    (24,265
                    )
  FASB ASC
220-10-45-6 (formerly SFAS No. 130, Reporting Comprehensive
Income) divides comprehensive income (loss) into “net income (loss)” and
“other comprehensive income (loss).” Other comprehensive income (loss) is
defined as revenues, expenses, gains and losses that under generally accepted
accounting principles are included in comprehensive income (loss) but excluded
from net income (loss). Other comprehensive income (loss) is a component of
Stockholders’ Equity and is shown on the Company’s Consolidated Statement of
Changes in Stockholders’ Equity (fourth column). The following table summarizes
the Company’s Accumulated Other Comprehensive Income (Loss) as reported on the
Consolidated Statement of Changes in Stockholders’ Equity.
 
 December
      31,2009
                        
                        
                        2008Net
      unrealized losses on securities available for sale
                        
                        $
                        (9,717
                        )
                        
                        $
                        (13,396
                        )Net
      unrealized losses on securities previously classifiedas
      available for sale
                        
                        
                        (9,872
                        )
                        
                        
                        (9,217
                        )Net
      realized losses on derivatives
                        
                        
                        (4,743
                        )
                        
                        
                        (5,505
                        )Accumulated
      other comprehensive loss
                        
                        $
                        (24,332
                        )
                        
                        $
                        (28,118
                        )
 
 17.
                Non-Controlling
      Interests
  As of
January 1, 2009, the Company adopted new accounting guidance (codified at FASB
ASC 810 and formerly SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements - An Amendment of ARB No. 51) that
classifies the portion of the equity that the Company does not own in the
Operating Partnership as a non-controlling interest, rather than a minority
interest.
  During
June 2006, the Operating Partnership issued 263,157 units of limited partnership
to an unaffiliated third party. All of these units were issued in connection
with the Company’s acquisition of a property in June 2006 from the third party.
During June 2008, the units of limited partnership became redeemable by the
holder, at its option, on the basis of one unit for either one share of CapLease
common stock or cash equal to the fair market value of a share of common stock
at the time of the redemption. The units of limited partnership do not have a
liquidation preference. During September 2008, the non-controlling interest
holder redeemed 107,131 units for the same number of shares of CapLease common
stock. As of December 31, 2009, the Operating Partnership had issued and
outstanding 156,026 units of limited partnership.
  Cash
distributions by the Operating Partnership are paid in the following priority:
first, to the non-controlling interest holder until such holder receives the
amount it would have received if the holder’s units of limited partnership
interest were converted to an equal number of shares of CapLease common stock,
and then, to CapLease. Since July 2006, at the same time CapLease has paid a
cash dividend to its common stockholders, the non-controlling interest holder
has been paid a cash dividend of the same amount per limited partnership
unit.
  83
  CapLease,
Inc. and Subsidiaries
 Notes to
Consolidated Financial Statements
 (Dollar
amounts in thousands, except per share amounts)
  December
31, 2009, 2008 and 2007
 18.
                Rental
      Income
  The
Company is the lessor to tenants under operating leases with expiration dates
ranging from 2010
to 2026.
The minimum rental amounts due under the leases are generally subject to
scheduled fixed increases. The leases generally also require that the tenants
pay for or reimburse the Company for the occupancy and operating costs of the
properties, or in certain cases reimburse the Company for increases in certain
operating costs and real estate taxes above their base year costs. Approximate
future minimum rents to be received over the next five years and thereafter for
non-cancelable operating leases in effect at December 31, 2009, are as
follows:
 
 2010
                      
                      $
                      119,3542011
                      
                      
                      117,9702012
                      
                      
                      116,7722013
                      
                      
                      90,0732014
                      
                      
                      87,979Thereafter
                      
                      
                      421,487$
                      953,635
  19.
                Concentration
      Risks
  The
Company has historically relied on Wachovia Bank to provide the majority of its
cash for financing its portfolio investments, including through short-term
borrowing facilities to facilitate the Company’s portfolio investment and
mortgage financings on its owned real properties. Wachovia Bank is now a
subsidiary of Wells Fargo & Company. Deterioration in the financial
condition of Wells Fargo or Wachovia Bank could have a negative impact on the
Company’s business, operating results and financial condition. As of December
31, 2009, Wells Fargo carried an AA- rating from Standard &
Poor’s.
  During
2009, approximately 11.9% of the Company’s total revenues were derived from one
tenant (the United States Government).
  20.
                401(k)
      Plan
  The
Company has a 401(k) Savings/Retirement Plan (the “401(k) Plan”) in place to
cover eligible employees of the Company. The 401(k) Plan permits eligible
employees of the Company to defer a portion of their annual compensation,
subject to certain limitations imposed by the Internal Revenue Code. The
employee’s elective deferrals are immediately vested and non-forfeitable upon
contribution to the 401(k) Plan. For the years ended December 31, 2009, December
31, 2008 and December 31, 2007, the Company made matching contributions of $234,
$312 and $287, respectively.
 
 21.
                Segment
      Reporting
  FASB ASC
280 (formerly SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information) establishes the manner in which
public businesses report information about operating segments in annual and
interim financial reports issued to stockholders. FASB ASC 280-10-50 defines a
segment as a component of an enterprise about which separate financial
information is available and that is evaluated regularly to allocate resources
and assess performance. The Company conducts its business through two segments:
operating real estate (including its investments in owned properties) and
lending investments (including its loan investments as well as its investments
in securities). For segment reporting purposes, the Company does not allocate
interest income on short-term investments or general and administrative
expenses.
 
 84
 
 CapLease,
Inc. and Subsidiaries
 Notes to
Consolidated Financial Statements
 (Dollar
amounts in thousands, except per share amounts)
 
 December
31, 2009, 2008 and 2007
 
 Selected
results of operations for the years ended December 31, 2009 are as
follows:
  Corporate /
                      Unallocated
                    
                    
                    Operating
                      Real Estate
                    
                    
                    Lending
                      Investments
                    
                    
                    TotalTotal
      revenues
                    
                    $
                    492
                    
                    
                    $
                    147,408
                    
                    
                    $
                    30,268
                    
                    
                    $
                    178,168Total
      expenses
                    
                    
                    21,210
                    
                    
                    
                    150,516
                    
                    
                    
                    30,602
                    
                    
                    
                    202,328Gain
      on extinguishment of debt
                    
                    
                    9,829
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    9,829Provision
      for income tax
                    
                    
                    201
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    201Loss
      from continuing operations
                    
                    
                    (11,090
                    )
                    
                    
                    (3,109
                    )
                    
                    
                    (333
                    )
                    
                    
                    (14,532
                    )Total
      assets
                    
                    
                    54,618
                    
                    
                    
                    1,471,987
                    
                    
                    
                    377,810
                    
                    
                    
                    1,904,415
  Selected
results of operations for the years ended December 31, 2008 are as
follows:
  Corporate /
                      Unallocated
                    
                    
                    Operating
                      Real Estate
                    
                    
                    Lending
                      Investments
                    
                    
                    TotalTotal
      revenues
                    
                    $
                    777
                    
                    
                    $
                    147,172
                    
                    
                    $
                    34,338
                    
                    
                    $
                    182,287Total
      expenses
                    
                    
                    23,457
                    
                    
                    
                    144,776
                    
                    
                    
                    39,762
                    
                    
                    
                    207,995Gain
      on extinguishment of debt
                    
                    
                    1,713
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    1,713Income
      (loss) from continuing operations
                    
                    
                    (20,967
                    )
                    
                    
                    2,396
                    
                    
                    
                    (5,424
                    )
                    
                    
                    (23,995
                    )Total
      assets
                    
                    
                    26,620
                    
                    
                    
                    1,566,405
                    
                    
                    
                    452,500
                    
                    
                    
                    2,045,525
  Selected
results of operations for the year ended December 31, 2007 are as
follows:
  Corporate /
                      Unallocated
                    
                    
                    Operating
                      Real Estate
                    
                    
                    Lending
                      Investments
                    
                    
                    TotalTotal
      revenues
                    
                    $
                    602
                    
                    
                    $
                    134,529
                    
                    
                    $
                    34,639
                    
                    
                    $
                    169,770Total
      expenses
                    
                    
                    16,388
                    
                    
                    
                    133,844
                    
                    
                    
                    24,420
                    
                    
                    
                    174,652Gain
      on extinguishment of debt
                    
                    
                    -
                    
                    
                    
                    1,363
                    
                    
                    
                    -
                    
                    
                    
                    1,363Income
      (loss) from continuing operations
                    
                    
                    (15,785
                    )
                    
                    
                    2,048
                    
                    
                    
                    10,218
                    
                    
                    
                    (3,519
                    )Total
      assets
                    
                    
                    64,413
                    
                    
                    
                    1,620,419
                    
                    
                    
                    473,235
                    
                    
                    
                    2,158,067
 
 22.
                Quarterly
      Financial Information
(Unaudited)
  The
following table sets forth selected quarterly financial data for the Company for
2009 and 2008.
  Revenue
                    
                    
                    Net income(loss)
                      applicable to
                      commonshares
                    
                    
                    Basic anddiluted
                      income(loss) per
                      commonshare2009December
      31
                    
                    $
                    43,632
                    
                    
                    $
                    (14,039
                    )
                    
                    $
                    (0.27
                    )September
      30
                    
                    
                    44,961
                    
                    
                    
                    (4,084
                    )
                    
                    
                    (0.08
                    )June
      30
                    
                    
                    44,450
                    
                    
                    
                    5,955
                    
                    
                    
                    0.12March
      31
                    
                    
                    45,126
                    
                    
                    
                    (4,642
                    )
                    
                    
                    (0.10
                    )2008December
      31
                    
                    
                    45,461
                    
                    
                    
                    (20,014
                    )
                    
                    
                    (0.42
                    )September
      30
                    
                    
                    45,422
                    
                    
                    
                    (2,199
                    )
                    
                    
                    (0.05
                    )June
      30
                    
                    
                    45,523
                    
                    
                    
                    (1,242
                    )
                    
                    
                    (0.03
                    )March
      31
                    
                    
                    45,880
                    
                    
                    
                    (2,552
                    )
                    
                    
                    (0.06
                    )
  The
totals for the year may differ from the sum of the quarters as a result of
weighting and rounding.
 
 85
 
 CapLease,
Inc. and Subsidiaries
 Notes to
Consolidated Financial Statements
 (Dollar
amounts in thousands, except per share amounts)
 
 December
31, 2009, 2008 and 2007
 
 23.
                Subsequent
      Events
  During
2010, the Company has continued to utilize the “at the market offering” program
described in note 14 above.  Between January 1, 2010 and March 3, 2010,
CapLease has issued and sold another 1,800,000 shares of common stock through
the program at an average price of $4.68 per share, generating net proceeds of
approximately $8.3 million.
 
 86
 
 CapLease,
Inc. and Subsidiaries
 Schedule
of Real Estate and Accumulated Depreciation
 
 December
31, 2009
 (amounts
in thousands)
 
 Schedule
III
 Initial Cost
              
              
              Cost Capitalized Subsequent to
                Acquisition
              
              
              Gross Amount at Which
                Carried at Close of PeriodDescription
              
              Encumbrances
              
              
              Land
              
              
              Building and
                Improvements
              
              
              Land
              
              
              Building and
                Improvements
              
              
              Land
              
              
              Building and
                Improvements
              
              
              Total
              
              
              Accumulated
                Depreciation
              
              Date of Construction
              
              Date Acquired
              
              Life on Which
                Depreciation
                is ComputedAbbott Laboratories,
      Columbus, OH
              
              $
              6,377
              
              
              $
              1,025
              
              
              $
              10,066
              
              
              $
              -
              
              
              $
              -
              
              
              $
              1,025
              
              
              $
              10,066
              
              
              $
              11,091
              
              
              $
              1,297
              
              1980, renovated in
      2003-2004
              
              11/5/2004
              
              VariousAbbott
      Laboratories, Waukegan, IL
              
              
              16,665
              
              
              
              2,500
              
              
              
              15,430
              
              
              
              -
              
              
              
              -
              
              
              
              2,500
              
              
              
              15,430
              
              
              
              17,930
              
              
              
              1,695
              
              2000
              
              8/9/2005
              
              VariousAetna
      Life Insurance Company, Fresno, CA
              
              
              19,675
              
              
              
              3,000
              
              
              
              19,462
              
              
              
              -
              
              
              
              849
              
              
              
              3,000
              
              
              
              20,311
              
              
              
              23,311
              
              
              
              2,506
              
              1
      story office 1969, 2 story office 1984, 2 story parking 1997, interior
      renovated in 2000 & 2008, parking lot reconstructed in
      2008
              
              10/19/2006
              
              VariousAllstate
      Insurance Company, Charlotte, NC
              
              
              23,151
              
              
              
              7,100
              
              
              
              14,594
              
              
              
              -
              
              
              
              -
              
              
              
              7,100
              
              
              
              14,594
              
              
              
              21,694
              
              
              
              1,470
              
              1973,
      renovated in the 1990s
              
              12/21/2005
              
              VariousAllstate
      Insurance Company, Roanoke, VA
              
              
              24,648
              
              
              
              3,200
              
              
              
              20,930
              
              
              
              -
              
              
              
              -
              
              
              
              3,200
              
              
              
              20,930
              
              
              
              24,130
              
              
              
              2,108
              
              1969/70,
      with an addition in 1981
              
              12/21/2005
              
              VariousAmeriCredit
      Corp., Arlington, TX
              
              
              27,395
              
              
              
              5,820
              
              
              
              32,219
              
              
              
              -
              
              
              
              -
              
              
              
              5,820
              
              
              
              32,219
              
              
              
              38,039
              
              
              
              2,425
              
              1999
              
              12/28/2006
              
              VariousAMVESCAP
      PLC, Denver, CO
              
              
              55,412
              
              
              
              7,200
              
              
              
              55,395
              
              
              
              -
              
              
              
              562
              
              
              
              7,200
              
              
              
              55,957
              
              
              
              63,157
              
              
              
              5,249
              
              2001,
      first floor renovated in 2008
              
              3/23/2006
              
              VariousAon
      Corporation, Glenview, IL
              
              
              67,613
              
              
              
              11,000
              
              
              
              68,639
              
              
              
              -
              
              
              
              1,136
              
              
              
              11,000
              
              
              
              69,775
              
              
              
              80,775
              
              
              
              9,224
              
              1976,
      renovated in 1999-2001
              
              8/19/2004
              
              VariousBaxter
      International, Inc., Bloomington, IN
              
              
              5,395
              
              
              
              1,200
              
              
              
              9,181
              
              
              
              -
              
              
              
              -
              
              
              
              1,200
              
              
              
              9,181
              
              
              
              10,381
              
              
              
              1,198
              
              1996,
      renovation and warehouse addition in 2004
              
              10/13/2004
              
              VariousBunge
      North America, Inc., Fort Worth, TX
              
              
              8,577
              
              
              
              650
              
              
              
              8,880
              
              
              
              -
              
              
              
              -
              
              
              
              650
              
              
              
              8,880
              
              
              
              9,530
              
              
              
              599
              
              2005
              
              4/19/2007
              
              VariousCadbury
      Schweppes Plc, Whippany, NJ
              
              
              36,495
              
              
              
              6,300
              
              
              
              38,994
              
              
              
              -
              
              
              
              1,232
              
              
              
              6,300
              
              
              
              40,226
              
              
              
              46,526
              
              
              
              4,524
              
              2005
              
              1/6/2005
              
              VariousCapital
      One Financial Corporation, Plano, TX
              
              
              21,782
              
              
              
              6,670
              
              
              
              18,816
              
              
              
              -
              
              
              
              -
              
              
              
              6,670
              
              
              
              18,816
              
              
              
              25,486
              
              
              
              2,130
              
              1999,
      renovated in 2005
              
              6/23/2005
              
              VariousChoice
      Hotels International, Inc., Silver Spring, MD
              
              
              29,094
              
              
              
              5,500
              
              
              
              37,361
              
              
              
              -
              
              
              
              256
              
              
              
              5,500
              
              
              
              37,617
              
              
              
              43,117
              
              
              
              4,731
              
              Building
      10720 - 1981, 10750 - 1971, 10770 - 1986
              
              11/23/2004
              
              VariousCounty
      of Yolo, California, Woodland, CA
              
              
              12,860
              
              
              
              2,300
              
              
              
              12,850
              
              
              
              -
              
              
              
              -
              
              
              
              2,300
              
              
              
              12,850
              
              
              
              15,150
              
              
              
              939
              
              2001
              
              1/30/2007
              
              VariousCrozer-Keystone
      Health System, Ridley, PA
              
              
              3,490
              
              
              
              -
              
              
              
              5,015
              
              
              
              -
              
              
              
              864
              
              
              
              -
              
              
              
              5,879
              
              
              
              5,879
              
              
              
              767
              
              1977,
      renovated in 2004
              
              8/9/2004
              
              VariousCVS
      Corporation, Randolph, MA
              
              
              8,205
              
              
              
              6,300
              
              
              
              7,801
              
              
              
              -
              
              
              
              -
              
              
              
              6,300
              
              
              
              7,801
              
              
              
              14,101
              
              
              
              1,025
              
              1965,
      renovated in the 1980's and 1993
              
              9/29/2004
              
              VariousFarmers
      Group, Inc., Simi Valley, CA
              
              
              34,105
              
              
              
              10,620
              
              
              
              28,127
              
              
              
              -
              
              
              
              -
              
              
              
              10,620
              
              
              
              28,127
              
              
              
              38,747
              
              
              
              2,051
              
              Office
      240M SF 1982, Training Facility (w/office) 21M SF  1999 &
      Warehouse 10M SF 1982
              
              1/31/2007
              
              VariousFarmers
      New World Life Insurance Company, Mercer Island, WA
              
              
              32,266
              
              
              
              24,000
              
              
              
              10,035
              
              
              
              -
              
              
              
              -
              
              
              
              24,000
              
              
              
              10,035
              
              
              
              34,035
              
              
              
              1,010
              
              1982
              
              12/22/2005
              
              VariousITT
      Industries, Inc., Herndon, VA
              
              
              45,223
              
              
              
              5,300
              
              
              
              40,221
              
              
              
              -
              
              
              
              9,528
              
              
              
              5,300
              
              
              
              49,749
              
              
              
              55,049
              
              
              
              5,414
              
              1999,
      interior renovated in 2005-2006
              
              5/23/2005
              
              VariousJohnson
      Controls, Inc., Largo, FL
              
              
              21,776
              
              
              
              4,600
              
              
              
              18,168
              
              
              
              -
              
              
              
              -
              
              
              
              4,600
              
              
              
              18,168
              
              
              
              22,768
              
              
              
              2,209
              
              1963
      & 2001
              
              12/12/2006
              
              VariousKoninklijke
      Ahold, N.V., Levittown, PA
              
              
              15,510
              
              
              
              4,000
              
              
              
              15,789
              
              
              
              -
              
              
              
              -
              
              
              
              4,000
              
              
              
              15,789
              
              
              
              19,789
              
              
              
              1,401
              
              2006
              
              6/13/2006
              
              VariousLowes
      Companies, Inc., Aliso Viejo, CA
              
              
              44,006
              
              
              
              26,600
              
              
              
              20,831
              
              
              
              -
              
              
              
              -
              
              
              
              26,600
              
              
              
              20,831
              
              
              
              47,431
              
              
              
              2,404
              
              1965,
      renovated in 2004-2005
              
              5/31/2005
              
              VariousMulti-Tenant,
      Omaha, NE
              
              
              19,298
              
              
              
              -
              
              
              
              31,866
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              31,866
              
              
              
              31,866
              
              
              
              2,498
              
              1991
              
              4/18/2007
              
              VariousMulti-Tenant,
      Omaha, NE
              
              
              3,953
              
              
              
              -
              
              
              
              11,626
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              11,626
              
              
              
              11,626
              
              
              
              1,166
              
              1985
              
              4/18/2007
              
              VariousMulti-Tenant
      (currently vacant), Johnston, RI
              
              
              -
              
              
              
              -
              
              
              
              31,499
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              31,499
              
              
              
              31,499
              
              
              
              4,855
              
              1973
              
              4/18/2007
              
              VariousN/A
      (Development Property), Simi Valley, CA
              
              
              -
              
              
              
              1,025
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              1,025
              
              
              
              -
              
              
              
              1,025
              
              
              
              -
              
              
              
              5/24/2007
              
              Various
  87
 CapLease,
Inc. and Subsidiaries
 Schedule
of Real Estate and Accumulated Depreciation
 
 December
31, 2009
 (amounts
in thousands)
 
 Schedule
III
  Initial Cost
              
              
              Cost Capitalized Subsequent to
                Acquisition
              
              
              Gross Amount at Which
                Carried at Close of PeriodDescription
              
              Encumbrances
              
              
              Land
              
              
              Building and
                Improvements
              
              
              Land
              
              
              Building and
                Improvements
              
              
              Land
              
              
              Building and
                Improvements
              
              
              Total
              
              
              Accumulated
                Depreciation
              
              Date of Construction
              
              Date Acquired
              
              Life on Which
                Depreciation
                is ComputedNestle
      Holdings, Inc., Breinigsville, PA
              
              
              59,946
              
              
              
              -
              
              
              
              77,439
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              77,439
              
              
              
              77,439
              
              
              
              5,232
              
              1994
              
              4/18/2007
              
              VariousNestle
      Holdings, Inc., Fort Wayne, IN
              
              
              33,399
              
              
              
              -
              
              
              
              37,313
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              37,313
              
              
              
              37,313
              
              
              
              2,521
              
              1994
              
              4/18/2007
              
              VariousNestle
      Holdings, Inc., Lathrop, CA
              
              
              42,153
              
              
              
              -
              
              
              
              57,483
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              57,483
              
              
              
              57,483
              
              
              
              3,884
              
              1994
              
              4/18/2007
              
              VariousOmnicom
      Group, Inc., Irving, TX
              
              
              13,749
              
              
              
              2,620
              
              
              
              11,800
              
              
              
              -
              
              
              
              184
              
              
              
              2,620
              
              
              
              11,984
              
              
              
              14,604
              
              
              
              1,339
              
              1997
              
              6/23/2005
              
              VariousPearson
      Plc., Lawrence, KS
              
              
              17,139
              
              
              
              1,140
              
              
              
              16,557
              
              
              
              -
              
              
              
              -
              
              
              
              1,140
              
              
              
              16,557
              
              
              
              17,697
              
              
              
              1,540
              
              1997
              
              4/12/2006
              
              VariousT-Mobile
      USA, Inc., Nashville, TN
              
              
              10,885
              
              
              
              2,450
              
              
              
              11,774
              
              
              
              -
              
              
              
              -
              
              
              
              2,450
              
              
              
              11,774
              
              
              
              14,224
              
              
              
              921
              
              2002
              
              11/14/2006
              
              VariousThe
      Kroger Co., Various locations in KY (five), GA (four), and TN
      (two)
              
              
              58,770
              
              
              
              -
              
              
              
              84,702
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              84,702
              
              
              
              84,702
              
              
              
              5,723
              
              Various,
      1995-1996
              
              4/18/2007
              
              VariousThe
      Travelers Corporation, Hartford, CT
              
              
              10,674
              
              
              
              -
              
              
              
              18,317
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              18,317
              
              
              
              18,317
              
              
              
              1,414
              
              1986
              
              4/18/2007
              
              VariousTiffany
      & Co., Parsippany, NJ
              
              
              61,010
              
              
              
              7,400
              
              
              
              62,150
              
              
              
              -
              
              
              
              47
              
              
              
              7,400
              
              
              
              62,197
              
              
              
              69,597
              
              
              
              6,621
              
              Office
      & Warehouse - 1996-1997, Warehouse Mezzanine - 2000, Garage - 2001,
      East Wing Office - 2002, solar rooftop panels installed in
      2006
              
              9/28/2005
              
              VariousTime
      Warner Entertainment Company, L.P., Milwaukee, WI
              
              
              23,400
              
              
              
              2,300
              
              
              
              22,299
              
              
              
              -
              
              
              
              -
              
              
              
              2,300
              
              
              
              22,299
              
              
              
              24,599
              
              
              
              1,723
              
              1903,
      renovated in 2001
              
              11/28/2006
              
              VariousTJX
      Companies, Inc., Philadelphia, PA
              
              
              76,911
              
              
              
              6,100
              
              
              
              79,734
              
              
              
              -
              
              
              
              -
              
              
              
              6,100
              
              
              
              79,734
              
              
              
              85,834
              
              
              
              7,593
              
              2001
              
              3/10/2006
              
              VariousUnited
      States Government (DEA), Birmingham, AL
              
              
              12,034
              
              
              
              1,000
              
              
              
              11,643
              
              
              
              -
              
              
              
              (474
              )
              
              
              1,000
              
              
              
              11,169
              
              
              
              12,169
              
              
              
              1,173
              
              2005
              
              8/11/2005
              
              VariousUnited
      States Government (EPA), Kansas City, KS
              
              
              24,326
              
              
              
              250
              
              
              
              29,476
              
              
              
              -
              
              
              
              -
              
              
              
              250
              
              
              
              29,476
              
              
              
              29,726
              
              
              
              3,229
              
              2003
              
              8/11/2005
              
              VariousUnited
      States Government (FBI), Albany, NY
              
              
              13,551
              
              
              
              3,000
              
              
              
              12,869
              
              
              
              -
              
              
              
              100
              
              
              
              3,000
              
              
              
              12,969
              
              
              
              15,969
              
              
              
              1,020
              
              1998,
      building expanded by 3M SF in 2008.
              
              10/25/2006
              
              VariousUnited
      States Government (FBI), Birmingham, AL
              
              
              20,015
              
              
              
              2,200
              
              
              
              20,171
              
              
              
              -
              
              
              
              1,603
              
              
              
              2,200
              
              
              
              21,773
              
              
              
              23,973
              
              
              
              2,316
              
              2005,
      building expanded by 10M SF in 2007
              
              8/11/2005
              
              VariousUnited
      States Government (NIH), N. Bethesda, MD
              
              
              60,929
              
              
              
              10,350
              
              
              
              61,537
              
              
              
              -
              
              
              
              99
              
              
              
              10,350
              
              
              
              61,635
              
              
              
              71,985
              
              
              
              6,630
              
              1989
              
              9/9/2005
              
              VariousUnited
      States Government (SSA), Austin, TX
              
              
              5,846
              
              
              
              1,100
              
              
              
              4,373
              
              
              
              -
              
              
              
              138
              
              
              
              1,100
              
              
              
              4,511
              
              
              
              5,611
              
              
              
              454
              
              2005
              
              8/11/2005
              
              VariousUnited
      States Government (VA), Ponce, PR
              
              
              5,477
              
              
              
              2,120
              
              
              
              10,252
              
              
              
              -
              
              
              
              74
              
              
              
              2,120
              
              
              
              10,326
              
              
              
              12,446
              
              
              
              1,324
              
              2000,
      HVAC system replaced in 2008
              
              11/1/2004
              
              VariousWalgreen
      Co., Pennsauken, NJ
              
              
              1,554
              
              
              
              463
              
              
              
              2,629
              
              
              
              -
              
              
              
              -
              
              
              
              463
              
              
              
              2,629
              
              
              
              3,092
              
              
              
              340
              
              1996
              
              11/1/2004
              
              VariousWalgreen
      Co., Portsmouth, VA
              
              
              2,934
              
              
              
              618
              
              
              
              3,560
              
              
              
              -
              
              
              
              1
              
              
              
              618
              
              
              
              3,563
              
              
              
              4,181
              
              
              
              466
              
              1998
              
              11/1/2004
              
              Various$
              1,137,673
              
              
              $
              189,021
              
              
              $
              1,219,873
              
              
              $
              -
              
              
              $
              16,199
              
              
              $
              189,021
              
              
              $
              1,236,072
              
              
              $
              1,425,093
              
              
              $
              120,358
  88
 CapLease,
Inc. and Subsidiaries
 Real
Estate and Accumulated Depreciation
 December
31, 2009
 (amounts
in thousands)
 Schedule
III—(Continued)
 Reconciliation
      of real estate owned:Balance-December
      31, 2006
                    
                    
                    
                    
                    $
                    1,030,221Property
      acquisitions
                    
                    $
                    432,762Costs
      capitalized subsequent to acquisition
                    
                    
                    3,169Balance-December
      31, 2007
                    
                    
                    
                    
                    
                    $
                    1,466,152Property
      acquisitions
                    
                    $
                    -Costs
      capitalized subsequent to acquisition
                    
                    
                    4,195Balance-December
      31, 2008
                    
                    
                    
                    
                    
                    $
                    1,470,347Property
      acquisitions
                    
                    $
                    -Costs
      capitalized subsequent to acquisition
                    
                    
                    1,389Property
      reclassed to asset held for sale
                    
                    
                    (4,420
                    )Adjustments
      due to lease terminations
                    
                    
                    (8,579
                    )Writedowns
      to reflect asset impairment
                    
                    
                    (13,410
                    )Property
      divestitures
                    
                    
                    (20,234
                    )$
                    1,425,093Reconciliation
      of accumulated depreciation:Balance-December
      31, 2006
                    
                    
                    
                    
                    
                    $
                    25,881Additions
      during the year:Depreciation
      on property
                    
                    $
                    29,994Balance-December
      31, 2007
                    
                    
                    
                    
                    
                    $
                    55,875Additions
      during the year:Depreciation
      on property
                    
                    $
                    33,419Balance-December
      31, 2008
                    
                    
                    
                    
                    
                    $
                    89,294Additions
      during the year:Depreciation
      on property
                    
                    $
                    32,991Deductions
      during the year:Property
      reclassed to asset held for sale
                    
                    
                    (245
                    )Accumulated
      depreciation on divested property
                    
                    
                    (1,682
                    )Balance-December
      31, 2009
                    
                    
                    
                    
                    
                    $
                    120,358
 89
 CapLease,
Inc. and Subsidiaries
 Schedule
of Loans Held for Investment
 
 December
31, 2009
 (amounts
in thousands)
 
 Schedule
IV


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
              InterestLong-Term Mortgage LoansAutozone,
      Inc.
            
            Douglas
      and Valdosta, GA
            
            
            6.50
            %
            Nov
      2022
            
            Principal
      and Interest are payable monthly at a level amount, over the life to
      maturity
            
            
            N/A
            
            
            $
            1,739
            
            
            $
            1,739
            
            
            $
            -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
            
            
            
            3,310
            
            
            
            3,310
            
            
            
            -Bank
      of America, N.A.
            
            Glenview,
      IL
            
            
            6.34
            %
            Dec
      2028
            
            Principal
      and Interest are payable monthly at a varying amount, over the life to
      maturity
            
            
            N/A
            
            
            
            4,273
            
            
            
            4,273
            
            
            
            -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
            
            
            
            17,062
            
            
            
            17,062
            
            
            
            -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
            
            
            
            1,549
            
            
            
            1,510
            
            
            
            -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
            
            
            
            2,099
            
            
            
            2,149
            
            
            
            -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
            
            
            
            2,143
            
            
            
            2,111
            
            
            
            -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
            
            
            
            1,287
            
            
            
            1,287
            
            
            
            -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
            
            
            
            2,186
            
            
            
            2,312
            
            
            
            -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
            
            
            
            1,143
            
            
            
            1,228
            
            
            
            -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
            
            
            
            1,415
            
            
            
            1,387
            
            
            
            -CVS
      Corporation
            
            Evansville,
      IN
            
            
            6.22
            %
            Jan
      2033
            
            Principal
      and Interest are payable monthly at a level amount, over the life to
      maturity
            
            
            N/A
            
            
            
            3,213
            
            
            
            3,213
            
            
            
            -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
            
            
            
            1,585
            
            
            
            1,735
            
            
            
            -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
            
            
            
            1,848
            
            
            
            2,041
            
            
            
            -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
            
            
            
            2,114
            
            
            
            2,313
            
            
            
            -CVS
      Corporation
            
            Oak
      Ridge, NC
            
            
            6.99
            %
            Aug
      2024
            
            Principal
      and Interest are payable monthly at a varying amount, over the life to
      maturity
            
            
            N/A
            
            
            
            2,865
            
            
            
            2,865
            
            
            
            -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
            
            
            
            1,273
            
            
            
            1,273
            
            
            
            -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
            
            
            
            2,434
            
            
            
            2,434
            
            
            
            -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
            
            
            
            4,066
            
            
            
            4,066
            
            
            
            -Home
      Depot USA, Inc.
            
            Chelsea,
      MA
            
            
            5.36
            %
            Jan
      2031
            
            Principal
      and Interest are payable monthly at a varying amount, over the life to
      maturity
            
            
            N/A
            
            
            
            7,964
            
            
            
            7,964
            
            
            
            -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
            
            
            
            8,322
            
            
            
            8,322
            
            
            
            -Kohls
      Corporation
            
            Chicago,
      IL
            
            
            6.69
            %
            May
      2030
            
            Principal
      and Interest are payable monthly at a varying amount, over the life to
      maturity
            
            
            N/A
            
            
            
            45,862
            
            
            
            45,862
            
            
            
            -Koninklijke
      Ahold, N.V.
            
            Bensalem,
      PA
            
            
            7.24
            %
            May
      2020
            
            Principal
      and Interest are payable monthly at a varying amount, over the life to
      maturity
            
            
            N/A
            
            
            
            2,680
            
            
            
            2,723
            
            
            
            -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
            
            
            
            6,210
            
            
            
            6,193
            
            
            
            -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
            
            
            
            6,102
            
            
            
            6,098
            
            
            
            -Koninklijke
      Ahold, N.V.
            
            Upper
      Darby Township, PA
            
            
            7.29
            %
            Apr
      2024
            
            Principal
      and Interest are payable monthly at a varying amount, over the life to
      maturity
            
            
            N/A
            
            
            
            5,968
            
            
            
            5,739
            
            
            
            -


90


CapLease,
Inc. and Subsidiaries
 Schedule
of Loans Held for Investment
 
 December
31, 2009
 (amounts
in thousands)
 
 Schedule
IV




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
              InterestLowes Companies,
      Inc.
            
            Matamoras,
      PA
            
            
            6.61
            %
            May
      2030
            
            Principal
      and Interest are payable monthly at a varying amount, over the life to
      maturity
            
            
            N/A
            
            
            
            6,984
            
            
            
            6,984
            
            
            
            -Lowes
      Companies, Inc.
            
            Framingham,
      MA
            
            
            0.87
            %
            Sep
      2031
            
            Principal
      and Interest are payable monthly at a level amount, over the life to
      maturity
            
            
            N/A
            
            
            
            5,564
            
            
            
            1,399
            
            
            
            -National
      City Bank
            
            Chicago,
      IL
            
            
            5.89
            %
            Dec
      2024
            
            Principal
      and Interest are payable monthly at a varying amount, over the life to
      maturity
            
            
            N/A
            
            
            
            2,800
            
            
            
            2,864
            
            
            
            -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
            
            
            
            6,089
            
            
            
            6,539
            
            
            
            -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
            
            
            
            804
            
            
            
            818
            
            
            
            -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
            
            
            
            19,399
            
            
            
            20,017
            
            
            
            -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
            
            
            
            4,257
            
            
            
            4,257
            
            
            
            -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
            
            
            
            3,427
            
            
            
            3,427
            
            
            
            -Walgreen
      Co.
            
            Rosemead,
      CA
            
            
            6.26
            %
            Dec
      2029
            
            Principal
      and Interest are payable monthly at a level amount, over the life to
      maturity
            
            
            N/A
            
            
            
            4,926
            
            
            
            4,926
            
            
            
            -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
            
            
            
            3,208
            
            
            
            3,205
            
            
            
            -198,170
            
            
            
            195,645
            
            
            
            -Corporate
      Credit NotesAlbertsons,
      LLC
            
            Los
      Angeles, CA
            
            
            6.50
            %
            Sep
      2013
            
            Principal
      and Interest are payable monthly at a varying amount, over the life to
      maturity
            
            
            N/A
            
            
            
            201
            
            
            
            190
            
            
            
            -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
            
            
            
            225
            
            
            
            223
            
            
            
            -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
            
            
            
            792
            
            
            
            774
            
            
            
            -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
            
            
            
            274
            
            
            
            268
            
            
            
            -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
            
            
            
            387
            
            
            
            381
            
            
            
            -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
            
            
            
            302
            
            
            
            296
            
            
            
            -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
            
            
            
            225
            
            
            
            221
            
            
            
            -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
            
            
            
            176
            
            
            
            174
            
            
            
            -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
            
            
            
            164
            
            
            
            160
            
            
            
            -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
            
            
            
            199
            
            
            
            196
            
            
            
            -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
            
            
            
            86
            
            
            
            86
            
            
            
            -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
            
            
            
            229
            
            
            
            226
            
            
            
            -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
            
            
            
            769
            
            
            
            764
            
            
            
            -FedEx
      Ground Package System, Inc.
            
            McCook,
      IL
            
            
            5.89
            %
            Feb
      2015
            
            Principal
      and Interest are payable monthly at a varying amount, over the life to
      maturity
            
            
            N/A
            
            
            
            1,619
            
            
            
            1,607
            
            
            
            -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
            
            
            
            17,086
            
            
            
            17,086
            
            
            
            -




91


CapLease,
Inc. and Subsidiaries
 Schedule
of Loans Held for Investment
 
 December
31, 2009
 (amounts
in thousands)
 
 Schedule
IV
 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
                                                                  InterestLowes
      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
                                                                
                                                                
                                                                
                                                                758
                                                                
                                                                
                                                                
                                                                748
                                                                
                                                                
                                                                
                                                                -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
                                                                
                                                                
                                                                
                                                                260
                                                                
                                                                
                                                                
                                                                257
                                                                
                                                                
                                                                
                                                                -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
                                                                
                                                                
                                                                
                                                                186
                                                                
                                                                
                                                                
                                                                186
                                                                
                                                                
                                                                
                                                                -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
                                                                
                                                                
                                                                
                                                                84
                                                                
                                                                
                                                                
                                                                84
                                                                
                                                                
                                                                
                                                                -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
                                                                
                                                                
                                                                
                                                                79
                                                                
                                                                
                                                                
                                                                78
                                                                
                                                                
                                                                
                                                                -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
                                                                
                                                                
                                                                
                                                                157
                                                                
                                                                
                                                                
                                                                153
                                                                
                                                                
                                                                
                                                                -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
                                                                
                                                                
                                                                
                                                                225
                                                                
                                                                
                                                                
                                                                224
                                                                
                                                                
                                                                
                                                                -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
                                                                
                                                                
                                                                
                                                                395
                                                                
                                                                
                                                                
                                                                382
                                                                
                                                                
                                                                
                                                                -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
                                                                
                                                                
                                                                
                                                                271
                                                                
                                                                
                                                                
                                                                268
                                                                
                                                                
                                                                
                                                                -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
                                                                
                                                                
                                                                
                                                                479
                                                                
                                                                
                                                                
                                                                479
                                                                
                                                                
                                                                
                                                                -25,628
                                                                
                                                                
                                                                
                                                                25,511
                                                                
                                                                
                                                                
                                                                -Mezzanine
      and Other InvestmentsWest
      End Mortgage Finance Fund I L.P.
                                                                
                                                                Various
                                                                
                                                                
                                                                10.00
                                                                %
                                                                Delinquent
                                                                
                                                                Principal
      and Interest are payable monthly at a varying amount, over the life to
      maturity
                                                                
                                                                
                                                                N/A
                                                                
                                                                
                                                                
                                                                1,444
                                                                
                                                                
                                                                
                                                                1,000
                                                                
                                                                
                                                                
                                                                1,4441,444
                                                                
                                                                
                                                                
                                                                1,000
                                                                
                                                                
                                                                
                                                                1,444Provision
      for valuation loss
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                (500
                                                                )Total
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                $
                                                                225,242
                                                                
                                                                
                                                                $
                                                                221,656
                                                                
                                                                
                                                                $
                                                                1,444
 
 (1) The
aggregate cost for federal income tax purposes is
$222,600
 92
 CapLease, Inc. and Subsidiaries
 Schedule
of Loans Held for Investment
 December
31, 2009
 (amounts
in thousands)
 Schedule
IV—(Continued)
 
 Balance-December
      31, 2006
                    
                    
                    
                    
                    $
                    274,085Additions
      during the year:New
      loan investments
                    
                    $
                    9,107Deductions
      during the year:Principal
      received
                    
                    
                    (12,961
                    )Amortization
      of unearned discounts and premiums
                    
                    
                    (88
                    )Balance-December
      31, 2007
                    
                    
                    
                    
                    
                    $
                    270,143Additions
      during the year:New
      loan investmentsDeductions
      during the year:Securities
      reclassified to loan investments
                    
                    $
                    24,453Principal
      received
                    
                    
                    (6,863
                    )Principal
      written-off as uncollectible
                    
                    
                    (498
                    )Allowance
      for loan losses
                    
                    
                    (500
                    )Amortization
      of unearned discounts and premiums
                    
                    
                    (172
                    )Balance-December
      31, 2008
                    
                    
                    
                    
                    
                    $
                    286,563Additions
      during the year:New
      loan investments
                    
                    $
                    790Deductions
      during the year:Loans
      reclassified to available for sale
                    
                    
                    (25,995
                    )Principal
      received
                    
                    
                    (15,458
                    )Allowance
      for loan losses
                    
                    
                    (444
                    )Amortization
      of unearned discounts and premiums
                    
                    
                    (103
                    )Loans
      sold
                    
                    
                    (23,697
                    )Balance-December
      31, 2009
                    
                    
                    
                    
                    
                    $
                    221,656


93




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




None.




Item
9A.        Controls and
Procedures.




Evaluation
of Disclosure Controls and Procedures




We
maintain disclosure controls and procedures (as defined under Rule 13a-15(e)
under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that
are designed to ensure that information required to be disclosed in our Exchange
Act reports is recorded, processed, summarized and reported within the time
periods specified in the SEC’s rules and forms, and that such information is
accumulated and communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure.




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




Changes
in Internal Controls




There has
been no change in our internal control over financial reporting during the
quarter ended December 31, 2009, that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.




Management’s
Report on Internal Control over Financial Reporting




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




Item
9B.        Other
Information.




None.


94


PART
III.




Item
10.       Directors, Executive Officers and
Corporate Governance.




The
information required by Item 10 is incorporated by reference herein to the
information contained in our definitive proxy statement related to our 2010
annual meeting of stockholders.




Item
11.       Executive
Compensation.




The
information required by Item 11 is incorporated by reference herein to the
information contained in our definitive proxy statement related to our 2010
annual meeting of stockholders.




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




The
information required by Item 12 is incorporated by reference herein to the
information contained in our definitive proxy statement related to our 2010
annual meeting of stockholders.




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




The
information required by Item 13 is incorporated by reference herein to the
information contained in our definitive proxy statement related to our 2010
annual meeting of stockholders.




Item
14.       Principal Accounting Fees and
Services.




The
information required by Item 14 is incorporated by reference herein to the
information contained in our definitive proxy statement related to our 2010
annual meeting of stockholders.


95


PART
IV.




Item
15.       Exhibits and Financial Statement
Schedules.




(a)
and (c)




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




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


96


(b)
Exhibits




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




Exhibit
                          No.
                        
                        Description3.1(1)
                        
                        Articles
      of Amendment and Restatement of the registrant3.2(2)
                        
                        Articles
      of Amendment to Articles of Incorporation of the
  registrant3.3(3)
                        
                        Articles
      Supplementary Establishing the Rights and Preferences of the 8.125% Series
      A Cumulative Redeemable Preferred Stock of the
  registrant3.4(1)
                        
                        Amended
      and Restated Bylaws of the registrant3.5(2)
                        
                        First
      Amendment to Amended and Restated Bylaws of the
  registrant4.1(1)
                        
                        Form
      of Certificate evidencing the Common Stock, par value $0.01 per share, of
      the registrant4.2(4)
                        
                        Junior
      Subordinated Indenture between Caplease, LP and JPMorgan Chase Bank,
      National Association, as trustee, dated December 13,
  20054.3(4)
                        
                        Amended
      and Restated Trust Agreement among Caplease, LP, JPMorgan Chase Bank,
      National Association, Chase Bank USA, National Association and the
      Administrative Trustees named therein, dated December 13,
    20054.4(5)
                        
                        Indenture
      among the registrant, Caplease, LP, Caplease Debt Funding, LP, Caplease
      Services Corp., Caplease Credit LLC, and Deutsche Bank Trust Company
      Americas, as trustee (including form of 7.50% Convertible Senior Note due
      2027) dated as of October 9, 20074.5(6)
                        
                        First
      Amended and Restated Limited Partnership Agreement of Caplease, LP, dated
      June 13, 200610.1(7)
                        
                        Promissory
      Note (Note A), dated October 28, 2004, of CLF 1000 Milwaukee Avenue LLC in
      favor of Wachovia Bank, National Association10.2(8)
                        
                        Promissory
      Note, dated December 9, 2004, of the registrant in favor of Wachovia Bank,
      National Association10.3(10)
                        
                        Promissory
      Note, dated February 25, 2005, of CLF Parsippany LLC in favor of Wachovia
      Bank, National Association10.4(12)
                        
                        Indenture,
      dated as of March 10, 2005, by and among Caplease CDO 2005-1, Ltd.,
      Caplease CDO 2005-1 Corp., Caplease Investment Management, LLC and LaSalle
      Bank National Association10.5(13)
                        
                        Sales
      Agreement, dated as of August 15, 2005, between Cantor Fitzgerald &
      Co. and the registrant10.6(22)
                        
                        Sales
      Agreement, dated as of October 9, 2009, between Brinson Patrick
      Securities Corporation and the registrant10.7(14)
                        
                        Promissory
      Note, dated August 16, 2005, of CLF FBI Birmingham LLC in favor of
      Wachovia Bank, National Association10.8(14)
                        
                        Promissory
      Note, dated August 16, 2005, of CLF DEA Birmingham LLC in favor of
      Wachovia Bank, National Association10.9(14)
                        
                        Promissory
      Note, dated August 16, 2005, of CLF SSA Austin, LP in favor of Wachovia
      Bank, National Association10.10(14)
                        
                        Trust
      Indenture dated as of February 1, 2001 between Unified Government of
      Wyandotte County, Kansas City, Kansas, as issuer, and Security Bank of
      Kansas City, as trustee10.11(14)
                        
                        Lease
      dated as of February 1, 2001 between Unified Government of Wyandotte
      County, Kansas City, Kansas and Kansas EPA Laboratory,
  LLC10.13(14)
                        
                        Promissory
      Note, dated as of September 9, 2005, of Caplease Credit LLC in favor of
      Wachovia Bank, National Association10.14(14)
                        
                        Promissory
      Note, dated as of September 28, 2005, of CLF Sylvan Way LLC in favor of
      Wachovia Bank, National Association10.15(4)
                        
                        Parent
      Guarantee Agreement between the registrant and JPMorgan Chase Bank,
      National Association, as guarantee trustee, dated December 13,
      200510.16(15)
                        
                        Promissory
      Note, dated as of December 21, 2005, of CLF McCullough Drive Charlotte LLC
      and CLF Electric Road Roanoke LLC in favor of LaSalle Bank National
      Association10.17(17)
                        
                        Membership
      Interests Purchase Agreement dated as of March 14, 2007 between EntreCap
      Financial LLC and Caplease,
LP


97





Exhibit
                          No.
                        
                        Description10.18(5)
                        
                        Registration
      Rights Agreement, dated as of October 9, 2007, between the registrant and
      Deutsche Bank Securities Inc., as representative of the several initial
      purchasers of the convertible senior notes due 202710.19(18)
                        
                        Loan
      Agreement, dated as of December 17, 2007, between CapLease 2007-STL
      LLC, as borrower, and KBC Bank, N.V., acting through its New York Branch,
      as lender and administrative agent10.20(19)
                        
                        Credit
      Agreement, dated as of April 29, 2008, among Caplease Debt Funding,
      LP, as the borrower, PREFCO II Limited Partnership, as a guarantor, the
      registrant, as a guarantor, Caplease, LP, as a guarantor, Caplease
      Services Corp., as a guarantor, and Wachovia Bank, National Association,
      as administrative agent and initial lender*10.21(9)
                        
                        Amended
      and Restated 2004 Stock Incentive Plan of the registrant (Effective March
      10, 2009)*10.22(21)
                        
                        Form
      of Non-Employee Director Restricted Stock Award
  Agreement*10.23(21)
                        
                        Form
      of Executive Officer Restricted Stock Agreement*10.24(11)
                        
                        Form
      of Employment Agreement between each of Paul H. McDowell, William R.
      Pollert, Shawn P. Seale and Robert C. Blanz, and the
      registrant*10.25(20)
                        
                        Amendment
      No. 1 to the Employment Agreement dated as of March 24, 2004 between
      Robert C. Blanz and the registrant, dated February 13,
  2007*10.26(16)
                        
                        Employment
      Agreement, dated as of February 13, 2007, between Paul Hughes and the
      registrant*10.26
                        
                        Summary
      of Independent Director Compensation for Fiscal 201012.1
                        
                        Computation
      of Ratio of Earnings to Fixed Charges and Earnings to Combined Fixed
      Charges and Preferred Stock Dividends21.1
                        
                        List
      of Subsidiaries23.1
                        
                        Consent
      of McGladrey & Pullen LLP31.1
                        
                        Certification
      of the Chief Executive Officer required by Rule 13a-14(a)/15d-14(a) of the
      Securities Exchange Act of 1934, as amended as adopted pursuant to Section
      302 of the Sarbanes-Oxley Act of 200231.2
                        
                        Certification
      of the Chief Financial Officer required by Rule 13a-14(a)/15d-14(a) of the
      Securities Exchange Act of 1934, as amended as adopted pursuant to Section
      302 of the Sarbanes-Oxley Act of 200232.1
                        
                        Certification
      of the Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of
  200232.2
                        
                        Certification
      of the Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of
  2002








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


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


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


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


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


(5)
            Incorporated
      by reference from the registrant’s Current Report on Form 8-K filed with
      the Securities and Exchange Commission on October 9,
  2007.


(6)
            Incorporated
      by reference from the registrant’s Registration Statement on Form S-3
      filed with the Securities and Exchange Commission on January 14, 2008
      (File No. 333-148649).


(7)
            Incorporated
      by reference from the registrant’s Current Report on Form 8-K filed with
      the Securities and Exchange Commission on November 3,
  2004.




98





Exhibit
                        No.
                      
                      Description




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


(9)
            Incorporated
      by reference from the registrant’s Definitive Proxy Statement filed with
      the Securities and Exchange Commission on April 17,
  2009.


(10)
            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.


(11)
            Incorporated
      by reference from the registrant’s Annual Report on Form 10-K filed with
      the Securities and Exchange Commission on March 30,
  2005.


(12)
            Incorporated
      by reference from the registrant’s Quarterly Report on Form 10-Q filed
      with the Securities and Exchange Commission on May 16,
    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 Quarterly Report on Form 10-Q filed
      with the Securities and Exchange Commission on November 14,
      2005.


(15)
            Incorporated
      by reference from the registrant’s Annual Report on Form 10-K filed with
      the Securities and Exchange Commission on March 16,
  2006.


(16)
            Incorporated
      by reference from the registrant’s Current Report on Form 8-K filed with
      the Securities and Exchange Commission on February 20,
    2007.


(17)
            Incorporated
      by reference from the registrant’s Quarterly Report on Form 10-Q filed
      with the Securities and Exchange Commission on May 10,
    2007.


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


(19)
            Incorporated
      by reference from the registrant’s Current Report on Form 8-K filed with
      the Securities and Exchange Commission on May 1,
  2008.


(20)
            Incorporated
      by reference from the registrant’s Annual Report on Form 10-K filed with
      the Securities and Exchange Commission on March 4,
  2008.


(21)
            Incorporated
      by reference from the registrant’s Current Report on Form 8-K filed
      with the Securities and Exchange Commission on June 16,
      2009.


(22)
            Incorporated
      by reference from the registrant’s Current Report on Form 8-K filed
      with the Securities and Exchange Commission on October 9,
      2009.




99


PART
V.




SIGNATURES




Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.




CAPLEASE,
      INC.RegistrantDate:  March
      3, 2010
              
              /s/      Paul H.
      McDowellPaul
      H. McDowell
                Chairman
      of the Board and Chief Executive
Officer




Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated:




Signature
                      
                      Title
                      
                      Date/s/       Paul H.
      McDowell
                      
                      Chairman
      of the Board and Chief Executive
                      
                      March
      3, 2010Paul
      H. McDowell
                      
                      Officer
                        (Principal
      Executive Officer)/s/       William R.
      Pollert
                      
                      President
      and Director
                      
                      March
      3, 2010William
      R. Pollert/s/       Shawn P.
      Seale
                      
                      Senior
      Vice President, Chief Financial
                      
                      March
      3, 2010Shawn
      P. Seale
                      
                      Officer
      and Treasurer
                        (Principal
      Financial Officer)/s/       John E.
      Warch
                      
                      Senior
      Vice President and Chief
                      
                      March
      3, 2010John
      E. Warch
                      
                      Accounting
      Officer
                        (Principal
      Accounting Officer)/s/       Michael E.
      Gagliardi
                      
                      Director
                      
                      March
      3, 2010Michael
      E. Gagliardi/s/       Stanley
      Kreitman
                      
                      Director
                      
                      March
      3, 2010Stanley
      Kreitman/s/       Jeffrey F.
      Rogatz
                      
                      Director
                      
                      March
      3, 2010Jeffrey
      F. Rogatz/s/       Howard A.
      Silver
                      
                      Director
                      
                      March
      3, 2010Howard
      A. Silver


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