UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C.  20549
  ______________
   FORM
10-Q
  ______________
   (Mark
One)
  x
            QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
  For
the quarterly period ended June 30, 2008
  OR
  [  ]
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
  Commission
File Number 1-13237
  ______________
   CENTERLINE
HOLDING COMPANY
 (Exact
name of Registrant as specified in its Trust Agreement)
 ______________
 
 Delaware
            
            13-3949418(State
      or other jurisdiction of incorporation or organization)
            
            (I.R.S.
      Employer Identification No.)625
      Madison Avenue, New York, New York
            
            10022(Address
      of principal executive offices)
            
            (Zip
      Code)
 
 (212)
317-5700
 Registrant’s
telephone number, including area code
 
 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 is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company (as
defined in Rule 12b-2 of the Exchange Act):  See the definitions of
“large accelerated filer,” “accelerated filer” and “smaller reporting company”
in Rule 12b-2 of the Exchange.
 
 Large
      accelerated filer x
              
              Accelerated
      filer [  ]Non-
      accelerated filer [  ] (Do not check if a smaller reporting
      company)
              
              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
July 31, 2008, there were 51,172,429 outstanding shares of the registrant’s
shares of beneficial interest.
 
 
 
  Table
of Contents
 
 CENTERLINE
HOLDING COMPANY
 
 FORM
10-Q
 
 
 PART
      I – Financial Information
                PageItem
      1
                Financial
      Statements (unaudited)Condensed
      Consolidated Balance Sheets
                3Condensed
      Consolidated Statements of Operations
                4Condensed
      Consolidated Statements of Cash Flows
                5Item
      2
                Management’s
      Discussion and Analysis of Financial Condition andResults
      of Operations
                43Item
      3
                Quantitative
      and Qualitative Disclosures about Market Risk
                73Item
      4
                Controls
      and Procedures
                74PART
      II – Other InformationItem
      1
                Legal
      Proceedings
                75Item
      1A
                Risk
      Factors
                76Item
      2
                Unregistered
      Sales of Equity Securities and Use of Proceeds
                77Item
      3
                Defaults
      Upon Senior Securities
                77Item
      4
                Submission
      of Matters to a Vote of Security Holders
                77Item
      5
                Other
      Information
                78Item
      6
                Exhibits
                78SIGNATURES
                
                79
 - 2
-
  PART
1.  FINANCIAL INFORMATION
 Item
1.  Financial Statements
 
 CENTERLINE
HOLDING COMPANY
 CONDENSED
CONSOLIDATED BALANCE SHEETS
 (in
thousands)
 
 June
      30,
              2008
            
            December
      31,
              2007(Unaudited)ASSETSCash
      and cash equivalents
            $
            113,141
            
            $
            137,111Restricted
      cash
            
            34,961
            
            
            32,548Investments:Available-for-sale
      (Note 2)
            
            718,626
            
            
            938,378Equity
      method (Note 3)
            
            39,174
            
            
            38,761Other
      (Note 4)
            
            136,427
            
            
            182,277Investments
      in and loans to affiliates (Note 17)
            
            99,080
            
            
            107,175Goodwill
      and intangible assets, net (Note 5)
            
            500,886
            
            
            504,273Deferred
      costs and other assets, net (Note 6)
            
            125,765
            
            
            141,026Consolidated
      partnerships (Note 18):Investments:Available-for-sale
            
            1,249,766
            
            
            1,782,543Equity
      method
            
            4,304,959
            
            
            4,178,206Other
            
            397,702
            
            
            414,377Land,
      buildings and improvements, net
            
            711,632
            
            
            661,380Other
      assets
            
            386,364
            
            
            371,735Total
      assets
            $
            8,818,483
            
            $
            9,489,790LIABILITIES
      AND EQUITYLiabilities:Notes
      payable (Note 7)
            $
            410,369
            
            $
            505,888Financing
      arrangements and secured financing (Note 8)
            
            479,591
            
            
            562,502Accounts
      payable, accrued expenses and other liabilities (Note 9)
            
            233,551
            
            
            312,838Preferred
      shares of subsidiary (subject to mandatory repurchase)
            
            273,500
            
            
            273,500Consolidated
      partnerships (Note 18):Financing
      arrangements
            
            1,123,095
            
            
            1,122,906Notes
      payable
            
            676,555
            
            
            458,367Repurchase
      agreements
            
            94,891
            
            
            416,059Due
      to property partnerships
            
            857,343
            
            
            970,602Other
      liabilities
            
            194,237
            
            
            193,020Total
      liabilities
            
            4,343,132
            
            
            4,815,682Minority
      interests in consolidated subsidiaries, net of tax (Note
    12)
            
            159,593
            
            
            176,716Preferred
      shares of subsidiary (not subject to mandatory repurchase)
            
            104,000
            
            
            104,000Redeemable
      securities (Note 13)
            
            324,623
            
            
            69,888Limited
      partners’ interests in consolidated partnerships (Note 18)
            
            3,840,342
            
            
            3,782,912Commitments
      and contingencies (Note 20)Shareholders’
      equity:4.4%
      Convertible CRA preferred shares; no par value; no shares issued andoutstanding
      in 2008 and 1,060 shares issued and outstanding 2007
            
            --
            
            
            51,281Convertible
      CRA preferred shares; no par value; 519 shares issued andoutstanding
      in 2008 and 5,306 shares issued and outstanding in 2007
            
            5,886
            
            
            66,879Special
      preferred voting shares; no par value; 14,131 shares issued andoutstanding
      in 2008 and 14,298 shares issued and outstanding in 2007
            
            141
            
            
            143Common
      shares; no par value; 160,000 shares authorized; 54,678 issued and51,171
      outstanding in 2008 and 53,943 issued and 50,567 outstanding in
      2007
            
            541,434
            
            
            592,505Treasury
      shares of beneficial interest – common, at cost; 3,507 shares in 2008 and3,376
      shares in 2007
            
            (64,961
            )
            
            (64,312
            )Accumulated
      other comprehensive loss (Note 14)
            
            (435,707
            )
            
            (105,904
            )Total
      shareholders’ equity
            
            46,793
            
            
            540,592Total
      liabilities and equity
            $
            8,818,483
            
            $
            9,489,790
   
 - 3
-
  CENTERLINE
HOLDING COMPANY
 CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
 (in
thousands, except per share amounts)
 (Unaudited)
 
 
 Three
      Months Ended
              June
      30,
            
            Six
      Months Ended
              June
      30,2008
            
            2007
            
            2008
            
            2007Revenues:Interest
      income
            
            $
            27,176
            
            $
            53,240
            
            $
            53,292
            
            $
            102,860Fee
      income
            
            
            14,874
            
            
            18,225
            
            
            32,034
            
            
            34,609Other
            
            
            3,663
            
            
            2,842
            
            
            5,807
            
            
            5,255Consolidated
      partnerships (Note 18):Interest
      income
            
            
            64,260
            
            
            45,423
            
            
            134,396
            
            
            80,323Rental
      income
            
            
            17,267
            
            
            13,277
            
            
            34,256
            
            
            25,428Other
            
            
            2,534
            
            
            2,057
            
            
            4,176
            
            
            3,754Total
      revenues
            
            
            129,774
            
            
            135,064
            
            
            263,961
            
            
            252,229Expenses:Interest
            
            
            6,205
            
            
            29,241
            
            
            33,354
            
            
            57,743Interest
      – consolidated partnerships (Note 18)
            
            
            32,913
            
            
            24,002
            
            
            67,805
            
            
            46,314Interest
      – distributions to preferred shareholders of subsidiary
            
            
            4,725
            
            
            4,725
            
            
            9,449
            
            
            9,449General
      and administrative (Note 15)
            
            
            43,225
            
            
            42,038
            
            
            87,127
            
            
            98,561Depreciation
      and amortization
            
            
            11,446
            
            
            10,594
            
            
            23,347
            
            
            21,692Impairment
      of mortgage revenue bonds and other assets
            
            
            13,417
            
            
            2,938
            
            
            21,440
            
            
            19,385Other
      expenses of consolidated partnerships (Note 18)
            
            
            41,381
            
            
            29,529
            
            
            73,239
            
            
            55,165Total
      expenses
            
            
            153,312
            
            
            143,067
            
            
            315,761
            
            
            308,309Loss
      before other income
            
            
            (23,538
            )
            
            (8,003
            )
            
            (51,800
            )
            
            (56,080
            )Other
      (loss) income:Equity
      and other (loss) income
            
            
            (484
            )
            
            (154
            )
            
            (2,379
            )
            
            (404
            )Gain
      from repayment or sale of investments
            
            
            5,965
            
            
            1,209
            
            
            795
            
            
            3,588Loss
      from investments held by consolidated partnerships (Note
    18)
            
            
            (72,521
            )
            
            (82,896
            )
            
            (167,322
            )
            
            (140,311
            )Loss
      before allocations
            
            
            (90,578
            )
            
            (89,844
            )
            
            (220,706
            )
            
            (193,207
            )(Income)
      loss allocations:Preferred
      shares of subsidiary
            
            
            (1,557
            )
            
            (1,557
            )
            
            (3,113
            )
            
            (3,113
            )Minority
      interests in subsidiaries, net of tax (Note 12)
            
            
            3,013
            
            
            (1,708
            )
            
            13,170
            
            
            4,409Limited
      partners of consolidated partnerships, net (Note 18)
            
            
            86,748
            
            
            97,776
            
            
            187,685
            
            
            178,887(Loss)
      income before income taxes
            
            
            (2,374
            )
            
            4,667
            
            
            (22,964
            )
            
            (13,024
            )Income
      tax benefit (provision)
            
            
            45
            
            
            313
            
            
            (1,004
            )
            
            3,259Net
      (loss) income
            
            
            (2,329
            )
            
            4,980
            
            
            (23,968
            )
            
            (9,765
            )Dividends
      for preferred and redeemable securities
            
            
            (5,448
            )
            
            (1,188
            )
            
            (10,467
            )
            
            (2,376
            )Effect
      of redeemable share conversions
            
            
            (2,100
            )
            
            --
            
            
            (14,020
            )
            
            --Net
      (loss)  income for earnings per share
    calculations
            
            $
            (9,877
            )
            $
            3,792
            
            $
            (48,455
            )
            $
            (12,141
            )Net
      (loss) income per share (Note 16):Basic
            
            $
            (0.19
            )
            $
            0.07
            
            $
            (0.93
            )
            $
            (0.21
            )Diluted
            
            $
            (0.19
            )
            $
            0.06
            
            $
            (0.93
            )
            $
            (0.21
            )Weighted
      average shares outstanding (Note 16):Basic
            
            
            51,725
            
            
            57,219
            
            
            51,857
            
            
            57,586Diluted
            
            
            51,725
            
            
            58,393
            
            
            51,857
            
            
            57,586Dividends
      declared per common share
            
            $
            0.075
            
            $
            0.42
            
            $
            0.225
            
            $
            0.84
 - 4
-
  CENTERLINE
HOLDING COMPANY
 CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
 (in
thousands)
 (Unaudited)
 
 Six
      Months Ended
              June
      30,2008
            
            2007CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      loss
            
            $
            (23,968
            )
            $
            (9,765
            )Reconciling
      items:Gain
      from repayment or sale of investments
            
            
            (795
            )
            
            (3,588
            )Impairment
      of mortgage revenue bonds and other assets
            
            
            21,440
            
            
            19,385Depreciation
      and amortization
            
            
            23,347
            
            
            21,692Equity
      in unconsolidated entities
            
            
            2,379
            
            
            404Income
      allocated to preferred shares of subsidiary
            
            
            3,113
            
            
            3,113Loss
      allocated to minority interests in subsidiaries
            
            
            (13,170
            )
            
            (4,409
            )Non-cash
      compensation expense
            
            
            7,371
            
            
            16,257Other
      non-cash (income) expense
            
            
            (4,306
            )
            
            3,171Deferred
      taxes
            
            
            (356
            )
            
            290Reserves
      for bad debts
            
            
            324
            
            
            5,405Changes
      in fair value of interest rate derivatives
            
            
            (6,530
            )
            
            (898
            )Changes
      in operating assets and liabilities:Mortgage
      loans held for sale
            
            
            51,325
            
            
            24,468Deferred
      revenues
            
            
            (17,680
            )
            
            11,183Receivables
            
            
            10,502
            
            
            33,159Other
      assets
            
            
            5,710
            
            
            (4,668
            )Accounts
      payable, accrued expenses and other liabilities
            
            
            (55,077
            )
            
            (8,745
            )Net
      cash flow from operating activities
            
            
            3,629
            
            
            108,250CASH
      FLOWS FROM INVESTING ACTIVITIES:Sale
      of available-for-sale securities
            
            
            34,272
            
            
            12,211Purchases
      of available-for-sale securities
            
            
            (33,760
            )
            
            (321,576
            )Acquisition
      of mortgage loans held for investment
            
            
            (29,828
            )
            
            (115,280
            )Repayments
      of mortgage loans held for investment
            
            
            32,872
            
            
            104,430Advances
      to partnerships
            
            
            (37,999
            )
            
            (77,413
            )Collection
      of advances to partnerships
            
            
            42,722
            
            
            70,436Deferred
      investment acquisition costs
            
            
            (814
            )
            
            (950
            )(Increase)
      decrease in restricted cash, escrows and other cash
    collateral
            
            
            (15,702
            )
            
            1,356Return
      of capital from equity investees
            
            
            254
            
            
            --Acquisition
      of furniture, fixtures and leasehold improvements
            
            
            (1,826
            )
            
            --Acquisition
      of asset management contract
            
            
            (7,505
            )
            
            --Loan
      to AMAC
            
            
            (2,192
            )
            
            (42,600
            )Equity
      investments and other investing activities
            
            
            (62,912
            )
            
            (15,072
            )Net
      cash flow from investing activities
            
            
            (82,418
            )
            
            (384,458
            )
 - 5
-
 
 CENTERLINE
HOLDING COMPANY
 CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
 (in
thousands)
 (Unaudited)
 
 
 Six
      Months Ended
              June
      30,2008
            
            2007CASH
      FLOWS FROM FINANCING ACTIVITIES:Repayments
      of financing arrangements
            
            
            (14,275
            )
            
            (74,999
            )Proceeds
      from financing arrangements and secured financing
            
            
            62,757
            
            
            146,802Distributions
      to shareholders
            
            
            (12,434
            )
            
            (52,899
            )Distributions
      to preferred shareholders of subsidiary
            
            
            (3,113
            )
            
            (3,113
            )Distributions
      to minority interests in consolidated subsidiaries
            
            
            (13,390
            )
            
            (17,690
            )(Decrease)
      increase in notes payable
            
            
            (95,519
            )
            
            226,658Minority
      interest contribution
            
            
            1,900
            
            
            3,225Proceeds
      from 11.0% Preferred shares
            
            
            131,235
            
            
            --Proceeds
      from 11.0% Preferred shares rights offering
            
            
            4,365
            
            
            --Retirement
      of minority interests and special preferred voting shares
            
            
            --
            
            
            (2,803
            )Treasury
      stock purchases
            
            
            (4,365
            )
            
            (30,310
            )Deferred
      financing and equity offering costs
            
            
            (2,342
            )
            
            (13
            )Net
      cash flow from financing activities
            
            
            54,819
            
            
            194,858Net
      decrease in cash and cash equivalents
            
            
            (23,970
            )
            
            (81,350
            )Cash
      and cash equivalents at the beginning of the period
            
            
            137,111
            
            
            178,813Cash
      and cash equivalents at the end of the period
            
            $
            113,141
            
            $
            97,463Non-cash
      investing and financing activities:Recognized
      sale of re-securitized mortgage revenue bonds:Reductions
      in secured financing liability
            
            $
            (130,027
            )
            $
            --Reduction
      in mortgage revenue bonds
            
            $
            178,265
            
            $
            --Increase
      in Freddie Mac Series A certificates
            
            $
            (13,276
            )
            $
            --Increase
      in Freddie Mac Series B certificates
            
            $
            (6,410
            )
            $
            --Share
      grants issued
            
            $
            7,882
            
            $
            9,383Conversion
      of minority interests to common shares
            
            $
            2,977
            
            $
            --Treasury
      stock purchase via employee withholding
            
            $
            650
            
            $
            2,848
 - 6
-
 
 CENTERLINE
HOLDING COMPANY
 NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 
 
 NOTE
1 – Description of Business and Basis of Presentation
 
 A.   Description
of Business
 
 Centerline
Holding Company, together with its subsidiaries, is an alternative asset manager
with a core focus on real estate funds and financing with more than $14.2
billion of assets under management as of June 30, 2008.  We conduct
substantially all of our business through our subsidiaries, generally under the
designation Centerline Capital Group.  For ease of readership the term
“we” (as well as “us”, “our” or “the Company”) as used throughout this document
may mean a subsidiary or the business as a whole, while the term “parent trust”
refers only to Centerline Holding Company as a stand-alone entity.
 
 B.  Basis
of Presentation
 
 The
accompanying unaudited condensed consolidated financial statements have been
prepared on a basis consistent with generally accepted accounting principles in
the United States (“GAAP”) for interim financial information and pursuant to the
rules of the Securities and Exchange Commission (“SEC”).  In the
opinion of management, the condensed consolidated financial statements contain
all adjustments (consisting of only normal recurring adjustments) necessary to
present fairly the financial statements of interim periods.  Given
that some of our businesses have a higher volume of transactions in the second
and fourth quarterly periods, the operating results for interim periods may not
be indicative of the results for the full year.
 
 These
condensed consolidated financial statements should be read in conjunction with
the audited consolidated financial statements and notes thereto included in our
Form 10-K for the year ended December 31, 2007 (the “2007 Form 10-K”), which
contains a summary of our significant accounting policies.  With the
exception of the adoption of Financial Accounting Standards Board (“FASB”)
Statement No. 157, Fair Value
Measurement (“SFAS 157”) (see Note 10), and the application of the
two-class method of calculating earnings per share (“EPS”) (see Note 16), there
have been no material changes to these policies since December 31,
2007.  New accounting pronouncements pending adoption that could
impact future presentation or results are described below.
 
 We are
responsible for the condensed consolidated financial statements included in this
document.  The preparation of financial statements in conformity with
GAAP requires us to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements as well as the reported
amounts of revenues and expenses during the reporting period.  Actual
results could differ from those estimates.
 
 Certain
amounts from the prior year have been reclassified to conform to the 2008
presentation.
 
 C.  Accounting
Pronouncements to be Adopted
 
 In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements – an amendment of ARB No. 51(“SFAS
160”).  SFAS 160 requires that a noncontrolling interest (currently
displayed as minority interests in consolidated subsidiaries, preferred shares
of  subsidiary (not subject to mandatory repurchase) and limited
partners’ interests in consolidated subsidiaries) be reported as equity and the
amount of consolidated net income specifically attributable to the
noncontrolling interest be identified in the consolidated financial
statements.  It also calls for consistency in the manner of reporting
changes in the parent’s ownership interest and requires fair value measurement
of any noncontrolling equity investment retained in a
deconsolidation.  SFAS 160 is effective for us on January 1, 2009 and
most of its provisions will apply prospectively.  We are currently
evaluating the impact of adopting SFAS 160 on our consolidated financial
condition, results of operations and cash flows.
 
 In June
2008, the FASB issued FASB Staff Position (“FSP”) EITF 03-6-1, Determining Whether Instruments
Granted in Share-Based Payment Transactions are Participating
Securities.  Under FSP EITF 03-6-1, all outstanding unvested
share-based payment awards that contain rights to nonforfeitable dividends
participate in undistributed earnings with common
shareholders.  Because the awards are considered participating
securities, they would be included as a separate class in our calculation of EPS
(see Note 16).  FSP EITF 03-6-1 is effective for us on January 1,
2009.
 
 - 7
-
 CENTERLINE
HOLDING COMPANY
 NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 NOTE
2 – Available-for-Sale Investments
 
 The table
below provides the components of available-for-sale investments as of the dates
presented:
 
 (in
      thousands)
            
            June
      30,
              2008
            
            
            December
      31, 2007Freddie
      Mac Certificates:Series
      A-1
            
            $
            302,116
            
            
            $
            288,672Series
      B
            
            
            160,682
            
            
            
            153,468Mortgage
      revenue bonds
            
            
            186,232
            
            
            
            376,432Retained
      CMBS certificates
            
            
            33,152
            
            
            
            75,328CMBS
            
            
            11,139
            
            
            
            13,361Syndicated
      corporate debt
            
            
            23,066
            
            
            
            27,749Marketable
      securities
            
            
            2,239
            
            
            
            3,368Total
            
            $
            718,626
            
            
            $
            938,378
 
  A.  Freddie
Mac Certificates
 
 As more
fully discussed in our 2007 Form 10-K, we retained Series A-1 and Series B
Freddie Mac Certificates in connection with the December 2007 re-securitization
of the mortgage revenue bond portfolio with Federal Home Loan Mortgage
Corporation (“Freddie Mac”).  The Series A-1 Freddie Mac Certificates
are fixed rate securities, whereas the Series B Freddie Mac Certificates are
residual interests of the re-securitization trust.
 
 Series
A-1
 
 Information
with respect to the Series A-1 Certificates is as follows:
 
 (in
      thousands)
              
              June
      30,
                2008
              
              
              December
      31, 2007Fair
      value
              
              $
              377,500
              
              
              $
              377,500Less:
      eliminations (1)
              
              
              (75,384
              )
              
              
              (88,828
              )Consolidated
      fair value
              
              $
              302,116
              
              
              $
              288,672
  (1)A portion of the Series A-1 certificates related to re-securitized
      mortgage revenue bonds that were not reflected as
      sold.  Accordingly, that portion is eliminated in
      consolidation.
 The
change in the amounts eliminated in consolidation resulted from the recognition
of certain re-securitized mortgage revenue bonds that were recognized as sold in
2008 (see B. Mortgage Revenue
Bonds below).
 
 Series B
 
 Information
with respect to the Series B Certificates is as follows:
 
 - 8
-
 
 CENTERLINE
HOLDING COMPANY
 NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 
 (in
      thousands)
                  
                  June
      30,
                    2008
                  
                  
                  December
      31, 2007Face
      amount
                  
                  $
                  140,028
                  
                  
                  $
                  140,028Interest
      receivable
                  
                  
                  1,012
                  
                  
                  
                  --Gross
      unrealized gains
                  
                  
                  58,011
                  
                  
                  
                  72,873Subtotal/fair
      value
                  
                  
                  199,051
                  
                  
                  
                  212,901Less:
      eliminations (1)
                  
                  
                  (38,369
                  )
                  
                  
                  (59,433
                  )Consolidated
      fair value
                  
                  $
                  160,682
                  
                  
                  $
                  153,468
  (1)A portion of the Series B certificates related to re-securitized
      mortgage revenue bonds that were not reflected as
      sold.  Accordingly, that portion is eliminated in
      consolidation.
 The
change in the amounts eliminated in consolidation resulted from the recognition
of certain re-securitized mortgage revenue bonds that were recognized as sold in
2008 (see B. Mortgage Revenue
Bonds below).
  Key fair
value assumptions used in measuring the Series B Freddie Mac Certificates are
provided in the table below:
  June
      30,
                2008
              
              
              December
      31,
                2007Weighted
      average discount rate
              
              
              11.0
              %
              
              
              11.0
              %Constant
      prepayment rate
              
              
              90.0
              %
              
              
              90.0
              %Weighted
      average life
              
              
              11.2
              years
              
              
              11.6
              yearsConstant
      default rate
              
              
              2.0
              %
              
              
              2.0
              %
  
 We
account for the Series B Certificates under EITF 99-20, “Recognition of Interest Income and
Impairment on Purchased and Retained Beneficial Interests in Securitized
Financial Assets” (“EITF 99-20”). Under EITF 99-20, when significant
changes in estimated cash flows from those previously estimated occur and the
present value of the revised cash flows using the current expected yield is less
than the present value of the previously estimated cash flows, an
other-than-temporary impairment is deemed to have occurred. Accordingly, the
security is written down to fair value with the resulting charge being included
in income. In the second quarter of 2008, we revised certain estimates as to the
timing of cash flows inherent in the valuation of the Series B Certificates as
they relate to assumed credit defaults of the underlying mortgage revenue bonds.
This change in estimate lowered the fair value of the Series B Certificates and,
accordingly, we recognized an impairment charge of $7.7 million in our condensed
consolidated statement of operations.
 
 B.  Mortgage
Revenue Bonds
 
 Information
regarding our portfolio of mortgage revenue bonds is provided in the table
below:
 
 (in
      thousands)
            
            June
      30,
              2008
            
            
            December
      31,2007Amortized
      cost basis
            
            $
            613,277
            
            
            $
            774,594Gross
      unrealized gains
            
            
            964
            
            
            
            2,351Gross
      unrealized losses
            
            
            (3,439
            )
            
            
            (3,624
            )Subtotal/fair
      value
            
            
            610,802
            
            
            
            773,321Less:
      eliminations (1)
            
            
            (424,570
            )
            
            
            (396,889
            )Consolidated
      fair value
            
            $
            186,232
            
            
            $
            376,432(1)Certain bonds are recorded as liabilities on the balance sheets of
      consolidated partnerships and therefore eliminated in
      consolidation.
  
 - 9
-
 CENTERLINE
HOLDING COMPANY
 NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 
 During
2008, we securitized seven mortgage revenue bonds and accounted for the
securitization as a financing transaction (see Note 8).
 
 During
the six months ended June 30, 2008, we recognized $10.9 million of mortgage
revenue bond impairment charges ($4.1 million in the second quarter). Of the
amount recorded, $7.2 million represents an expected loss on the planned sale of
two bonds.  The remaining $3.7 million relates to one bond whose
impairment resulted from substandard performance at the underlying
property.
 
 For
mortgage revenue bonds in an unrealized loss position as of the dates presented,
the fair value and gross unrealized losses, aggregated by length of time that
individual bonds have been in a continuous unrealized loss position, is
summarized in the table below:
 
 (dollars
      in thousands)
            
            Less
      than
              12
      Months
            
            
            12
      Months
              or
      More
            
            
            TotalJune 30,
      2008Number
            
            
            28
            
            
            
            --
            
            
            
            28Fair
      value
            
            $
            253,698
            
            
            $
            --
            
            
            $
            253,698Gross
      unrealized losses
            
            $
            3,439
            
            
            $
            --
            
            
            $
            3,439December 31,
      2007Number
            
            
            18
            
            
            
            3
            
            
            
            21Fair
      value
            
            $
            234,248
            
            
            $
            36,559
            
            
            $
            270,807Gross
      unrealized losses
            
            $
            3,244
            
            
            $
            380
            
            
            $
            3,624
 
 
 Unrealized
losses on mortgage revenue bonds are primarily a result of unamortized yield
adjustments related to the bonds and are not necessarily reflective of the
operating performance of the assets.
 
 Under our
term loan agreement which became effective in December 2007 (see Note 7), five
bonds with an aggregate fair value of $30.5 million as of June 30, 2008, remain
pledged as collateral.
 
 C.  Retained
CMBS Certificates
 
 Retained
commercial mortgage backed securities (“CMBS”) certificates are not direct
investments in CMBS, but rather investments in the debt of trusts that hold CMBS
investments.  Retained CMBS certificates we hold for our own account
as of June 30, 2008 are comprised of the following classes:
  - 10
-
  CENTERLINE
HOLDING COMPANY
 NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 (dollars
      in thousands)
            
            Face
      Amount
            
            Accreted
      Cost
            
            Unrealized
      Gain
            
            Unrealized
      Loss
            
            Fair
      Value
            
            Percentage
      of Fair ValueSecurity
      Rating:AAA
      interest only
            
            $
            --
            
            $
            13,240
            
            $
            --
            
            $
            --
            
            $
            13,240
            
            39.9
            %BB
            
            
            26,150
            
            
            14,915
            
            
            --
            
            
            (4,455
            )
            
            10,460
            
            31.6B-
            
            
            74,717
            
            
            24,871
            
            
            --
            
            
            (17,788
            )
            
            7,083
            
            21.4CCC+
            
            
            9,402
            
            
            461
            
            
            9
            
            
            --
            
            
            470
            
            1.4CC
            
            
            18,804
            
            
            423
            
            
            517
            
            
            --
            
            
            940
            
            2.8D
            
            
            6,721
            
            
            69
            
            
            266
            
            
            --
            
            
            335
            
            1.0Non-rated
            
            
            31,190
            
            
            1,705
            
            
            --
            
            
            (1,081
            )
            
            624
            
            1.9Non-rated
      interest only
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            --Total
            
            $
            166,984
            
            $
            55,684
            
            $
            792
            
            $
            (23,324
            )
            $
            33,152
            
            100.0
            %
 
 
 At June
30, 2008, the AAA interest only certificate had a notional amount of $467.2
million and the non-rated interest only certificates had a combined notional
amount of $194.4 million.
 
 The
unrealized losses presented above do not include $1.1 million related to the AAA
interest only and non-rated interest only certificates which have experienced
losses related to the underlying assets and for which we realized an impairment
loss in the quarter ended June 30, 2008.  In accordance with SFAS 115,
Accounting for Certain
Investments in Debt and Equity Securities(“SFAS 115”), when we record an
impairment charge and reduce an asset to its fair value, the fair value becomes
the new cost basis of the investment.  As such, there is no difference
between the accreted cost of these assets and their fair values as of June 30,
2008.
 
 The
unrealized losses on other retained CMBS certificates (all have been in an
unrealized loss position for less than 12 months) are due to widening credit
spreads resulting from market conditions and do not necessarily reflect the
credit quality of the underlying assets.  We have the ability and
intent to hold these investments until recovery; as such, we have determined
that these decreases in fair value are temporary.
 
 In April
and July 2008, rating agencies downgraded certain certificates we hold resulting
in a reduction of the fair value of the investments, which led to margin calls
on a repurchase facility (see Note 7).
 
 D.  CMBS
 
 CMBS
investments we hold for our account were comprised of the following as of June
30, 2008:
 
 (dollars
      in thousands)
            
            Face
      Amount
            
            Accreted
      Cost
            
            Unrealized
      Gain
            
            Unrealized
      Loss
            
            Fair
      Value
            
            Percentage
      of Fair ValueSecurity
      Rating:BB+
            
            $
            3,898
            
            $
            2,289
            
            $
            --
            
            $
            (1,262
            )
            $
            1,027
            
            9.2
            %BB
            
            
            3,898
            
            
            2,142
            
            
            --
            
            
            (1,187
            )
            
            955
            
            8.6BB-
            
            
            3,898
            
            
            2,006
            
            
            --
            
            
            (1,116
            )
            
            890
            
            8.0B+
            
            
            10,395
            
            
            4,336
            
            
            --
            
            
            (2,088
            )
            
            2,248
            
            20.2B
            
            
            2,599
            
            
            531
            
            
            --
            
            
            (74
            )
            
            457
            
            4.1B-
            
            
            6,698
            
            
            1,350
            
            
            --
            
            
            (197
            )
            
            1,153
            
            10.4Non-rated
            
            
            25,819
            
            
            5,143
            
            
            --
            
            
            (734
            )
            
            4,409
            
            39.5Total
            
            $
            57,205
            
            $
            17,797
            
            $
            --
            
            $
            (6,658
            )
            $
            11,139
            
            100.0
            %
  During
the first six months of 2008, we purchased CMBS investments with a face amount
of $18.2 million at a cost of $3.7 million.  Similar to retained CMBS
certificates, the unrealized losses on CMBS (all have been in an unrealized loss
position for less than 12 months) are due to widening credit spreads and do not
necessarily reflect the credit quality of the underlying assets.  We
have the ability and intent to hold these investments until recovery; as such,
we have determined that the decreases in fair value are temporary.
 - 11
-
 CENTERLINE
HOLDING COMPANY
 NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
  E.  Syndicated
Corporate Debt
 
 Syndicated
corporate debt primarily represents corporate secured term loans.  We
have funded such purchases through an asset backed warehouse line (see Note
7).  Information regarding our syndicated corporate debt investments
for the periods presented is provided below:
 
 (in
      thousands)
            
            June
      30,
              2008
            
            
            December
      31,
              2007Amortized
      cost basis
            
            $
            22,851
            
            
            $
            27,839Gross
      unrealized gains (losses)
            
            
            215
            
            
            
            (90
            )Consolidated
      fair value
            
            $
            23,066
            
            
            $
            27,749
 
 
 During
the six months ended June 30, 2008, we sold five syndicated corporate debt
investments at a loss of $0.6 million, of which $0.1 million we recognized as an
impairment charge in 2007.  In addition, we recognized impairment
charges of $1.3 million due to recent market fluctuations for the remaining
securities where we concluded that the declines in fair value were
other-than-temporary as we expect to sell the investments upon termination of
the associated financing in August 2008 (see Note 7). In accordance with SFAS
115, when we record an impairment charge and reduce an asset to its fair value,
the fair value becomes the new cost basis of the investment.  As such,
there is no difference between the accreted cost of those assets and their fair
values as of June 30, 2008.
 
 
 NOTE
3 – Equity Method Investments
 
 Equity
method investments for the periods presented are provided below:
 
 (in
      thousands)
            
            June
      30,
              2008
            
            
            December
      31,
              2007Equity
      interests in LIHTC partnerships
            
            $
            39,174
            
            
            $
            38,761
 
 
 We
acquire interests in entities that own low income housing tax credit (“LIHTC”)
properties.  We hold these investments on a short-term basis for
inclusion in future Affordable Housing Group investment fund
offerings.  We expect to recapture our costs in such investments from
the proceeds when the investment fund has closed.
 
 The
balances shown above do not include our investments in American Mortgage
Acceptance Company (“AMAC”) and Centerline Urban Capital I, LLC (“CUC”), which
we also account for under the equity method, as the entities are related
parties.  For discussion regarding these investments, see Note
17.
 
 
 NOTE
4 – Other Investments
 
 Other
investments consisted of the following categories:
 
 (in
      thousands)
            
            June
      30,
              2008
            
            
            December
      31,
              2007Mortgage
      loans held for sale
            
            $
            39,740
            
            
            $
            91,065Mortgage
      loans held for investment
            
            
            12,643
            
            
            
            15,687Stabilization
      escrow
            
            
            76,215
            
            
            
            62,565Construction
      loans to LIHTC property partnerships
            
            
            1,521
            
            
            
            6,379Miscellaneous
      investments
            
            
            6,308
            
            
            
            6,581Total
            
            $
            136,427
            
            
            $
            182,277
 
 - 12
-
 CENTERLINE
HOLDING COMPANY
 NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 A.  Mortgage
Loans Held for Sale
 
 Mortgage
loans held for sale include originated loans pre-sold to government sponsored
entities, such as Federal National Mortgage Association (“Fannie Mae”), Freddie
Mac and Government National Mortgage Association (“GNMA”) under contractual sale
obligations that normally settle within three months of
origination.  Mortgage loans held for sale can differ widely from
period to period depending on the timing and size of originated mortgages as
compared to reporting dates.
 
 B.  Stabilization
Escrow
 
 (in
      thousands)
            
            June
      30,
              2008
            
            
            December
      31,
              2007Cash
      balance
            
            $
            90,250
            
            
            $
            76,032Present
      value discount net of eliminations and accumulated
      amortization
            
            
            (14,035
            )
            
            
            (13,467
            )Total
            
            $
            76,215
            
            
            $
            62,565
 
 
 As
further discussed in the 2007 Form 10-K, a portion of the cash received from the
mortgage revenue bonds re-securitized with Freddie Mac in December 2007 was
placed in escrow.  Due to the risk of the projected construction
completion and/or stabilization of the underlying properties, contributions to
the escrow account are recorded at their net present value determined based upon
an evaluation of the underlying cash flows and a discount rate of
15.0%.   Of the amount required as of the transaction date
($126.0 million), we funded $76.0 million in December 2007 and, in March 2008,
we funded an additional $30.0 million (resulting in a recognized loss in the
first quarter of $3.5 million representing the difference between the amount
deposited and the present value of the associated releases of the funds, with
such loss recorded as a component of “gain from repayment or sale of
investments”).  Giving effect to escrow releases upon construction
completion and/or stabilization of the underlying properties (including $36.2
million during the six months ended June 30, 2008), the stabilization escrow is
fully funded as of June 30, 2008.
 
 C.  Construction
Loans to LIHTC Property Partnerships
 
 Through a
subsidiary, we issue construction loans to LIHTC properties on a short-term
basis until the properties are included in the Affordable Housing Group’s
investment fund offerings.  These loans are guaranteed by the
developers of the LIHTC properties and certain loans are secured by mortgages on
the land.
 
 
 NOTE
5 – Goodwill and Intangible Assets, Net
 
 Goodwill
and intangible assets, net consisted of the following for the periods
presented:
 
 (in
      thousands)
            
            June
      30,
              2008
            
            
            December
      31,
              2007Goodwill
            
            $
            342,311
            
            
            $
            342,667Other
      intangible assets, net
            
            
            103,395
            
            
            
            103,077Mortgage
      servicing rights, net
            
            
            55,180
            
            
            
            58,529Total
            
            $
            500,886
            
            
            $
            504,273
 
   - 13
-
 CENTERLINE
HOLDING COMPANY
 NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
  A.  Goodwill
 
 The table
provided below summarizes information regarding goodwill, which we include in
our Corporate segment:
 (in
      thousands)
            
            TotalBalance
      at December 31, 2007
            
            $
            342,667Additions
            
            
            --Reductions
            
            
            (356
            )Balance
      at June 30, 2008
            
            $
            342,311
 
 
 The
reduction in goodwill relates to the redemption of Special Common Units (“SCUs”)
(see Note 12).  The deferred tax impact of such redemption effectively
reduces the purchase price for the subsidiary they were issued to
finance.
 
 B.  Other
Intangible Assets, Net
 
 The
components of other intangible assets, net for the periods presented are
provided below:
 
 (dollars
      in thousands)
            
            Estimated
      Useful
              Life
              (in
      Years)
            
            Gross
      Carrying Amount
            
            Accumulated
      Amortization
            
            NetJune
      30,
              2008
            
            December
      31,
              2007
            
            June
      30,
              2008
            
            December
      31,
              2007
            
            June
      30,
              2008
            
            December
      31,
              2007Amortized
      intangible assets:Transactional
      relationships
            
            16.7
            
            $
            103,000
            
            $
            103,000
            
            $
            38,935
            
            $
            34,721
            
            $
            64,065
            
            $
            68,279Partnership
      service contracts
            
            9.4
            
            
            47,300
            
            
            47,300
            
            
            29,970
            
            
            28,057
            
            
            17,330
            
            
            19,243General
      partner interests
            
            7.0
            
            
            13,521
            
            
            6,016
            
            
            3,017
            
            
            2,547
            
            
            10,504
            
            
            3,469Joint
      venture developer relationships
            
            5.0
            
            
            4,800
            
            
            4,800
            
            
            4,435
            
            
            3,955
            
            
            365
            
            
            845Mortgage
      banking broker relationships
            
            5.0
            
            
            1,080
            
            
            1,080
            
            
            722
            
            
            612
            
            
            358
            
            
            468Weighted
      average life/subtotal
            
            13.5
            
            
            169,701
            
            
            162,196
            
            
            77,079
            
            
            69,892
            
            
            92,622
            
            
            92,304Unamortized
      intangible assets:Mortgage
      banking licenses and approvals with no expiration
            
            
            
            
            10,773
            
            
            10,773
            
            
            --
            
            
            --
            
            
            10,773
            
            
            10,773Total
            
            
            
            $
            180,474
            
            $
            172,969
            
            $
            77,079
            
            $
            69,892
            
            $
            103,395
            
            $
            103,077
 
 
 Three
      Months Ended
              June
      30,
            
            
            Six
      Months Ended
              June
      30,(in
      thousands)
            
            2008
            
            
            2007
            
            
            2008
            
            
            2007Amortization
      expense
            
            $
            3,647
            
            
            $
            4,082
            
            
            $
            7,187
            
            
            $
            8,163
 
 
 In June
2008, we reached an agreement to act as collateral manager for two commercial
real estate collateralized debt obligations (“CDOs”) created by Nomura Credit
and Capital, Inc (“Nomura”).  In connection with this agreement, we
paid $7.5 million which we capitalized, included in “general partner interests”
above, which represented the fair value of the agreement at the time we
completed the transaction.  The asset will be amortized over 5.8
years, representing the estimated weighted average life of the Nomura
CDOs.
 
 In
connection with this agreement, the High-Yield Debt Fund Partnership we manage
and consolidate purchased debt and equity securities in the Nomura CDOs (see
Note 18).
 
 - 14
-
 CENTERLINE
HOLDING COMPANY
 NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 NOTE
6 – Deferred Costs and Other Assets, Net
 
 The
components of deferred costs and other assets, net are presented in the table
below:
 
 (in
      thousands)
            
            June
      30,
              2008
            
            
            December
      31,
              2007Deferred
      financing and other costs
            
            $
            38,420
            
            
            $
            39,599Less:  Accumulated
      amortization
            
            
            (10,113
            )
            
            
            (5,176
            )Net
      deferred costs
            
            
            28,307
            
            
            
            34,423Collateral
      deposits receivable
            
            
            68,787
            
            
            
            59,957Interest
      receivable, net
            
            
            6,246
            
            
            
            10,550Fees
      receivable
            
            
            7,663
            
            
            
            14,057Furniture,
      fixtures and leasehold improvements, net
            
            
            6,799
            
            
            
            8,366Other
            
            
            7,963
            
            
            
            13,673Total
            
            $
            125,765
            
            
            $
            141,026
 
 
 NOTE
7 – Notes Payable
 
 Notes
payable included the following:
 
 (in
      thousands)
            
            June
      30,
              2008
            
            
            December
      31,
              2007Term
      loan
            
            $
            109,040
            
            
            $
            140,000Revolving
      credit facility
            
            
            211,000
            
            
            
            210,000CMC
      warehouse line
            
            
            --
            
            
            
            32,302Multifamily
      ASAP plus facility
            
            
            39,617
            
            
            
            58,413Commercial
      real estate repurchase lines
            
            
            30,987
            
            
            
            56,912Syndicated
      corporate debt warehouse line
            
            
            17,014
            
            
            
            5,423Other
            
            
            2,711
            
            
            
            2,838Total
            
            $
            410,369
            
            
            $
            505,888
 
 
 A.  Term
Loan and Revolving Credit Facility
 
 As of
June 30, 2008, we have a $109.0 million term loan, which matures in December
2008 (the “Term Loan”), and a $245.0 million revolving credit facility, subject
to an increase of up to $55.0 million upon an increase in commitments and
subject to a step-down to $275.0 million on March 30, 2009 (the “Revolving
Credit Facility”), which matures in June 2009, subject to a six-month
extension.  In 2008, we received additional commitments of $10.0
million related to the Term Loan and $20.0 million related to the Revolving
Credit Facility, which, pursuant to the credit agreement, were used to fund the
stabilization escrow (see Note 4) associated with the re-securitization of our
mortgage revenue bond portfolio.  Through June 30, 2008, we repaid
$41.0 million of the Term Loan in accordance with the terms of the loan
agreement.  The next scheduled amortization payment on the Term Loan
is August 31, 2008 at which time the balance of the term loan must be reduced to
$75.0 million. The balance must be further reduced to $50.0 million by October
31, 2008 and repaid in full by December 31, 2008.
 
 Available
borrowings under the revolving credit facility are reduced by a letter of credit
associated with our mortgage banking loss sharing agreement with Freddie Mac
(see Note 20).
 
 B.  CMC
Warehouse Line
 
 In May
2008, we amended our $150.0 million Centerline Mortgage Capital, Inc. (“CMC”)
Warehouse facility.  The new facility, with the same capacity, matures
in May 2009 and bears interest at the London Interbank Offering Rate (“LIBOR”)
plus 1.0%. Mortgages financed by such advances (see Note 4) as well as the
related servicing and other rights (see Note 5) have been pledged as security
under the new facility.  As of June 30, 2008, no amounts were
outstanding under this facility.  As described in Note 4, all loans
securing this facility have firm sale commitments.
  - 15
-
 CENTERLINE
HOLDING COMPANY
 NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
  C.  Multifamily ASAP Plus
Facility
 
 Under
this program with Fannie Mae, mortgage loans are initially funded using the CMC
warehouse line described above. Subsequently, Fannie Mae funds approximately 99%
of the loan and CMC funds the remaining 1%. CMC is later reimbursed by Fannie
Mae.  As of June 30, 2008, the interest rate was 2.46%.
 
 D.  Commercial
Real Estate Repurchase Lines
 
 As of
June 30, 2008, we are a party to two repurchase agreements with two
counterparties, one of which is currently used to monetize investments we hold
for our own account, while we have no borrowings outstanding under the other
agreement.
 
 In April
2008, the decline in value caused by a rating agency downgrade on the retained
CMBS certificate collateral (see Note 2) led to a margin call of $7.1 million,
on our repurchase facility with Morgan Stanley Mortgage Capital Holdings LLC
(“Morgan Stanley”).  In July 2008, another rating agency downgrade led
to a margin call of $1.7 million on this repurchase facility.  Both
margin calls were paid from available cash.
 
 In May
2008, we received notice from Morgan Stanley that the repurchase agreement would
not be extended and a termination date of November 27, 2008 was established for
this facility.
 
 E.  Syndicated
Corporate Debt Warehouse Line
 
 The
syndicated corporate debt warehouse line is secured by investments in syndicated
corporate debt (see Note 2) and will be terminated August 15,
2008.  As described in Note 2, we plan to sell the assets securing
this warehouse line.
 
 F.  Covenants
 
 As of
June 30, 2008, we believe we were in compliance with all covenants required by
our facilities.
 
 
 NOTE
8 – Financing Arrangements and Secured Financing
 
 Following
are the components of financing arrangements and secured financing for the
periods presented:
 
 (in
      thousands)
            
            June
      30,
              2008
            
            
            December
      31,
              2007Freddie
      Mac secured financing
            
            $
            416,834
            
            
            $
            548,227Bond
      securitizations
            
            
            62,757
            
            
            
            14,275Total
            
            $
            479,591
            
            
            $
            562,502
 
 
 As more
fully discussed in our 2007 Form 10-K, the Freddie Mac secured financing
liability relates to mortgage revenue bonds that we re-securitized but for which
the transaction was not recognized as a sale.  During the first half
of 2008, guarantees we had provided with respect to payment of debt service on
certain re-securitized bonds expired.  As the guarantees had
constituted continuing involvement with the securitized assets and prevented our
recognition of a sale, we recognized the bonds as sold upon the expiration of
the guarantees and de-recognized the assets and the associated
liabilities.  The remaining liability relates to bonds for which we
continue to guarantee payment of debt service and/or for which a subsidiary
controls the general partner of the underlying property
partnership.
 
 For the
six months ended June 30, 2008, we repaid one bond securitization in connection
with the redemption of the underlying mortgage revenue bond and securitized an
additional seven bonds with unpaid principal balances of $62.8
million.  The proceeds were utilized for general corporate purposes
including repayment of a portion of the Term Loan.
 
 - 16
-
 CENTERLINE
HOLDING COMPANY
 NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 NOTE
9 – Accounts Payable, Accrued Expenses and Other Liabilities
 
 Accounts
payable, accrued expenses and other liabilities consisted of the following for
the periods presented:
 
 (in
      thousands)
            
            June
      30,
              2008
            
            
            December
      31,
              2007Deferred
      revenues
            
            $
            82,930
            
            
            $
            100,610Transactions
      costs payable
            
            
            35,014
            
            
            
            35,314Interest
      rate swaps at fair value (Note 11)
            
            
            43,022
            
            
            
            50,445Distributions
      payable
            
            
            12,965
            
            
            
            41,016Accounts
      payable
            
            
            13,767
            
            
            
            15,976Salaries
      and benefits
            
            
            13,371
            
            
            
            30,513Accrued
      fund organization and offering expenses
            
            
            8,312
            
            
            
            8,484Deposits
      payable
            
            
            242
            
            
            
            3,760Accrued
      interest payable
            
            
            10,064
            
            
            
            1,350Unsettled
      investments
            
            
            186
            
            
            
            15,000Income
      tax reserves
            
            
            2,438
            
            
            
            2,442Other
            
            
            11,240
            
            
            
            7,928Total
            
            $
            233,551
            
            
            $
            312,838
 
 
 NOTE
10 – Fair Value Disclosures
 
 In
September 2006, the FASB issued SFAS 157, which defines fair value, establishes
a framework for measuring fair value (emphasizing fair value as a market-based
measurement) and expands disclosures about fair value
measurements.  To comply with the provisions of SFAS 157, we
incorporate credit value adjustments, where appropriate, to reflect both our own
non-performance risk and the respective counterparty’s nonperformance risk in
the fair value measurements.  For the six months ended June 30, 2008,
credit value adjustments resulted in a $5.7 million reduction in the fair value
of our free-standing interest rate swaps (see Note 11), which we recorded as a
reduction of interest expense and a $0.2 million increase in the fair value of
cash flow hedges, which we recorded as a component of accumulated other
comprehensive loss.  The FASB deferred the effective date of SFAS 157
with respect to non-financial assets and liabilities measured on a non-recurring
basis.  We will be subject to those requirements as of January 1,
2009.
 We have
categorized our assets and liabilities recorded at fair value based upon the
fair value hierarchy specified by SFAS 157.  The levels of fair value
hierarchy are as follows:
 
 ·
            Level
      1 inputs utilize quoted prices (unadjusted) in active markets for
      identical assets or liabilities that we have the ability to
      access.
 
 ·
            Level
      2 inputs utilize other-than-quoted prices that are observable, either
      directly or indirectly.  Level 2 inputs include quoted prices
      for similar assets and liabilities in active markets, and inputs such as
      interest rates and yield curves that are observable at commonly quoted
      intervals.
 
 ·
            Level
      3 inputs are unobservable and are typically based on our own assumptions,
      including situations where there is little, if any, market
      activity.
 
 In
certain cases, the inputs used to measure fair value may fall into different
levels of the fair value hierarchy.  In such cases, we categorize such
financial asset or liability based on the lowest level input that is significant
to the fair value measurement in its entirety.  Our assessment of the
significance of a particular input to the fair value measurement in its entirety
requires judgment and considers factors specific to the asset or
liability.
 
 The
following tables present the information about our financial assets and
liabilities measured at fair value on a recurring or non-recurring basis as of
June 30, 2008, and indicate the fair value hierarchy of the valuation techniques
we utilize to determine fair value:
  - 17
-
 CENTERLINE
HOLDING COMPANY
 NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 
 (in
      thousands)
            
            Level
      1
            
            Level
      2
            
            Level
      3
            
            Balance
              as
      of
              June
      30,
              2008Measured
      on a recurring basis:AssetsAvailable-for-sale
      investments:Freddie
      Mac Certificates:Series
      A-1
            
            $
            --
            
            $
            --
            
            $
            302,116
            
            $
            302,116Series
      B
            
            
            --
            
            
            --
            
            
            160,682
            
            
            160,682Mortgage
      revenue bonds
            
            
            --
            
            
            --
            
            
            186,232
            
            
            186,232Retained
      CMBS certificates
            
            
            --
            
            
            --
            
            
            33,152
            
            
            33,152CMBS
            
            
            --
            
            
            --
            
            
            11,139
            
            
            11,139Syndicated
      corporate debt
            
            
            23,066
            
            
            --
            
            
            --
            
            
            23,066Marketable
      securities
            
            
            2,239
            
            
            --
            
            
            --
            
            
            2,239Total
      available-for-sale investments
            
            $
            25,305
            
            $
            --
            
            $
            693,321
            
            $
            718,626LiabilitiesDerivatives
            
            $
            --
            
            $
            43,022
            
            $
            --
            
            $
            43,022Measured
      on a non-recurring basis:AssetsMortgage
      loans held-for-sale
            
            $
            --
            
            $
            39,740
            
            $
            --
            
            $
            39,740Mortgage
      loans held for investment - impaired
            
            
            --
            
            
            1,794
            
            
            --
            
            
            1,794Mortgage
      servicing rights
            
            
            --
            
            
            --
            
            
            55,180
            
            
            55,180
 
 
 Provided
below is a summary of the valuation techniques employed with respect to
financial instruments measured at fair value utilizing methodologies other than
quoted prices in active markets (more fully described in our 2007 Form
10-K):
 Series
      A-1 Freddie Mac certificates:
              The
      Series A-1 Freddie Mac Certificates are fixed-rate, tax-exempt, credit
      enhanced certificates that have terms consistent with preferred shares of
      our Centerline Equity Issuer Trust I (“Equity Issuer”)
      subsidiary.  We determine fair value based on observable market
      transactions of similar instruments. Because these certificates typically
      have a limited market, in the absence of observable market transactions,
      we estimate fair value for each certificate utilizing the present value of
      the expected cash flows discounted at a rate for comparable tax-exempt
      investments and then comparing it against any similar market
      transactions.  During the second quarter of 2008, management
      evaluated the number of transactions conducted with instruments similar to
      the Series A-1 Freddie Mac certificates and concluded that due to the
      unique terms of the certificates, such population was now too limited to
      continue a Level 2 designation as determined upon adoption of SFAS 157. As
      a result, we have re-classified these investments as Level 3
      assets.Series
      B  Freddie Mac certificates:
              We
      determine fair value of the Series B Freddie Mac Certificates, which
      represent the retained residual interests in connection with the December
      2007 re-securitization of our mortgage revenue bond portfolio, based upon
      a discounted cash flow model that follows the contractual provisions of
      the certificates.  The significant assumptions of the valuation
      include projecting the cash flows of the underlying mortgage revenue bonds
      and an appropriate discount rate.
  - 18
-
 CENTERLINE
HOLDING COMPANY
 NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 Mortgage
      revenue bonds:
              We
      base the fair value of our mortgage revenue bonds on observable market
      transactions, which may indicate a fair value approximating the unpaid
      principal balance.  Because mortgage revenue bonds typically
      have a limited market, in the absence of observable market transactions,
      we estimate fair value for each bond by utilizing the present value of the
      expected cash flows discounted at a rate for comparable tax-exempt
      investments and then comparing it against any similar market
      transactions.Retained
      CMBS certificates and CMBS:
              We
      generally estimate fair value of CMBS and similar retained interests based
      on market prices provided by certain dealers who make a market in these
      financial instruments, although such markets may not be
      active.
                
                We
      perform additional analysis on prices received based on broker
      quotes.  This process includes analyzing the securities based on
      vintage year, rating and asset type and converting the price received to a
      spread.  The calculated spread is then compared to market
      information available for securities of similar type, vintage year and
      rating.  We utilize this process to validate the prices received
      from brokers.Syndicated
      corporate debt and marketable securities:
              We
      estimate fair value based on readily available market prices.Derivatives:
              The
      fair values of interest rate swaps are determined using the market
      standard methodology of netting the discounted future fixed cash receipts
      (or payments) and the discounted expected variable cash payments (or
      receipts).  The variable cash payments (or receipts) are based
      on an expectation of future interest rates (forward curve) derived from
      observable market interest rate curves.  In adjusting the fair
      value of our derivative contracts for the effect of nonperformance risk,
      we have considered the impact of netting and any applicable credit
      enhancements, such as thresholds and guarantees.Mortgage
      loans held for sale
              We
      record mortgage loans held for sale at the lower of cost or
      market.  As we originate loans held for sale only when we have a
      firm sale commitment for the principal amount of the loan, we carry these
      loans at their respective principal balances.Mortgage
      loans held for investment – impaired
              When
      a loan is deemed impaired, we write the loan down to its fair value, which
      becomes its new cost basis.  We measure the fair market value of
      a loan using the observable market price for sales of similar assets or
      the market value of the loan’s collateral if the loan is
      collateral-dependent.  Market prices are determined by using a
      combination of updated appraised values and broker quotes or services
      supplying market and sales data in various geographical locations where
      the collateral is located.Mortgage
      servicing rights
              Although
      we have elected to account for our mortgage servicing rights under the
      amortization method, they are originally recorded at fair value and we
      value the portfolio annually for the purpose of testing for
      impairment.  We obtain valuations of originated mortgage
      servicing rights from a third-party valuation specialist.  The
      inputs include contractual servicing fees, our projected cost to service
      as well estimates of default rates, prepayment speeds and an appropriate
      discount rate.  While there is an active market for similar
      assets and certain of the inputs such as fee rates and discount rates are
      observable, most of the other inputs are based on historical company
      data.
   - 19
-
 CENTERLINE
HOLDING COMPANY
 NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 
 (in
      thousands)
            
            Freddie
      Mac
              Certificates
              Series
      A-1
            
            
            Freddie
      Mac
              Certificates
              Series
      B
            
            
            Mortgage
              revenue
      bonds
            
            
            Retained
              CMBS
              certificates
            
            
            CMBS
            
            
            TotalBalance
      at January 1, 2008
            
            $
            --
            
            
            $
            153,468
            
            
            $
            376,432
            
            
            $
            75,328
            
            
            $
            13,361
            
            
            $
            618,589Total
      realized and unrealized gains or (losses):Included
      in earnings
            
            
            --
            
            
            
            --
            
            
            
            (6,832
            )
            
            
            --
            
            
            
            --
            
            
            
            (6,832
            )Included
      in other comprehensive income
            
            
            --
            
            
            
            (960
            )
            
            
            (884
            )
            
            
            204
            
            
            
            (5,775
            )
            
            
            (7,415
            )Amortization
      or accretion
            
            
            --
            
            
            
            (1,420
            )
            
            
            38
            
            
            
            (1,860
            )
            
            
            163
            
            
            
            (3,079
            )Purchases,
      issuances, settlements and other adjustments
            
            
            --
            
            
            
            (327
            )
            
            
            (15,840
            )
            
            
            --
            
            
            
            3,664
            
            
            
            (12,503
            )Net
      transfers in and/or out of Level 3
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --Balance
      at March 31, 2008
            
            $
            --
            
            
            $
            150,761
            
            
            $
            352,914
            
            
            $
            73,672
            
            
            $
            11,413
            
            
            $
            588,760Total
      realized and unrealized gains or (losses):Included
      in earnings
            
            
            --
            
            
            
            (7,668
            )
            
            
            (4,096
            )
            
            
            (1,077
            )
            
            
            --
            
            
            
            (12,841
            )Included
      in other comprehensive income
            
            
            --
            
            
            
            4,357
            
            
            
            (318
            )
            
            
            (38,429
            )
            
            
            (198
            )
            
            
            (34,588
            )Amortization
      or accretion
            
            
            --
            
            
            
            (1,585
            )
            
            
            178
            
            
            
            (1,014
            )
            
            
            (76
            )
            
            
            (2,497
            )Purchases,
      issuances, settlements and other adjustments
            
            
            13,444
            
            
            
            14,817
            
            
            
            (162,446
            )
            
            
            --
            
            
            
            --
            
            
            
            (134,185
            )Net
      transfers in and/or out of Level 3
            
            
            288,672
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            288,672Balance
      at June 30, 2008
            
            $
            302,116
            
            
            $
            160,682
            
            
            $
            186,232
            
            
            $
            33,152
            
            
            $
            11,139
            
            
            $
            693,321Amount of total gains
      (losses) for the period included in earnings attributable to the change in
      unrealized gains or losses relating to assets still held at June 30,
      2008 (1)
            
            $
            --
            
            
            $
            (7,668
            )
            
            $
            (10,928
            )
            
            $
            (1,077
            )
            
            $
            --
            
            
            $
            (19,673
            )
  (1)Recorded
      in “Impairment of Mortgage Revenue Bonds and Other Assets” in the
      Condensed Consolidated Statement of
  Operations.
   Both
observable and unobservable inputs may be used to determine the fair value of
positions that we classified within the Level 3 category.  As a
result, the unrealized gains and losses for assets and liabilities within the
Level 3 category presented in the table above may include changes in fair value
that were attributable to both observable (e.g., changes in market interest
rates) and unobservable (e.g., changes in the historical company data)
inputs.
 
 For SFAS
157 disclosures related to our Consolidated Partnerships, see Note
18.
 
 
 NOTE
11 – Financial Risk Management and Derivatives
 
 Our
derivative instruments are comprised of cash flow hedges of debt and
free-standing derivatives related to investments.  While we carry
derivative instruments in both categories at their estimated fair values on our
Condensed Consolidated Balance Sheets, the change in those fair values are
recorded differently.  To the extent that the cash flow hedges are
effectively hedging the associated debt, we record changes in their fair values
as a component of other comprehensive income within shareholders’
equity.  If deemed ineffective, and the ineffectiveness exceeds the
limits allowed by SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, as amended and interpreted, we would
record the entire fair value (and subsequent changes) in our Condensed
Consolidated Statement of Operations.  With respect to the
free-standing derivatives, we include all changes in fair value in our Condensed
Consolidated Statements of Operations.
 
 A.  Cash
Flow Hedges of Debt
 
 Our Term
Loan and the Revolving Credit Facility (see Note 7) incur interest expense at
variable rates, exposing us to interest rate risk.  We have
established a policy for risk management and our objectives and strategies for
the use of derivative instruments to potentially mitigate such
risk.  We currently manage a portion of our interest rate risk
resulting from the exposure to variable rates (benchmark rate) on our credit
facility through the use of an interest rate swap indexed to
LIBOR.  Under the swap agreement, for a specified period of time we
are required to pay a fixed rate of interest on a specified notional amount to
the transaction counterparty and we receive a floating rate of interest
equivalent to the LIBOR index.  The swap outstanding at June 30, 2008,
had a notional amount of $275.0 million, expires in August 2009 and has a fixed
rate of 5.25%.  The average LIBOR rate was 2.94% for the six months
ended June 30, 2008.
 
 - 20
-
 CENTERLINE
HOLDING COMPANY
 NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 
 At
inception, we designated these swaps as cash flow hedging instruments, with the
hedged item being the interest payments on our variable-rate debt.  On
an ongoing basis, we assess whether the swap agreements are effective in
offsetting changes in the cash flows of the hedged financing.  Amounts
in accumulated other comprehensive loss are reclassified into earnings in the
same period during which the hedged forecasted transaction affects
earnings.  An inherent risk of these swap agreements is the credit
risk related to the counterparty’s ability to meet the terms of the contracts
with us.
 
 We
evaluate our interest rate risk on an ongoing basis to determine whether it
would be advantageous to engage in any further hedging
transactions.
 
 Certain
of our consolidated partnerships also had interest rate swaps accounted for as
hedges as of June 30, 2008 (see Note 18).
 
 B.  Free
Standing Derivatives
 
 Through
our Affordable Housing Group, we are party to 26 interest rate swap agreements
with the developers of properties relating to certain mortgage revenue bonds we
previously owned.  Under the terms of these agreements, we pay a
variable rate of interest and receive interest at fixed rates equal to those of
the related bonds. Due to the re-securitization of the related mortgage revenue
bonds in December 2007, these swaps are now deemed to be free-standing
derivatives.  At June 30, 2008, these swaps had an aggregate notional
amount of $280.9 million, a weighted average interest rate of 6.08% and a
weighted average remaining term of 14.0 years.
 
 Through
our Commercial Real Estate Group, we entered into seven interest rate swap
agreements in connection with a CMBS fund that closed in 2007.  At
June 30, 2008, these swaps had an aggregate notional amount of $230.5 million, a
weighted average interest rate of 5.77% and a weighted average remaining term of
9.3 years.
 
 C.  Financial
Statement Impact
 
 Presented
below are amounts included in Interest expense on the Condensed Consolidated
Statements of Operations related to the swaps described above:
 
 Three
      Months Ended June 30,
            
            Six
      Months Ended June 30,(in
      thousands)
            
            2008
            
            2007
            
            2008
            
            2007Interest
      payments – cash flow hedges
            
            $
            7,353
            
            $
            --
            
            $
            12,576
            
            $
            --Interest
      receipts – cash flow hedges
            
            
            (2,760
            )
            
            (894
            )
            
            (5,967
            )
            
            (1,574
            )Change
      in fair value of free- standing derivatives(1)
            
            
            (15,479
            )
            
            (1,585
            )
            
            (6,530
            )
            
            (898
            )Ineffectiveness
            
            
            437
            
            
            199
            
            
            637
            
            
            399Net
            
            $
            (10,449
            )
            $
            (2,280
            )
            $
            716
            
            $
            (2,073
            )(1)The six months ended June 30, 2008 amount includes a $5.7 million
      reduction to interest expense ($1.2 million reduction for the second
      quarter) related to credit value adjustments as required by SFAS
      157.
 
 
 During
the second quarter, we reclassified $0.4 million from accumulated other
comprehensive loss to the Condensed Consolidated Statement of Operations based
on the changes to the expected timing of long-term borrowings.
 
 Interest
rate swaps in a net liability position (“out of the money”) are recorded in
accounts payable, accrued expenses and other liabilities and those in a net
asset position (“in the money”) are recorded in deferred costs and other
assets.  The amounts recorded were as follows:
  - 21
-
 CENTERLINE
HOLDING COMPANY
 NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
  (in
      thousands)
              
              June
      30,
                2008
              
              
              December
      31,
                2007Net
      liability position
              
              $
              43,022
              
              
              $
              50,445
 We
estimate that $14.2 million of the net unrealized loss included in accumulated
other comprehensive loss will be reclassified into interest expense within the
next twelve months.
 
 
 NOTE
12 – Minority Interests in Consolidated Subsidiaries, net of tax
 
 Minority
interests in consolidated subsidiaries consisted of the following for the
periods presented:
 
 (in
      thousands)
            
            June
      30,
              2008
            
            
            December
      31,
              2007Convertible
      SCUs of a subsidiary;14,131
      outstanding in 2008 and 14,298 outstandingin
      2007
            
            $
            147,440
            
            
            $
            165,717Convertible
      Special Common Interests (“SCIs”) of a subsidiary;268
      outstanding in 2008 and 2007
            
            
            3,708
            
            
            
            3,984Other
            
            
            8,445
            
            
            
            7,015Total
            
            $
            159,593
            
            
            $
            176,716
 
 
 Other
minority interests at June 30, 2008, primarily represent the 10% interest in
Centerline Financial Holdings, LLC, (“CFH”) held by Natixis Capital Markets
North America, Inc. (“Natixis”).
 
 Income
(loss) allocated to minority interests, net of tax, was as follows:
 
 Three
      Months Ended
              June
      30,
            
            Six
      Months Ended
              June
      30,(in
      thousands)
            
            2008
            
            2007
            
            2008
            
            2007SCUs
            
            $
            (2,683
            )
            $
            1,929
            
            $
            (12,616
            )
            $
            (4,027
            )SCIs
            
            
            (37
            )
            
            25
            
            
            (171
            )
            
            (51
            )Special
      Membership Units (“SMUs”)
            
            
            --
            
            
            26
            
            
            --
            
            
            (53
            )Other
            
            
            (293
            )
            
            (272
            )
            
            (383
            )
            
            (278
            )Total
            
            $
            (3,013
            )
            $
            1,708
            
            $
            (13,170
            )
            $
            (4,409
            )
 
 
 All SMUs
were redeemed by December 31, 2007.
 
 Redemptions
 
 Holders
of SCUs redeemed units as follows:
 
 Six
      Months Ended
              June
      30,
            
            Number
              redeemed
            
            Common
              shares
      issued
            
            Cash
      paid(in
      thousands)2007
            
            132,000
            
            --
            
            $
            2,8032008
            
            166,120
            
            166,120
            
            
            --
 
 - 22
-
 CENTERLINE
HOLDING COMPANY
 NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 For any
SCU redemptions, we also redeemed the special preferred voting shares related to
the converted SCUs at their $0.01 per share redemption price.
 
 
 NOTE
13– Redeemable Securities
 
 Redeemable
securities consisted of the following for the periods presented:
 
 (in
      thousands)
            
            June
      30, 2008
            
            December
      31, 2007Series
            
            Carrying
      Value
            
            Number
      of Shares
            
            Number
      of
              common
      shares
              if
      converted
            
            Carrying
      Value
            
            Number
      of Shares
            
            Number
      of
              common
      shares
              if
      convertedConvertible
      Redeemable CRA Shares
            
            $
            88,607
            
            5,762
            
            5,698
            
            $
            13,893
            
            974
            
            652Redeemable
      CRA Shares
            
            
            4,585
            
            271
            
            --
            
            
            4,502
            
            271
            
            --Convertible
      Redeemable CRA Preferred Shares
            
            
            49,840
            
            1,060
            
            1,916
            
            
            --
            
            --
            
            --Redeemable
      CRA Preferred Shares
            
            
            52,134
            
            1,100
            
            --
            
            
            51,493
            
            1,100
            
            --11.0%
      Cumulative Convertible Preferred Shares
            
            
            129,457
            
            11,217
            
            12,208
            
            
            --
            
            --
            
            --Total
            
            $
            324,623
            
            19,410
            
            19,822
            
            $
            69,888
            
            2,345
            
            652
 
 
 A.  Redeemable
CRA Shares
 
 As
further discussed in the 2007 Form 10-K, in December 2007, we entered into
option agreements with most of our Convertible Community Reinvestment Act
Preferred Shares (“Convertible CRA Shares”) shareholders and all 4.4% Cumulative
Perpetual Convertible CRA Preferred shareholders.  The option
agreements allow us to redeem the shares at their initial issuance prices, or
otherwise for the shareholders to redeem the shares after specified dates at the
same price.  In 2008, we entered into additional option agreements
with respect to these classes of shares.   In connection with the
execution of these agreements, we reclassified the shares outside of permanent
equity at fair value and recorded a charge to shareholders’ equity for the
difference between that fair value and the carrying basis of the shares.
Subsequently, we amortize the difference between the fair value as of the
execution date and the future redemption price as a reduction of shareholders’
equity.  The charge to shareholders’ equity was $14.0 million for the
six months ended June 30, 2008 ($2.1 million for the quarter).
 
 B.
11.0% Cumulative Convertible Preferred Shares
 
 In
January 2008, we issued 11.2 million shares of 11.0 % Cumulative Convertible
Preferred Shares, Series A-1 (“11.0% Preferred Shares”) in a private
placement.  The issue was purchased by an affiliate of The Related
Companies, LP (“TRCLP”), a company controlled by our Chairman.  The
shares have a liquidation preference of $11.70 per share, are convertible into
12.2 million common shares (at $10.75 per share) and are entitled to voting
rights as if converted into common shares.  Proceeds of the issuance
were $129.5 million, net of offering costs of $1.7 million.
 
 In March
2008, we commenced a rights offering that entitled shareholders to purchase
these shares, with the TRCLP affiliate retaining all shares not purchased as
part of the rights offering.  The rights offering concluded in April
2008; shareholders purchased 0.4 million shares for $4.4 million and we redeemed
the same number of shares from the TRCLP affiliate.
 
 The 11.0%
Preferred Shares are mandatorily redeemable in January 2018.  Under
certain conditions, we may force conversion into our common shares beginning
January 2013; otherwise, if certain events occur, the holders may redeem the
shares prior to the mandatory redemption date.  As such, we classify
the shares outside of permanent equity.
 
 - 23
-
 CENTERLINE
HOLDING COMPANY
 NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 NOTE
14 – Comprehensive Loss
 
 Components
of comprehensive loss were as follows:
 
 Six
      Months Ended
              June
      30,(in
      thousands)
            
            2008
            
            
            2007Net
      loss
            
            $
            (23,968
            )
            
            $
            (9,765
            )Net
      unrealized gain on interest rate derivatives
            
            
            548
            
            
            
            2,265Net
      unrealized loss on available-for-sale securities:Unrealized
      loss during the period
            
            
            (65,108
            )
            
            
            (6,132
            )Reclassification
      adjustment to net loss
            
            
            24,250
            
            
            
            19,385Net
      unrealized gain (loss) on equity investees, net of amounts allocated to
      minority interests
            
            
            2,604
            
            
            
            (6,104
            )Net
      unrealized loss allocated to minority interests
            
            
            (292,097
            )
            
            
            --Comprehensive
      loss
            
            $
            (353,771
            )
            
            $
            (351
            )
 
 
 NOTE
15 – General and Administrative Expenses
 
 General
and administrative expenses consisted of the following:
 
 Three
      Months Ended
              June
      30,
            
            Six
      Months Ended
              June
      30,(in
      thousands)
            
            2008
            
            2007
            
            2008
            
            2007Salaries
      and benefits
            
            $
            24,070
            
            $
            27,028
            
            $
            50,801
            
            $
            63,888Professional
      fees
            
            
            3,728
            
            
            3,813
            
            
            7,979
            
            
            6,238LIHTC
      Fund origination and property acquisition
            
            
            1,575
            
            
            1,336
            
            
            3,827
            
            
            3,026Other
      general and administrative
            
            
            13,852
            
            
            9,861
            
            
            24,520
            
            
            25,409Total
            
            $
            43,225
            
            $
            42,038
            
            $
            87,127
            
            $
            98,561
 
 
 NOTE
16 – Earnings per Share
 
 Prior to
the execution of the option agreements described in Note 13, we treated our
common and Convertible CRA Shares as a single class in applying SFAS No. 128,
Earnings per Share
(“SFAS 128”). Weighted average shares outstanding included common shares and
Convertible CRA Shares (prior to execution of an option agreement), as the
Convertible CRA Shares had the same economic benefits as the common
shares.  Income for the calculation represented net income or loss
less dividends for our preferred shares.
 
 Subsequent
to the execution of those option agreements, our calculation of EPS incorporates
provisions of EITF Issue No. 03-6, Participating Securities and the
Two-Class Method under FASB Statement 128 (“EITF 03-6”), which
establishes standards regarding the computation of EPS when securities other
than common stock contractually entitle the holder to participate in dividends
and earnings of the Company (“Participating Securities”). EITF 03-6 requires
earnings available, after deduction of preferred dividends and dividends to the
holders of Participating Securities, to be allocated between the common and
Participating Security shareholders. In addition, the difference between the
carrying amounts of redeemable securities and the exercise price of put options
for those shares is deducted from net loss to calculate net income allocable to
shareholders.
 
 Basic EPS
is then calculated by dividing income allocable to common shareholders by the
weighted average number of shares outstanding.  Net losses are not
allocated to Participating Security shareholders. EITF 03-6 does not require the
presentation of basic and diluted EPS for securities other than common stock;
therefore the following EPS amounts only pertain to our common shares and
non-redeemable Convertible CRA shares.
 
 - 24
-
 CENTERLINE
HOLDING COMPANY
 NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
  
 Diluted
EPS is calculated using the weighted average number of shares outstanding during
the period plus the dilutive effect of potential future issuances of common
stock relating to stock option programs and other potentially dilutive
securities using the treasury stock method.  The Convertible
Redeemable CRA Preferred Shares, the 11.0% Preferred Shares and our
subsidiaries’ convertible equity units are not included in the calculation as
their assumed conversions would be anti-dilutive for the periods
presented.
 The
calculation of basic and diluted net loss per share is as
follows:
 
 Three
      Months Ended
              June
      30,
            
            Six
      Months Ended
              June
      30,(in
      thousands, except per share amounts)
            
            2008
            
            2007
            
            2008
            
            2007Numerator:Net
      (loss) income
            
            $
            (2,329
            )
            $
            4,980
            
            $
            (23,968
            )
            $
            (9,765
            )Preferred
      dividends
            
            
            (5,004
            )
            
            (1,188
            )
            
            (9,040
            )
            
            (2,376
            )Dividends
      for other redeemable securities
            
            
            (444
            )
            
            --
            
            
            (1,427
            )
            
            --Undistributed
      (loss) income
            
            
            (7,777
            )
            
            3,792
            
            
            (34,435
            )
            
            (12,141
            )Effect
      of redeemable share conversions
            
            
            (2,100
            )
            
            --
            
            
            (14,020
            )
            
            --Net
      (loss) income for EPS calculations
            
            $
            (9,877
            )
            $
            3,792
            
            $
            (48,455
            )
            $
            (12,141
            )Denominator:Weighted
      average shares outstandingBasic
            
            
            51,725
            
            
            57,219
            
            
            51,857
            
            
            57,586Effect
      of dilutive shares (1)
            
            
            --
            
            
            1,174
            
            
            --
            
            
            --Diluted
            
            
            51,725
            
            
            58,393
            
            
            51,857
            
            
            57,586Calculation
      of EPS:Net
      (loss) income as computed above
            
            $
            (9,877
            )
            $
            3,792
            
            $
            (48,455
            )
            $
            (12,141
            )Weighted
      average shares outstanding – basic
            
            
            51,725
            
            
            57,219
            
            
            51,857
            
            
            57,586Net
      (loss) income per share – basic
            
            $
            (0.19
            )
            $
            0.07
            
            $
            (0.93
            )
            $
            (0.21
            )Net
      (loss) income as computed above
            
            $
            (9,877
            )
            $
            3,792
            
            $
            (48,455
            )
            $
            (12,141
            )Weighted
      average shares outstanding – diluted (1)
            
            
            51,725
            
            
            58,393
            
            
            51,857
            
            
            57,586Net
      (loss) income per share – diluted
            
            $
            (0.19
            )
            $
            0.06
            
            $
            (0.93
            )
            $
            (0.21
            )
 
 (1)
            In
      accordance with SFAS 128, 1.3 million common share equivalents have been
      excluded from the Diluted EPS calculation in the six months ended June 30,
      2007, as we reported a net loss after preferred
      dividends.  Common share equivalents excluded from the 2008
      periods were less than 0.1 million.
 
 - 25
-
 CENTERLINE
HOLDING COMPANY
 NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 NOTE
17 – Related Party Transactions
 
 Investments
in and Loans to Affiliates
 
 The
components of investments in and loans to affiliates are presented in the table
below:
 (in
      thousands)
              
              June
      30,
                2008
              
              December
      31,
                2007Loan
      to AMAC
              
              $
              79,877
              
              $
              77,685Interest
      receivable on AMAC loan
              
              
              364
              
              
              529Investment
      in AMAC common and preferred shares
              
              
              5,497
              
              
              6,910Co-investment
      in CUC
              
              
              4,109
              
              
              4,184Due
      from partnerships, net
              
              
              2,894
              
              
              8,300Fees
      receivable, net
              
              
              6,339
              
              
              9,567Total
              
              $
              99,080
              
              $
              107,175Note:  The
      table above does not include our co-investments in the consolidated CMBS
      and High-Yield Debt Fund Partnerships as the amounts are eliminated in
      consolidation.  The carrying amount of these co-investments, net
      of our share of accumulated other comprehensive loss, totaled $(4.0)
      million as of June 30, 2008, and $36.1 million as December 31,
      2007.
 Impact
to Statements of Operation
 
 Our
Condensed Consolidated Statements of Operations included the following amounts
pertaining to related party transactions:
 
 Three
      Months Ended
              June
      30,
            
            Six
      Months Ended
              June
      30,(in
      thousands)
            
            2008
            
            2007
            
            2008
            
            2007AMAC
      asset management and incentive managements fees and expense
      reimbursements
            
            $
            665
            
            $
            834
            
            $
            1,213
            
            $
            1,841AMAC
      credit facility interest income
            
            
            1,128
            
            
            805
            
            
            2,368
            
            
            902AMAC
      servicing fee income
            
            
            103
            
            
            187
            
            
            192
            
            
            317Equity
      in loss of AMAC
            
            
            (288
            )
            
            --
            
            
            (2,282
            )
            
            --TRCLP
      shared service fee expense
            
            
            --
            
            
            (139
            )
            
            --
            
            
            (282
            )TRCLP
      property management services expense
            
            
            (1,296
            )
            
            (1,127
            )
            
            (2,433
            )
            
            (2,200
            )
 
 
 A.  AMAC
 
 Through
one of our subsidiaries, we manage the operations of AMAC.  As more
fully discussed in our 2007 Form 10-K, we also own AMAC common and preferred
shares.  No additional interests have been purchased during
2008.  We account for this investment utilizing the equity method as
we can exercise significant influence over AMAC’s financial and operating
policies via our advisory agreement.
 
 Effective
July 1, 2008, we extended our revolving credit facility to AMAC, with a maximum
capacity of $80.0 million, to June 2009.  The revolving credit
facility is used by AMAC for general corporate purposes.  Income we
earn from this facility is included in “Other interest income” in the Condensed
Consolidated Statements of Operations.
 
 During
2007, AMAC suspended investment activity due to volatility in credit markets
that led to significant margin calls on its debt facilities and interest rate
swaps.  As a result, it sold certain assets, recorded impairment
charges on others and recorded a substantial net loss.  In addition,
AMAC has recorded unrealized losses on some of its remaining assets and interest
rate derivatives.  Due to the equity losses, we have recorded our
allocable share of AMAC’s unrealized losses, the carrying value of our
investment in its common shares was reduced to zero and the carrying value of
our preferred investment was reduced from our initial investment of $7.0 million
to $5.5 million.  Dividends, when received, are recorded as a return
of capital.
 
 - 26
-
 CENTERLINE
HOLDING COMPANY
 NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 
 We serve
as the collateral manager for AMAC’s $400.0 million CDO and service all of the
loans in AMAC’s investment portfolio, performing all primary and special
servicing functions.  Pursuant to the servicing agreement, we receive
fees from AMAC based on the dollar amount of loans we service and record these
fees in “Fee income” in the Condensed Consolidated Statements of
Operations.
 
 Centerline
Real Estate Special Situations Mortgage Fund, LLC (“CRESS”) has entered into a
co-investment agreement with AMAC whereby both may participate in investment
opportunities that are originated by our subsidiaries and meet mutual investment
criteria.  A portion of CRESS’ 2008 and 2007 investments were made
pursuant to this agreement.  During the six months ended June 30,
2008, CRESS purchased investments with a principal amount of $33.4 million from
AMAC for a purchase price of $31.7 million, consistent with transactions with
independent third parties.
 
 B.  The
Related Companies, L.P.
 
 General
and administrative expenses in the 2007 period include shared service fees paid
or payable to TRCLP.  This shared services agreement was terminated in
June 2007.
 
 In
addition, a subsidiary of TRCLP earned fees for performing property management
services for various properties held in LIHTC Fund Partnerships we manage and
are included in “Other expenses of consolidated partnerships” in the Condensed
Consolidated Statements of Operations.
 
 During
the six months ended June 30, 2008, LIHTC Fund Partnerships that we consolidate
provided equity financing to properties developed by a subsidiary of
TRCLP.  CRESS funded an additional $5.2 million on two loans secured
by properties developed by TRCLP.
 
 In
January 2008, we issued $131.2 million of our convertible preferred shares to a
company affiliated with TRCLP and repurchased certain of the shares as part of a
rights offering (see Note 13).
 
 C.  Co-investment
in CUC
 
 CUC is an
investment fund with the California Public Employees Retirement System
(“CalPERS”) as majority investor, focusing on investments in multifamily
properties in major urban markets.  Our membership interest includes a
co-investment obligation amounting to 2.5% of capital invested. Remaining
funding commitments under this obligation are insignificant.
 
 D.  Due
from Partnerships, Net
 
 Due from
partnerships represents loans advanced to investment funds that we
sponsor.  A portion of these advances relate to the financial
difficulties of three developers and our subsequent actions to protect our
investments in the properties that were under development and for which we
assumed the general partner interest (see Note 20).  As we consolidate
the majority of investment funds we sponsor, the above balances are net of
eliminations of $48.0 million at June 30, 2008, and $48.9 million at December
31, 2007.
 
 E.  Other
 
 Substantially
all fund origination revenues in the Affordable Housing Group are received from
LIHTC Fund Partnerships we have originated and manage, many of which comprise
the partnerships that we consolidate.  While our affiliates hold
equity interests in the investment funds’ general partner and/or managing
member/advisor, we have no direct investments in these entities and we do not
guarantee their obligations.  We have agreements with these entities
to provide ongoing services on behalf of the general partners and/or managing
members/advisors and we receive all fee income to which these entities are
entitled.
 
 - 27
-
 CENTERLINE
HOLDING COMPANY
 NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 
 
 NOTE
18 – Consolidated Partnerships
 
 Financial
information for the LIHTC Fund and Property Partnerships is as of March 31,
2008, the most recent reliable date.  Information with respect to the
CMBS Fund Partnerships and High-Yield Debt Fund Partnership is as of June 30,
2008.
 
 Assets
and liabilities of consolidated partnerships consisted of the
following:
 
 June
      30, 2008
            
            December
      31, 2007(in
      thousands)
            
            LIHTC
      Fund and Property Partnerships
            
            CMBS
      and High-Yield Debt Fund Partnerships
            
            Total
            
            LIHTC
      Fund and Property Partnerships
            
            CMBS
      and High-Yield Debt Fund Partnerships
            
            TotalAvailable-for-saleCMBS
            
            $
            --
            
            $
            795,315
            
            $
            795,315
            
            $
            --
            
            $
            1,235,059
            
            $
            1,235,059Retained
      CMBS certificates
            
            
            --
            
            
            378,230
            
            
            378,230
            
            
            --
            
            
            482,424
            
            
            482,424CDO
      equity
            
            
            --
            
            
            76,221
            
            
            76,221
            
            
            --
            
            
            65,060
            
            
            65,060--
            
            
            1,249,766
            
            
            1,249,766
            
            
            --
            
            
            1,782,543
            
            
            1,782,543Equity MethodEquity
      interests in LIHTC properties
            
            
            4,304,959
            
            
            --
            
            
            4,304,959
            
            
            4,178,206
            
            
            --
            
            
            4,178,206OtherMortgage
      loans held for investment
            
            
            --
            
            
            329,437
            
            
            329,437
            
            
            --
            
            
            336,322
            
            
            336,322Other
      investments
            
            
            68,265
            
            
            --
            
            
            68,265
            
            
            78,055
            
            
            --
            
            
            78,05568,265
            
            
            329,437
            
            
            397,702
            
            
            78,055
            
            
            336,322
            
            
            414,377Total
      investments held by consolidated partnerships
            
            
            4,373,224
            
            
            1,579,203
            
            
            5,952,427
            
            
            4,256,261
            
            
            2,118,865
            
            
            6,375,126Land,
      buildings and improvements, net
            
            
            711,632
            
            
            --
            
            
            711,632
            
            
            661,380
            
            
            --
            
            
            661,380Other
      assets
            
            
            296,476
            
            
            89,888
            
            
            386,364
            
            
            290,076
            
            
            81,659
            
            
            371,735Total
      assets
            
            $
            5,381,332
            
            $
            1,669,091
            
            $
            7,050,423
            
            $
            5,207,717
            
            $
            2,200,524
            
            $
            7,408,241Financing
      arrangements
            
            $
            --
            
            $
            1,123,095
            
            $
            1,123,095
            
            $
            --
            
            $
            1,122,906
            
            $
            1,122,906Notes
      payable
            
            
            381,555
            
            
            295,000
            
            
            676,555
            
            
            422,904
            
            
            35,463
            
            
            458,367Repurchase
      agreements
            
            
            --
            
            
            94,891
            
            
            94,891
            
            
            --
            
            
            416,059
            
            
            416,059Due
      to property partnerships
            
            
            857,343
            
            
            --
            
            
            857,343
            
            
            970,602
            
            
            --
            
            
            970,602Other
      liabilities
            
            
            172,543
            
            
            21,694
            
            
            194,237
            
            
            177,979
            
            
            15,041
            
            
            193,020Total
      liabilities
            
            $
            1,411,441
            
            $
            1,534,680
            
            $
            2,946,121
            
            $
            1,571,485
            
            $
            1,589,469
            
            $
            3,160,954
 
 
 A.  CMBS
 
 The CMBS
Fund Partnerships invest in and hold CMBS investments.  CMBS
investments held by these partnerships comprised the amounts noted below as of
June 30, 2008:
  - 28
-
 CENTERLINE
HOLDING COMPANY
 NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 (dollars
      in thousands)
            
            Face
      Amount
            
            Accreted
      Cost
            
            Unrealized
      Gain
            
            Unrealized
      Loss
            
            Fair
      Value
            
            Percentage
      of Fair ValueSecurity
      Rating:BBB+
            
            $
            26,500
            
            $
            24,687
            
            $
            --
            
            $
            (14,512
            )
            $
            10,175
            
            1.4
            %BBB
            
            
            86,139
            
            
            75,103
            
            
            --
            
            
            (46,439
            )
            
            28,664
            
            3.6BBB-
            
            
            417,065
            
            
            304,516
            
            
            --
            
            
            (168,483
            )
            
            136,033
            
            17.1BB+
            
            
            309,441
            
            
            258,073
            
            
            --
            
            
            (157,799
            )
            
            100,274
            
            12.6BB
            
            
            273,943
            
            
            222,016
            
            
            --
            
            
            (137,345
            )
            
            84,671
            
            10.6BB-
            
            
            304,908
            
            
            217,639
            
            
            --
            
            
            (133,038
            )
            
            84,601
            
            10.6B+
            
            
            257,029
            
            
            167,614
            
            
            --
            
            
            (95,858
            )
            
            71,756
            
            9.0B
            
            
            172,743
            
            
            99,681
            
            
            137
            
            
            (59,855
            )
            
            39,963
            
            5.0B-
            
            
            219,507
            
            
            96,324
            
            
            470
            
            
            (48,337
            )
            
            48,457
            
            6.1CCC+
            
            
            17,064
            
            
            11,127
            
            
            --
            
            
            (6,712
            )
            
            4,415
            
            0.6CCC
            
            
            6,826
            
            
            1,651
            
            
            --
            
            
            --
            
            
            1,651
            
            0.2CCC-
            
            
            16,239
            
            
            6,776
            
            
            --
            
            
            (1,175
            )
            
            5,601
            
            0.7Non-rated
            
            
            970,989
            
            
            287,001
            
            
            781
            
            
            (108,728
            )
            
            179,054
            
            22.5Total
            
            $
            3,078,393
            
            $
            1,772,208
            
            $
            1,388
            
            $
            (978,281
            )
            $
            795,315
            
            100.0
            %
 
 
 During
the six months ended June 30, 2008, one of the CMBS Fund Partnerships purchased
CMBS investments with a face amount of $72.0 million for a purchase price of
$24.9 million.
 
 Unrealized
losses presented above do not include $8.0 million of unrealized losses that a
CMBS Fund Partnership recognized as an impairment charge, included in “loss from
investments held by consolidated partnerships”, during the six months ended June
30, 2008.  The impairment was primarily due to increased rates of
default within one CMBS trust. In accordance with SFAS 115, when we record an
impairment charge and reduce an asset to its fair value, the fair value becomes
the new cost basis of the investment.  As such, there is no difference
between the accreted cost of those assets and their fair values as of June 30,
2008.
 
 For CMBS
investments in an unrealized loss position, the fair value and gross unrealized
losses, aggregated by length of time that individual investments have been in a
continuous unrealized loss position, is summarized in the table
below:
 (dollars
      in thousands)
              
              Less
      than 12 Months
              
              
              12
      Months or More
              
              
              TotalJune
      30, 2008Number
              
              
              242
              
              
              
              97
              
              
              
              339Fair
      Value
              
              $
              618,932
              
              
              $
              174,555
              
              
              $
              793,487Gross
      Unrealized loss
              
              $
              966,822
              
              
              $
              11,459
              
              
              $
              978,281
 
 The
unrealized losses are due to widening credit spreads as a result of market
conditions and we believe do not reflect the credit quality of the underlying
assets.  The CMBS Fund Partnerships have the ability and intent to
hold these investments until recovery; as such, we have determined that the
decreases in fair value are temporary.
 
 B.  Retained
CMBS Certificates
 
 The CMBS
Fund Partnerships retain interests in certain securitized assets that they have
sold, as well as others purchased in market transactions.  Investments
in retained certificates held by these partnerships comprised the amounts noted
below as of June 30, 2008:
  - 29
-
 CENTERLINE
HOLDING COMPANY
 NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 (dollars
      in thousands)
            
            Face
      Amount
            
            Accreted
      Cost
            
            Unrealized
      Gain
            
            Unrealized
      Loss
            
            Fair
      Value
            
            Percentage
      of Fair ValueSecurity
      Rating:AAA
            
            $
            147,900
            
            $
            144,795
            
            $
            --
            
            $
            (11,344
            )
            $
            133,451
            
            35.3
            %AA+
            
            
            51,100
            
            
            49,315
            
            
            --
            
            
            (5,687
            )
            
            43,628
            
            11.5AA
            
            
            15,400
            
            
            16,168
            
            
            --
            
            
            (3,178
            )
            
            12,990
            
            3.4A+
            
            
            62,600
            
            
            62,697
            
            
            --
            
            
            (12,101
            )
            
            50,596
            
            13.4A
            
            
            66,500
            
            
            71,239
            
            
            --
            
            
            (19,828
            )
            
            51,411
            
            13.6A-
            
            
            30,700
            
            
            28,681
            
            
            --
            
            
            (7,155
            )
            
            21,526
            
            5.7BBB+
            
            
            49,600
            
            
            45,506
            
            
            --
            
            
            (16,293
            )
            
            29,213
            
            7.7B
            
            
            63,319
            
            
            54,409
            
            
            --
            
            
            (44,565
            )
            
            9,844
            
            2.6B-
            
            
            157,007
            
            
            43,270
            
            
            --
            
            
            (26,372
            )
            
            16,898
            
            4.5Non-rated
            
            
            183,427
            
            
            3,396
            
            
            --
            
            
            --
            
            
            3,396
            
            0.9Non-rated
      interest only
            
            
            --
            
            
            4,439
            
            
            898
            
            
            (60
            )
            
            5,277
            
            1.4Total
            
            $
            827,553
            
            $
            523,915
            
            $
            898
            
            $
            (146,583
            )
            $
            378,230
            
            100.0
            %
 
 
 At June
30, 2008, the non-rated interest only certificates had combined notional amounts
of $1.3 billion.
  Unrealized
losses presented above do not include $17.7 million of unrealized losses that a
CMBS Fund Partnership recognized as an impairment charge, included in “loss from
investments held by consolidated partnerships”,  during the six months
ended June 30, 2008 and an additional $20.9 million recognized in
2007.  The CMBS Fund Partnership is scheduled to liquidate within the
next two years and may not be able to hold the assets until recovery. In
accordance with SFAS 115, when we record an impairment charge and reduce an
asset to its fair value, the fair value becomes the new cost basis of the
investment.  As such, there is no difference between the accreted cost
of those assets and their fair values as of June 30, 2008.
 
 For
retained CMBS certificates in an unrealized loss position, the fair value and
gross unrealized losses, aggregated by length of time that individual
investments have been in a continuous unrealized loss position, is summarized in
the table below:
 
 (dollars
      in thousands)
              
              Less
      than
                12
      Months
              
              
              12
      Months
                or
      More
              
              
              TotalJune
      30, 2008Number
              
              
              26
              
              
              
              7
              
              
              
              33Fair
      Value
              
              $
              189,994
              
              
              $
              187,180
              
              
              $
              377,174Gross
      Unrealized loss
              
              $
              135,729
              
              
              $
              10,854
              
              
              $
              146,583
 The
unrealized losses are due to widening credit spreads as a result of market
conditions and we believe do not reflect the credit quality of the underlying
assets.  The CMBS Fund Partnerships have the ability and intent to
hold these investments until recovery; as such, we have determined that the
decreases in fair value are temporary.
 
 C.  CDO
Debt and Equity
 
 The
High-Yield Debt Partnership invests in trusts that hold commercial real estate
loans and issue CDOs.  CDO debt and equity investments held by this
partnership comprised the amounts noted below as of June 30, 2008:
 
 - 30
-
 CENTERLINE
HOLDING COMPANY
 NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 (dollars
      in thousands)
            
            Face
      Amount
            
            Accreted
      Cost
            
            Unrealized
      Gain
            
            Unrealized
      Loss
            
            Fair
      Value
            
            Percentage
      of Fair ValueSecurity
      Rating:BBB
            
            $
            9,750
            
            $
            9,458
            
            $
            --
            
            $
            (5,070
            )
            $
            4,388
            
            5.9
            %BBB-
            
            
            28,550
            
            
            27,097
            
            
            --
            
            
            (16,485
            )
            
            10,612
            
            13.9BB+
            
            
            42,300
            
            
            40,147
            
            
            --
            
            
            (26,482
            )
            
            13,665
            
            17.9BB
            
            
            17,413
            
            
            16,392
            
            
            --
            
            
            (10,737
            )
            
            5,655
            
            7.4BB-
            
            
            11,325
            
            
            10,534
            
            
            --
            
            
            (6,855
            )
            
            3,679
            
            4.8B+
            
            
            18,575
            
            
            17,139
            
            
            --
            
            
            (12,341
            )
            
            4,798
            
            6.3B
            
            
            7,124
            
            
            6,326
            
            
            --
            
            
            (4,333
            )
            
            1,993
            
            2.6B-
            
            
            17,325
            
            
            16,508
            
            
            --
            
            
            (12,298
            )
            
            4,210
            
            5.5Non-rated
            
            
            118,576
            
            
            102,544
            
            
            --
            
            
            (75,323
            )
            
            27,221
            
            35.7Total
            
            $
            270,938
            
            $
            246,145
            
            $
            --
            
            $
            (169,924
            )
            $
            76,221
            
            100.0
            %
 
 
 During
the six months ended June 30, 2008, the High-Yield Debt Fund Partnership
purchased CDO debt and equity investments with a face amount of $165.0 million
for a purchase price of $142.0 million.
 
 For CDO
debt and equity investments in an unrealized loss position, the fair value and
gross unrealized losses, aggregated by length of time that individual
investments have been in a continuous unrealized loss position, is summarized in
the table below:
 
 (dollars
      in thousands)
            
            Less
      than
              12
      Months
            
            
            12
      Months
              or
      More
            
            
            TotalJune
      30, 2008Number
            
            
            19
            
            
            
            6
            
            
            
            25Fair
      value
            
            $
            57,972
            
            
            $
            18,249
            
            
            $
            76,221Gross
      unrealized loss
            
            $
            124,960
            
            
            $
            44,964
            
            
            $
            169,924
 
 
 The
unrealized losses are due to widening credit spreads as a result of market
conditions and we believe are not reflective of the credit quality of the
underlying assets.  The High-Yield Debt Fund Partnership has the
ability and intent to hold these investments until recovery; as such, we have
determined that the decreases in fair value are temporary.
 
 D.  Equity
Interests in LIHTC Properties and Due to Property Partnerships
 
 The LIHTC
Fund Partnerships invest in property level partnerships that generate the
LIHTCs.  Neither we nor the LIHTC Fund Partnerships control these
partnerships and, therefore, we do not consolidate them in our financial
statements.  “Equity interests in LIHTC properties” represents the
limited partner investments in those property level partnerships, which the
LIHTC Fund Partnerships carry on the equity method of accounting.  The
partnership agreements of the property level partnerships stipulate the amount
of capital to be funded and the timing of payments of that
capital.  “Due to property partnerships” represents the unfunded
portion of those capital commitments.
 
 E.  Mortgage
Loans Held for Investment
 
 The
High-Yield Debt Fund Partnership invests in various types of
loans.  The aggregate carrying values, allocated by product type and
weighted average coupons, of mortgage loans held for investment held by that
Partnership as of June 30, 2008, are presented in the table below:
  - 31
-
 CENTERLINE
HOLDING COMPANY
 NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 (dollars
      in thousands)
            
            Total
              Commitment
            
            Carrying
              Value
            
            Allocation
      by
              Product
      Type
            
            Fixed
      Rate
              Average
              Yield
            
            Variable
      Rate
              Average
      Yield
              as
      of June 30, 2008Product
      Type:Bridge
      loans, variable rate
            
            $
            15,000
            
            $
            5,901
            
            3.8
            %
            
            
            6.00
            %Bridge
      loans, fixed rate
            
            
            43,426
            
            
            41,901
            
            11.0
            
            7.24
            %Subordinated
      notes, variable rate
            
            
            71,800
            
            
            61,303
            
            18.3
            
            
            
            7.24Subordinated
      notes, fixed rate
            
            
            23,375
            
            
            21,327
            
            5.9
            
            8.17Mezzanine
      loans, variable rate
            
            
            144,925
            
            
            108,204
            
            36.8
            
            
            
            7.35Mezzanine
      loans, fixed rate
            
            
            92,917
            
            
            89,474
            
            23.7
            
            9.79First
      mortgage, variable rate
            
            
            2,025
            
            
            1,327
            
            0.5
            
            
            
            5.62Total/Average
            
            $
            393,468
            
            $
            329,437
            
            100.0
            %
            8.40
            %
            6.55
            %
 
 
 F.  Financing
Arrangements/Notes Payable/Repurchase Agreements
 
 The Fund
Partnerships use debt facilities to finance investment activity.
 
 In
February 2008, one of the CMBS Fund Partnerships received loans of $295.0
million from certain members of the fund (excluding $22.3 million from
us).  The loans are for a two year term, subject to two one-year
extensions upon approval of all lenders (excluding us) and bear interest at a
fixed rate of 14.0% (and a portion may be paid-in-kind although the fund has
paid all interest in cash to date).  Proceeds from the loan were used
to repay all outstanding repurchase agreement and subscription line financing of
the CMBS Fund Partnership and to repay other loans we had made to the Fund
Partnership.
 
 In
connection with the repayment of the outstanding repurchase agreement financing,
certain interest rate swaps were terminated as discussed below.
 
 Other
changes in the balances since December 31, 2007, are due to transactions
undertaken in the ordinary course of business.
 
 In July
2008, the High Yield Debt Partnership’s $150.0 million-capacity repurchase
agreement with Morgan Stanley Bank was terminated and the balance ($29.4 million
as of June 30, 2008) was repaid.
 
 G.  Financial
Risk Management and Derivatives
 
 In
connection with the termination of repurchase agreement financings as discussed
above, one of the CMBS Fund Partnerships terminated seven interest rate swap
contracts with a total notional amount of $187.8 million that were designated as
cash flow hedges against future interest payments on the fund’s future long-term
borrowings.  The termination of these swap contracts resulted in a
realized loss of approximately $14.1 million which was included in other
comprehensive loss during the first quarter.  Of this amount, $0.3
million was recorded through the Condensed Consolidated Statement of Operations
in the second quarter based on changes to the expected timing of the fund’s
future long-term borrowings.  Additionally, $1.3 million of losses on
the fund’s remaining swaps were reclassified from accumulated other
comprehensive loss to the Condensed Consolidated Statement of Operations in the
second quarter based on the changes to the expected timing of the fund’s
long-term borrowings.
 
 In
connection with the termination of repurchase agreement financings, during the
first quarter of 2008, the High-Yield Debt Fund terminated all of its cash flow
hedges with total notional amount of $73.2 million.  Termination costs
of $5.6 million were paid at the time of termination and included in accumulated
other comprehensive loss during the first quarter.  Of this amount,
$4.3 million was recorded through the Condensed Consolidated Statement of
Operations in the second quarter based on changes to the expected timing of the
fund’s future long-term borrowings.
 
 As part
of our review of our overall hedging strategy, in July 2008, one of the CMBS
Fund Partnerships terminated their remaining swap contracts with a total
notional amount of $49.0 million.  The termination of these swaps
contracts resulted in a realized loss of $3.3 million which will be included in
the funds’ statement of operations in the third quarter.
  - 32
-
 CENTERLINE
HOLDING COMPANY
 NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 H.  Revenues
and Expenses
 
 Revenues
and expenses of consolidated partnerships consisted of the
following:
 
 Three
      Months Ended June 30,2008
            
            2007(in
      thousands)
            
            LIHTC
      Fund and Property Partnerships
            
            CMBS
      and High-Yield Debt Fund Partnerships
            
            Total
            
            LIHTC
      Fund and Property Partnerships
            
            CMBS
      and High-Yield Debt Fund Partnerships
            
            TotalInterest
      income
            
            $
            2,768
            
            $
            61,492
            
            $
            64,260
            
            $
            3,954
            
            $
            41,469
            
            $
            45,423Rental
      income
            
            
            17,267
            
            
            --
            
            
            17,267
            
            
            13,277
            
            
            --
            
            
            13,277Other
      revenues
            
            
            2,441
            
            
            93
            
            
            2,534
            
            
            1,647
            
            
            410
            
            
            2,057Total
      revenues
            
            $
            22,476
            
            $
            61,585
            
            $
            84,061
            
            $
            18,878
            
            $
            41,879
            
            $
            60,757Interest
      expense
            
            $
            5,394
            
            $
            27,519
            
            $
            32,913
            
            $
            5,263
            
            $
            18,739
            
            $
            24,002Asset
      management fees
            
            
            6,332
            
            
            --
            
            
            6,332
            
            
            6,264
            
            
            --
            
            
            6,264Property
      operating expenses
            
            
            9,012
            
            
            --
            
            
            9,012
            
            
            7,407
            
            
            --
            
            
            7,407General
      and administrative expenses
            
            
            7,045
            
            
            475
            
            
            7,520
            
            
            4,704
            
            
            287
            
            
            4,991Depreciation
      and amortization
            
            
            10,094
            
            
            1,526
            
            
            11,620
            
            
            7,966
            
            
            608
            
            
            8,574Other
      expenses
            
            
            2,550
            
            
            4,347
            
            
            6,897
            
            
            2,293
            
            
            --
            
            
            2,293Subtotal
            
            
            35,033
            
            
            6,348
            
            
            41,381
            
            
            28,634
            
            
            895
            
            
            29,529Total
      expenses
            
            $
            40,427
            
            $
            33,867
            
            $
            74,294
            
            $
            33,897
            
            $
            19,634
            
            $
            53,531
 
 
 Six
      Months Ended June 30,2008
            
            2007(in
      thousands)
            
            LIHTC
      Fund and Property Partnerships
            
            CMBS
      and High-Yield Debt Fund Partnerships
            
            Total
            
            LIHTC
      Fund and Property Partnerships
            
            CMBS
      and High-Yield Debt Fund Partnerships
            
            TotalInterest
      income
            
            $
            5,752
            
            $
            128,644
            
            $
            134,396
            
            $
            7,485
            
            $
            72,838
            
            $
            80,323Rental
      income
            
            
            34,256
            
            
            --
            
            
            34,256
            
            
            25,428
            
            
            --
            
            
            25,428Other
      revenues
            
            
            3,991
            
            
            185
            
            
            4,176
            
            
            3,207
            
            
            547
            
            
            3,754Total
      revenues
            
            $
            43,999
            
            $
            128,829
            
            $
            172,828
            
            $
            36,120
            
            $
            73,385
            
            $
            109,505Interest
      expense
            
            $
            8,418
            
            $
            59,387
            
            $
            67,805
            
            $
            12,448
            
            $
            33,866
            
            $
            46,314Asset
      management fees
            
            
            14,424
            
            
            --
            
            
            14,424
            
            
            12,603
            
            
            --
            
            
            12,603Property
      operating expenses
            
            
            15,869
            
            
            --
            
            
            15,869
            
            
            13,297
            
            
            --
            
            
            13,297General
      and administrative expenses
            
            
            12,639
            
            
            890
            
            
            13,529
            
            
            9,944
            
            
            1,026
            
            
            10,970Depreciation
      and amortization
            
            
            17,376
            
            
            3,770
            
            
            21,146
            
            
            14,055
            
            
            1,205
            
            
            15,260Other
      expenses
            
            
            3,924
            
            
            4,347
            
            
            8,271
            
            
            3,035
            
            
            --
            
            
            3,035Subtotal
            
            
            64,232
            
            
            9,007
            
            
            73,239
            
            
            52,934
            
            
            2,231
            
            
            55,165Total
      expenses
            
            $
            72,650
            
            $
            68,394
            
            $
            141,044
            
            $
            65,382
            
            $
            36,097
            
            $
            101,479
 
 - 33
-
  CENTERLINE
HOLDING COMPANY
 NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 I.  Fair
Value Disclosures
 
 Valuation
methodologies applied by our Consolidated Partnerships are consistent with those
described in Note 10 for CMBS, retained CMBS certificates and derivatives. The
valuation methodology followed for investments in CDO equity is consistent with
that applied to investments in CMBS.
 
 The
following tables present the information about assets and liabilities of
consolidated partnerships measured at fair value on a recurring basis as of June
30, 2008:
 
 (in
      thousands)
            
            Level
      1
            
            
            Level
      2
            
            
            Level
      3
            
            
            Balance
              as
      of
              June
      30,
              2008Available-for-sale
      investments:CMBS
            
            $
            --
            
            
            $
            --
            
            
            $
            795,315
            
            
            $
            795,315Retained
      CMBS certificates
            
            
            --
            
            
            
            --
            
            
            
            378,230
            
            
            
            378,230CDO
      equity
            
            
            --
            
            
            
            --
            
            
            
            76,221
            
            
            
            76,221Total
      available-for-sale investments
            
            $
            --
            
            
            $
            --
            
            
            $
            1,249,766
            
            
            $
            1,249,766LiabilitiesDerivatives
      (included in “Other liabilities of consolidated
    partnerships”)
            
            $
            --
            
            
            $
            8,990
            
            
            $
            --
            
            
            $
            8,990
 
 
 The
following table presents additional information about assets measured at fair
value on a recurring basis and for which the consolidated partnerships utilized
Level 3 inputs to determine fair value:
 
 (in
      thousands)
            
            CMBS
            
            
            Retained
      CMBS certificates
            
            
            CDO
      equity
            
            
            TotalBalance
      at January 1, 2008
            
            $
            1,235,059
            
            
            $
            482,424
            
            
            $
            65,060
            
            
            $
            1,782,543Total
      realized and unrealized gains (losses):Included
      in earnings
            
            
            --
            
            
            
            (688
            )
            
            
            --
            
            
            
            (688
            )Included
      in other comprehensive income
            
            
            (406,520
            )
            
            
            (3,037
            )
            
            
            (56,490
            )
            
            
            (466,047
            )Amortization
      or accretion
            
            
            1,049
            
            
            
            762
            
            
            
            415
            
            
            
            2,226Purchases,
      issuances, settlements and other adjustments
            
            
            47,540
            
            
            
            --
            
            
            
            129,521
            
            
            
            177,061Net
      transfers in and/or out of Level 3
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --Balance
      at March 31, 2008
            
            $
            877,128
            
            
            $
            479,461
            
            
            $
            138,506
            
            
            $
            1,495,095Total
      realized and unrealized gains (losses):Included
      in earnings
            
            
            (7,985
            )
            
            
            (17,006
            )
            
            
            --
            
            
            
            (24,991
            )Included
      in other comprehensive income
            
            
            (71,724
            )
            
            
            (84,919
            )
            
            
            (75,453
            )
            
            
            (232,096
            )Amortization
      or accretion
            
            
            (2,104
            )
            
            
            694
            
            
            
            670
            
            
            
            (740
            )Purchases,
      issuances, settlements and other adjustments
            
            
            --
            
            
            
            --
            
            
            
            12,498
            
            
            
            12,498Net
      transfers in and/or out of Level 3
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --Balance
      at June 30, 2008
            
            $
            795,315
            
            
            $
            378,230
            
            
            $
            76,221
            
            
            $
            1,249,766Amount
      of total gains (losses) for the period included in earnings attributable
      to the change in unrealized gains or losses relating to assets still held
      at June 30, 2008 (1)
            
            $
            (7,985
            )
            
            $
            (17,694
            )
            
            $
            --
            
            
            $
            (25,679
            )
  (1)Included in “Other (Loss) Income– Loss from Investments
      Held by Consolidated Partnerships” in the Condensed Consolidated Statement
      of Operations.
   - 34
-
  CENTERLINE
HOLDING COMPANY
 NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 Both
observable and unobservable inputs may be used to determine the fair value of
positions that are classified within the Level 3 category.  As a
result, the unrealized gains and losses for assets within the Level 3 category
presented in the table above may include changes in fair value that were
attributable to both observable (e.g., changes in market interest rates) and
unobservable (e.g., changes in historical company data) inputs.
 
 
 NOTE
19 – Business Segments
 
 We manage
our operations through six reportable segments including two segments not
involved in direct operations.  Our four operating segments
include:
 
 Affordable Housing, which
brings together the users and providers of debt and equity capital to the
affordable multifamily rental industry;
 
 Commercial Real Estate, which
provides a broad spectrum of financing and investment products for multifamily,
office, retail, industrial, mixed-use and other properties;
 
 Portfolio Management, which
comprises activities for monitoring, managing and servicing the Affordable
Housing and Commercial Real Estate assets we own, for funds we manage and for
third parties; and
 
 Credit Risk Products, which
provides credit intermediation, through our subsidiaries, to affordable housing
debt and equity products.  Through this segment, we also invest in
syndicated corporate debt.
 
 We
consolidate certain funds we control, notwithstanding the fact that we may only
have a minority economic interest in such entities.  For segment
purposes, the Consolidated Partnerships segment includes the investment fund
partnerships we originate and manage through the Affordable Housing and
Commercial Real Estate Groups and certain property partnerships, all of which we
are required to consolidate in accordance with various accounting
pronouncements.  The Consolidated Partnerships invest in LIHTC
properties, high-yield CMBS, CDO equity and high-yield debt.  In
addition to these five segments, we separately show our Corporate Group, which
includes our executive, central administrative, finance and risk policy
functions.
 
 Segment
results include all direct and contractual revenues and expenses of each segment
and allocations of certain indirect expenses based on specific
methodologies.  These reportable segments are strategic business units
that primarily generate revenue streams that are distinctly different and are
generally managed separately.
 
 The table
below includes Adjusted Net Income, and a reconciliation from Adjusted Net
Income to GAAP net income, as Adjusted Net Income is the performance measure
used by our chief decision-maker for purposes of measuring performance and
capital allocation.  We define Adjusted Net Income as net income
pursuant to GAAP and adjusted for non-cash amortization of acquired intangible
assets and acquisition-related, share-based compensation.  There is no
generally accepted methodology for computing Adjusted Net Income, and our
computation of Adjusted Net Income may not be comparable to similar measurements
reported by other companies.
  - 35
-
 CENTERLINE
HOLDING COMPANY
 NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 Three
      Months Ended June 30,
            
            Six
      Months Ended June 30,(in
      thousands)
            
            2008
            
            2007
            
            2008
            
            2007RevenueAffordable
      Housing
            
            $
            40,655
            
            $
            67,872
            
            $
            84,103
            
            $
            130,452Commercial
      Real Estate
            
            
            16,033
            
            
            16,377
            
            
            30,377
            
            
            31,379Portfolio
      Management
            
            
            11,696
            
            
            15,303
            
            
            23,080
            
            
            29,286Credit
      Risk Products
            
            
            2,242
            
            
            4,187
            
            
            4,545
            
            
            7,579Corporate
            
            
            5,571
            
            
            5,547
            
            
            11,902
            
            
            12,168Consolidated
      Partnerships
            
            
            84,061
            
            
            60,757
            
            
            172,828
            
            
            109,505Elimination
      of intersegment transactions
            
            
            (30,484
            )
            
            (34,979
            )
            
            (62,874
            )
            
            (68,140
            )Consolidated
      Revenues
            
            $
            129,774
            
            $
            135,064
            
            $
            263,961
            
            $
            252,229Depreciation
      and AmortizationAffordable
      Housing
            
            $
            222
            
            $
            222
            
            $
            720
            
            $
            477Commercial
      Real Estate
            
            
            3,077
            
            
            3,890
            
            
            6,165
            
            
            8,451Portfolio
      Management
            
            
            962
            
            
            3,076
            
            
            2,235
            
            
            3,102Credit
      Risk Products
            
            
            43
            
            
            21
            
            
            79
            
            
            38Corporate
            
            
            7,142
            
            
            3,385
            
            
            14,148
            
            
            9,624Consolidated
      Depreciation and Amortization
            
            $
            11,446
            
            $
            10,594
            
            $
            23,347
            
            $
            21,692Depreciation
      and Amortization of Consolidated Partnerships
            
            $
            11,620
            
            $
            8,574
            
            $
            21,146
            
            $
            15,260Adjusted
      Net Income (Loss)Affordable
      Housing
            
            $
            2,872
            
            $
            18,719
            
            $
            4,803
            
            $
            11,066Commercial
      Real Estate
            
            
            9,820
            
            
            62
            
            
            4,669
            
            
            (2,647
            )Portfolio
      Management
            
            
            3,096
            
            
            5,797
            
            
            6,716
            
            
            11,136Credit
      Risk Products
            
            
            (1,717
            )
            
            (2,767
            )
            
            (4,771
            )
            
            (2,761
            )Corporate
            
            
            (15,928
            )
            
            (21,815
            )
            
            (30,889
            )
            
            (33,387
            )Consolidated
      Partnerships
            
            
            4,580
            
            
            3,213
            
            
            11,944
            
            
            10,281Eliminations
            
            
            (2,187
            )
            
            7,781
            
            
            (9,698
            )
            
            8,580Total
      Adjusted Net Income (Loss)
            
            
            536
            
            
            10,990
            
            
            (17,226
            )
            
            2,268Amortization
      of acquired intangible assets, net of minority interests
            
            
            (2,492
            )
            
            (2,672
            )
            
            (4,968
            )
            
            (5,349
            )Amortization
      of acquisition-related share-based compensation, net of minority
      interests
            
            
            (373
            )
            
            (3,338
            )
            
            (1,774
            )
            
            (6,684
            )Net
      (loss) income
            
            $
            (2,329
            )
            $
            4,980
            
            $
            (23,968
            )
            $
            (9,765)
 
 
 NOTE
20– Commitments and Contingencies
 
 PRS/CRG/ERC
 
 PRS/CRG
 
 PRS
Companies (“PRS”) and Capital Realty Group (“CRG”) were sponsors of certain
LIHTC property partnerships for which we held mortgage revenue bonds and/or to
which investment funds we sponsor have contributed equity, and a construction
affiliate of PRS served as general contractor for most of these
partnerships.  Due to financial difficulties experienced by PRS and
its construction affiliate, we ceased our business dealings with PRS and
acquired the general partner interest in certain partnerships sponsored by PRS
as part of agreements reached in April 2005 (the “PRS
Partnerships”).  There were two additional projects for which the PRS
construction affiliate was general contractor (the “GCG Partnerships”) for which
the general partner interest owned by PRS or an affiliate were transferred to us
at the same time.
 
 Likewise,
we entered into agreements in April 2005 with CRG with respect to certain
partnerships in which CRG served as sponsor (the “CRG
Partnerships”).  The PRS financial difficulties created construction
finance shortfalls that created liquidity problems for these partnerships as
well.  In December 2006, we entered into an additional agreement with
CRG to transfer to us the general partner interests held by CRG in four
additional properties.  This agreement included the termination of
certain rights retained by CRG with respect to the CRG Partnerships in the 2005
Agreements and we have ceased our business dealings with CRG.
 
 - 36
-
 CENTERLINE
HOLDING COMPANY
 NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 
 In August
2007, we entered into a letter of intent for a developer to acquire the general
partnership interests in nine of the PRS partnerships located in Atlanta,
Georgia.  Under the proposed arrangement, the acquirer will manage the
projects and we will fund a fixed amount of advances, after which we will
jointly fund any required advances with the acquirer.  We will also
jointly share fees and cash flow payable to the general partners of the
projects.  We anticipate that the sale of the general partner interest
in the projects will close in the third quarter of 2008.
 
 ERC
 
 To
protect our interests in properties for which we had provided debt or equity
financing, in October 2006 we reached an agreement with ERC, Inc. (a developer)
to acquire its general partner interests in partnerships it had
sponsored.  Those partnerships are also summarized in the table
below.
 
 We have
advanced funds to the partnerships after the takeover to cover operating costs
until the properties achieve stabilization.  Future equity payments
and proceeds from the sale of the general partner interests due from these
partnerships will help offset the advances.
 
 In
October 2007, we entered into letters of intent to sell the general partner
interests in 17 of the ERC partnerships to a developer.  If the
transactions close, the developer will acquire six of the general partner
interests for $3.4 million and the remaining 11 general partner interests for a
specified multiple of cash flow as the properties stabilize during a three-year
period.  We will jointly fund property deficits with the acquirer up
to specified maximum amounts.
  - 37
-
  CENTERLINE
HOLDING COMPANY
 NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 Summary of
Impact
 
 The
partnerships are summarized as follows:
 
 Number
            
            Centerline
      Capital
              Sponsored
      Fund is
              Equity
      Partner
            
            Included
      in Credit
              Intermediated
      Funds
            
            Centerline
      Holds
              GP
      Interest
            
            Third
      Party is
              Equity
      PartnerPRS
      PartnershipsLease-Up
            
            
            11
            
            
            6
            
            
            4
            
            
            6
            
            
            5Stabilized
            
            
            2
            
            
            --
            
            
            --
            
            
            --
            
            
            2Subtotal
            
            
            13
            
            
            6
            
            
            4
            
            
            6
            
            
            7CRG
      PartnershipsConstruction
            
            
            1
            
            
            1
            
            
            1
            
            
            1
            
            
            --Rehab
            
            
            1
            
            
            1
            
            
            1
            
            
            1
            
            
            --Lease-Up
            
            
            4
            
            
            4
            
            
            2
            
            
            3
            
            
            --Stabilized
            
            
            3
            
            
            3
            
            
            2
            
            
            1
            
            
            --Subtotal
            
            
            9
            
            
            9
            
            
            6
            
            
            6
            
            
            --GCG
      PartnershipsLease-Up
            
            
            2
            
            
            2
            
            
            1
            
            
            --
            
            
            --Subtotal
            
            
            2
            
            
            2
            
            
            1
            
            
            --
            
            
            --ERC
      PartnershipsConstruction
            
            
            1
            
            
            1
            
            
            1
            
            
            1
            
            
            --Lease-Up
            
            
            13
            
            
            13
            
            
            12
            
            
            13
            
            
            --Stabilized
            
            
            4
            
            
            4
            
            
            2
            
            
            4
            
            
            --Subtotal
            
            
            18
            
            
            18
            
            
            15
            
            
            18
            
            
            --Total
            
            
            42
            
            
            35
            
            
            26
            
            
            30
            
            
            7
 
 
 Our
potential exposure falls into two categories as follows:
 
 Cash required to bring
      the properties to break-even operation – As of June 30, 2008,
      advances outstanding totaled $42.1 million, net of
      reserves.  These advances, and additional loans, are assessed
      periodically for collectability.  At present, we do not
      anticipate that any of the remaining advances would require a charge to
      expense, although as the strategy with respect to any property is
      implemented, circumstances may require a change in that
      outlook.
 
 The
current marketing plan is to sell the general partner interests in the above
referenced assets over the course of the next twelve months.  The
assets continue to be actively managed to minimize the necessary cash flow
outlays and maximize the performance of each asset.  Letters of intent
for the purchase of most of the general partner interests are in place and it is
anticipated that the properties will, in the aggregate, require $10.6 million of
additional cash over the next 24 months to fund deficit cash flow at the
property level.  The 24-month funding horizon includes up to 12 months
of marketing through the ultimate sale date and an additional 12 months of
required funding with the future general partners as part of the agreements to
bring the properties toward stabilization.
 
 Potential cost to
      provide specified yields – As noted in the table above, 26 of the
      partnerships are included in credit intermediated funds, for which we are
      obligated to provide specified yields.  As construction delays
      are likely to reduce the expected yields of the properties themselves,
      performance of the funds is likely to be impacted as well.  The
      obligations, however, provide for expected yields on pools of properties,
      some of which are performing above expected levels and the funds
      themselves often provide for adjustors that may mitigate the negative
      impact that would arise from the construction delays over the guarantee
      period covered by the agreements.  Our current estimate given
      these factors, and assuming that the property level partnerships meet
      their obligations under existing partnership agreements, is that no
      exposure under these agreements is probable at this
  time.
   - 38
-
 CENTERLINE
HOLDING COMPANY
 NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 
 Forward
Transactions
  At June
30, 2008, our Commercial Real Estate subsidiaries had forward commitments under
Fannie Mae and Freddie Mac programs of $231.8 million for mortgages to be funded
through October 2010, and each lending commitment has an associated sale
commitment.
 
 In
addition, those subsidiaries had commitments to sell mortgages that have either
been funded  (some of which have forward commitments as noted above) or
have been committed and/or “rate locked”.  Those that have been funded
as of June 30, 2008, totaled $39.9 million and are included in “Investments –
Other” as “Mortgage loans held for sale” on the Condensed Consolidated Balance
Sheet.  We expect to fund $83.0 million of committed and/or “rate
locked” loans in 2008.
 Mortgage
Loan Loss Sharing Agreements
 
 Pursuant
to a master loss sharing agreement under the Fannie Mae Delegated Underwriting
and Servicing (“DUS”) program, we assume responsibility for a portion of any
loss that may result from borrower defaults, based on Fannie Mae loss sharing
formulas.  At June 30, 2008, a significant proportion of our loans
sold to Fannie Mae consisted of Level I loans, meaning, in most cases, that we
are responsible for the first 5% of the unpaid principal balance and a portion
of any additional losses to a maximum of 20% of the original principal balance;
Fannie Mae bears any remaining loss.  Pursuant to this agreement, we
are responsible for funding 100% of mortgagor delinquency (principal and
interest) and servicing (taxes, insurance and foreclosure costs) advances until
the amounts advanced exceed 5% of the unpaid principal balance at the date of
default.  Thereafter, we may request interim loss sharing adjustments
which allow us to fund 25% of such advances until final settlement under the
agreement.
 
 We also
participate in loss sharing transactions under Freddie Mac’s Delegated
Underwriting Initiative (“DUI”) program whereby we originate loans that are
purchased by Freddie Mac.  Under the terms of our master agreement
with Freddie Mac, we are obligated to reimburse Freddie Mac, for a portion of
any loss that may result from borrower defaults in DUI
transactions.  For such loans, if a default occurs, our share of the
standard loss will be the first 5% of the unpaid principal balance and 25% of
the next 20% of the remaining unpaid principal balance to a maximum of 10% of
the unpaid principal balance.  The loss on a defaulted loan is
calculated as the unpaid principal amount due, unpaid interest due and default
resolutions costs (taxes, insurance, operation and foreclosure costs) less
recoveries.
 
 Our
maximum exposure at June 30, 2008, pursuant to these agreements, was $870.4
million (representing what we would owe in accordance with the loss sharing
percentages with Fannie Mae and Freddie Mac described above if every loan
defaulted and losses were incurred in amounts equal to or greater than these
levels for which we are responsible), although this amount is not indicative of
our actual potential losses.  We maintain an allowance for loan losses
for loans originated under these product lines at a level that, in management’s
judgment, is adequate to provide for estimated losses.  At June 30,
2008, and December 31, 2007, that reserve was $13.1 million which represents our
estimate of potential losses as of those dates.  The reserve is
recorded as a reduction of mortgage servicing rights (see Note 5).  In
addition, we recorded a $1.3 million charge in the quarter ended June 30, 2008,
for specific expected losses under our mortgage loan loss sharing agreement with
Fannie Mae.  The reserve is recorded in “accounts payable, accrued
expenses and other liabilities” on our Condensed Consolidated Balance
Sheet.
 
 As of
June 30, 2008, we maintained collateral consisting of commercial paper of $11.2
million and a money market account of $81,000, which is included in restricted
cash on our Condensed Consolidated Balance Sheet, to satisfy the Fannie Mae
collateral requirements of $11.0 million.
 
 We are
also required by the master agreement with Freddie Mac to provide collateral in
the amount of 8% of the original principal balance as security for payment of
the reimbursement obligation.  The collateral taken into account can
include a combination of the net worth of one of our Mortgage Banking
subsidiaries, a letter of credit and/or cash. To help cover this collateral
requirement, we have a letter of credit arrangement with Bank of America as a
part of our revolving credit facility (see Note 7).  At June 30, 2008,
commitments under this agreement totaled $11.5 million.
 
 Yield
Transactions
 
 We have
entered several credit intermediation agreements with either Natixis or Merrill
Lynch & Co., Inc. (“Merrill Lynch”) (each a “Primary Intermediator”) to
provide agreed-upon rates of return for pools of multifamily properties to LIHTC
funds sponsored by a subsidiary.  In return, we have or will receive
fees, generally at the start of each credit intermediation
period.  There are a total of 19 outstanding agreements to provide the
specified returns:
  - 39
-
 CENTERLINE
HOLDING COMPANY
 NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 ·
            through  the
      construction and lease-up phases of the
  properties;
 
 ·
            for
      the period from the completion of the construction and lease-up phases
      through the operating phase of the properties;
  or
 
 ·
            covering
      both periods.
 
 Total
potential exposure pursuant to these transactions is $1.6 billion, assuming the
funds achieve no return whatsoever.  Of these totals, seven of the
agreements (with $788.3 million of the potential exposure) are transacted by our
bankruptcy remote subsidiary, Centerline Financial LLC (“Centerline
Financial”).
 
 We have
analyzed the expected operations of the underlying properties and believe there
is no risk of loss at this time.  Should our analysis of risk of loss
change in the future, a provision for possible losses might be required pursuant
to SFAS No. 5, Accounting for
Contingencies.  The fair value of these obligations,
representing the deferral of the fee income over the obligation periods, was
$33.8 million as of June 30, 2008.  This amount is included in
“Deferred revenues” within “Accounts payable, accrued expense and other
liabilities” on our Condensed Consolidated Balance Sheet.  (Refer also
to PRS/CRG/ERC above, regarding potential exposure under existing
obligations).
 
 As of
June 30, 2008, we maintained collateral consisting of cash deposits of $55.0
million which is included in “deferred costs and other assets, net” on our
Condensed Consolidated Balance Sheet, to satisfy Merrill Lynch’s collateral
requirements (see Note 21).
 
 Other
Contingent Liabilities
 
 We have
entered into several transactions pursuant to the terms of which we will provide
credit support to construction lenders for project completion and Fannie Mae
conversion.  In some instances, we have also agreed to acquire
subordinated bonds to the extent the construction period bonds do not fully
convert.  In some instances, we also provide payment, operating
deficit, recapture and replacement reserve guarantees as business requirements
for developers to obtain construction financing.  Our maximum
aggregate exposure relating to these transactions was $199.2 million as of June
30, 2008.  The fair value of these obligations, representing the
deferral of the fee income over the obligation periods, was $0.3 million as of
June 30, 2008.  To date, we have had minimal exposure to losses under
these transactions and anticipate no material liquidity requirements in
satisfaction of any guarantee issued. This amount is included in “Deferred
revenues” within “Accounts payable, accrued expenses and other liabilities” on
our Condensed Consolidated Balance Sheet.
 
 Centerline
Financial has entered into three credit intermediation agreements to provide for
monthly principal and interest debt service payments for debt owed by property
partnerships owned by third parties, only to the extent there is a shortfall
payment from the underlying property.  In return, we receive fees
monthly based on a fixed rate until the expiration of the agreements which occur
in 2009 and 2023.  Total potential exposure pursuant to these
transactions is $44.0 million as well as monthly interest obligations, assuming
the bonds default and cannot be sold.  The recourse upon default would
be to acquire the bond and foreclose on the underlying property at which point
the property would either be rehabilitated or sold.  The fair value of
the obligations, representing the deferral of the fee income over the obligation
period, was $1.2 million as of June 30, 2008.  This amount is included
in “Deferred revenues” within “Accounts payable, accrued expenses and other
liabilities” on our Condensed Consolidated Balance Sheet.
 
 Legal
Contingencies
 
 We are
subject to routine litigation and administrative proceedings arising in the
ordinary course of business.  In addition, we are party to the
following actions:
 
 Putative Class and
Derivative Actions
 
 Through
August 7, 2008, we and our trustees have been named as defendants in fourteen
shareholder putative class and/or derivative actions arising out of our
announcements that (i) we have taken steps to transition our business to more of
a fund manager and in connection with such action intend to reduce the dividend
payable on our common shares from that which has been paid in prior years and
(ii) we committed to sell and then sold the 11.0% Preferred Shares to an
affiliate of TRCLP (see Note 13).  Six of these cases are putative
class actions pending in federal court in New York that assert claims under the
federal securities laws.  The other eight cases are primarily
derivative actions, although some purport also to assert class claims, arising
under state law.  Each of the actions is summarized
below.
  - 40
-
  CENTERLINE
HOLDING COMPANY
 NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 
 Federal
Securities Cases
 
 On
January 18, 2008, the first of the federal securities putative class actions was
filed against us and certain of our officers and trustees in the United States
District Court for the Southern District of New York.  Thereafter,
five other, essentially duplicative putative class actions were also filed in
the same court.  The complaint in each case asserted that we and other
defendants allegedly violated federal securities law by failing to disclose in a
timely fashion our December 2007 transaction with Freddie Mac.  On May
5, 2008, the Court designated Centerline Investor Group, which is made up of
several shareholders, as lead plaintiff for these cases.  Pursuant to
the Court’s stipulation and order dated March 3, 2008, the lead plaintiff filed
a consolidated complaint on July 7, 2008 in this action, In re Centerline
Holding Company Securities Litigation, No. 08 CV 00505.  The
consolidated complaint also alleges violations of the federal securities laws in
connection with our announcement of the Freddie Mac transaction, changes to the
Company’s business model, and the reduction in dividend guidance policy, and
seeks an unspecified amount of compensatory damages and other relief on behalf
of all persons or entities that purchased the common stock of Centerline Holding
Company during the period March 12, 2007 through December 28,
2007.  The defendants in this action are scheduled to file a motion to
dismiss the consolidated complaint by August 21, 2008.  We intend to
defend vigorously the claims that have been asserted against us and our officers
and trustees.
 
 Derivative
Lawsuits
 
 On
January 15, 2008, the first of the state law cases, a putative class and
derivative action, entitled Off v. Ross, CA No. 3468-VCP,
was filed against us, our Board of Trustees and TRCLP in the Delaware Court of
Chancery.  The lawsuit concerns our sale of a new issue of convertible
preferred stock to an affiliate of TRCLP.  The lawsuit alleges claims
for breach of fiduciary duty against the Trustees and seeks an unspecified
amount of compensatory damages from them as well as injunctive relief against
all defendants.  Thereafter, seven other derivative lawsuits asserting
the same or similar claims were filed in state and federal courts in New York
and in the Delaware Chancery Court.  Four of these later-filed actions
also allege that the trustees breached their fiduciary duties to us by allegedly
violating the federal securities laws (as alleged in the federal securities
lawsuits described above).  We are named solely as a nominal defendant
in all eight derivative actions and no monetary relief is sought against us in
any of those cases.  The seven derivative actions filed subsequent to
the Off case
are:
 
 ·
            On
      January 18, 2008, Kramer v. Ross, et al., Index. No. 100861-08, was filed
      against us and our board of trustees, in New York County Supreme
      Court;
 ·
            On
      January 25, 2008, Carfagno v. Schnitzer, et al., No. 08 CV 00912, was
      filed against us and our board of trustees in the United States District
      Court for the Southern District of New
York;
 ·
            On
      January 30, 2008, Ciszerk v. Ross, et al., CA No. 3511, was filed against
      us, our board of trustees and The Related Companies, L.P. in the Delaware
      Court of Chancery;
 ·
            On
      February 22, 2008, Kanter v. Ross, et al., 08 Civ. 01827, was filed
      against us, our board of trustees and The Related Companies, L.P. in the
      United States District Court for the Southern District of New
      York;
 ·
            On
      February 27, 2008, Broy v. Centerline Holding Company et al., No. 08 CV
      01971, was filed against us and certain of our officers and trustees in
      the United States District Court for the Southern District of New
      York;
 ·
            On
      April 10, 2008, Kastner v. Schnitzer et al, Index No. 601043-08, was filed
      against us and our board of trustees, in New York Supreme Court;
      and
 ·
            On
      April 10, 2008, Kostecka v. Schnitzer et al, Index No. 601044-08, was
      filed against us and our board of trustees, in New York Supreme
      Court.
 
 On April
28, 2008, a consolidated amended verified complaint alleging breaches of
fiduciary duties of loyalty, candor, due care, fair dealing, waste of corporate
assets and unjust enrichment, was filed against us and our board of trustees in
Carfagno v. Schnitzer et al., 08 CV 912 (SAS) and Broy v. Blau, 08 CV 1971
(SAS), pending in the U.S. District Court for the Southern District of New
York.  The action is styled both as a derivative suit and as a class
action on behalf of all holders of Centerline securities who qualified to
purchase our 11.0% Preferred Shares pursuant to the rights offering but who did
not do so.
 
 We have
negotiated a settlement with the plaintiff in the Offcase based on the rights
offering (see Note 13) and which is subject to court approval.  We
believe that the settlement in Offwill also resolve the
similar claims that have been asserted in several of the other derivative
lawsuits.  If the court does not approve the settlement in Off, and/or to the extent
that the Off settlement
does not resolve all of the claims in the other cases, the defendants intend to
defend themselves vigorously in all of the lawsuits.   An initial
hearing for approval of the settlement of the Off case was held on May 23,
2008 and a second hearing was held July 15, 2008.  We are currently
awaiting the judge’s decision regarding the settlement.
 
 - 41
-
  CENTERLINE
HOLDING COMPANY
 NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
     
 Other
 
 Claims
have been asserted against our subsidiaries in two separate but interrelated
lawsuits relating to two properties for which we have provided debt and equity
financing, but associated with the same developers. The lawsuits allege, among
other things:
 
 ·
            breach
      of fiduciary duty;
 ·
            breach
      of the implied covenant of good faith and fair
  dealing;
 ·
            intentional
      misrepresentation, fraud and
deceit;
 ·
            negligent
      misrepresentation; and
 ·
            tortious
      interference with contracts.
 
 One of
the lawsuits, which was originally filed in Pierce County Superior Court, and
thereafter transferred to King County Superior Court, in the State of
Washington, is entitled Silverwood Alliance Apartments, LLC,
et al. v. Affordable Housing Partnership Alliance LLC, et al., Case No.
06-2-40705-9SEA.  Silverwoodinvolves
counterclaims against our subsidiaries for unspecified damages.  The
other lawsuit, also was originally filed in Pierce County Superior Court in the
State of Washington and thereafter was removed to the United States District
Court for the Western District of Washington, is entitled Viewcrest Bremerton, LLC v. Related
Capital Housing Partnership I, L.P. - Series 3, et al., Case No.
C06-5459RSM.  Viewcrestalleges damages of
at least $10 to 15 million against our subsidiaries.  The parties have
entered into a settlement agreement that, if consummated, will result in the
global resolution of both lawsuits and all disputes between the
parties.  No Centerline entity will be required to make any payment as
part of the settlement other than payments contemplated under the original
Viewcrest deal documents.  The settlement is, however, subject to
certain contingencies and the parties are currently working on the satisfaction
of those contingencies.  Both lawsuits have been stayed pending the
consummation or termination of the settlement. If the settlement cannot be
effectuated, our subsidiaries intend to defend vigorously against the claims and
to prosecute their own claims.  We are unable at the present time to
estimate what potential losses, if any, may arise in connection with this
litigation if the settlement is not effectuated.
 
 
 NOTE
21 –Subsequent Events
 Effective
July 1, 2008, we extended our related party line of credit with AMAC and entered
into a forbearance agreement (see Note 17).
 
 In July
2008, the High Yield Debt Partnership’s $150.0 million-capacity repurchase
agreement with Morgan Stanley Bank was repaid and terminated, and one of the
CMBS Fund Partnerships terminated its remaining swap contracts with a total
notional amount of $49.0 million (see Note 18).
 
 In July
2008, we were notified by Merrill Lynch that we will need to post additional
collateral with respect to credit intermediation transactions whereby we agree
to provide agreed-upon rates of return to investors in certain LIHTC funds (see
Note 20). While we are in negotiations as to the amount of collateral, the
amount required could range from $5.0 to $15.0 million.
 - 42
-
  Item
2.  Management’s Discussion and Analysis of Financial Condition and
Results of Operations
 
 Management’s
Discussion and Analysis of Financial Condition and Results of Operations
(“MD&A”) is intended to help the reader understand the results of operations
and financial condition of Centerline Holding Company.  MD&A is
provided as a supplement to, and should be read in conjunction with, our
unaudited condensed consolidated financial statements and the accompanying
notes.
 
 This
MD&A contains forward-looking statements; please see page 71for more
information.
 OVERVIEW
 
 We are an
alternative asset manager with a core focus on real estate funds and financing
with more than $14.2 billion of assets under management as of June 30,
2008.  Our 2008 results reflect our transformation from direct
investing towards fund and asset management.  During 2008, we
continued to operate in an unfavorable market environment characterized by lack
of liquidity in credit markets (particularly with respect to real estate
finance) spread deterioration, and declining asset values.  In
addition, we continue to be hampered by general economic
conditions.  The market environment and general economic conditions,
in aggregate, depressed our asset values and limited our ability to grow our
assets under management.  Also, given that some of our businesses have
a higher volume of transactions in the second and fourth quarterly periods, the
operating results for interim periods may not be indicative of the results for
the full year.
 
 For a
discussion of our four operating groups and two groups not involved in direct
operations, see Note 19 to the condensed consolidated financial
statements.
 
 Significant
changes between 2008 and 2007 for our operating groups include:
 
 Affordable
Housing
 
 ·
                Since
      the beginning of 2008, we have seen a change in the investor base for our
      Affordable Housing Group such that traditional investors (e.g., Fannie
      Mae, Freddie Mac, commercial banks) have reduced their demand for tax
      credits which has resulted in fewer LIHTC fund originations through the
      first half of 2008 as compared to prior periods.  We continue to
      work with traditional investors and note an elevated interest in LIHTC
      investments from non-traditional investors such as insurance
      companies.  Although the raising of LIHTC funds is traditionally
      weighted to the fourth quarter, our current expectations are that total
      gross equity raised with respect to LIHTC funds will be less than
      2007.  To date, during 2008 we have raised $121.9 million of
      gross equity in six LIHTC Funds, as compared to $416.6 million of gross
      equity raised in six LIHTC Funds in
2007.
 
 ·
                With
      respect to mortgage revenue bonds, funding costs have increased
      significantly and liquidity declined resulting in a reduction in our
      ability to originate new mortgage revenue bonds.  We funded
      $26.1 million of mortgage revenue bonds in the second quarter and
      year-to-date 2008 periods compared to $43.7 million of originations and
      fundings in the second quarter of 2007 and $72.1 million for the
      comparative six months of 2007.  We expect this trend of lower
      originations as compared to prior periods to continue for the foreseeable
      future.
 
 ·
                Our
      overall bond portfolio has significantly declined as compared to prior
      comparable periods as a result of the  re-securitization of $2.8
      billion of bonds with Freddie Mac in December 2007 as more fully discussed
      in our 2007 Form 10-K.  We believe this materially improved our
      risk profile by reducing the funding and interest rate risk inherent in
      our liability structure.
 Commercial Real
Estate
 
 ·
                  Our
      CMBS investments, whether held by our funds or in our own account, have
      experienced a significant decline in value.  We continue to
      believe that such declines are due to market dislocation and not
      necessarily reflective of the credit quality of the underlying assets (see
      Fair Value
      Disclosures discussion in the Liquidity and Capital
      Resources section beginning on page 66).  In
      addition, our strategy with CMBS investments is long-term in nature and we
      have the intent and ability to hold these assets until market conditions
      improve allowing time for the asset values to
  recover.
 
 ·
                  Events
      impacting comparability of results for our Commercial Real Estate group
      when evaluating the six months ended June 30, 2008 to the prior period
      include the launch of our third high-yield CMBS Fund in August 2007 with
      committed capital of $585.3 million as of June 30, 2008; and increased
      capital commitments of $178.6 million in December 2007 in our High-Yield
      Debt Fund Partnership.
 
 ·
                  Due
      to the decline in lending for commercial real estate, we have originated
      no commercial mortgage loans for AMAC or CRESS in the current year and
      have seen a significant decline in originations for conduit
      originations.   We continue to believe in the long-term
      viability of commercial loan originations and recently greatly
      strengthened our capabilities in this area by hiring a 14 member team
      formerly of Nomura.  As part of an agreement with Nomura, we
      began to act as collateral manager for two commercial real estate CDOs
      previously managed by Nomura and are managing a portfolio of assets that
      Nomura holds for its own account.
 - 43
-
  Management’s
Discussion and Analysis of
 Financial
Condition and Results of Operations
 (continued)
 Portfolio
Management
 
 ·
              Our
      primary loan servicing portfolio decreased to $25.0 billion, as compared
      to $31.5 billion at June 30, 2007, due principally to declining
      pre-securitization servicing that has been affected by the disruption in
      credit markets.
 Credit Risk
Products
 
 ·
                Centerline
      Financial, part of our Credit Risk Products Group, received a
      AAA-counterparty rating as a credit-derivative products company from
      S&P at the end of 2007.  A counterparty rating should allow
      us to provide credit default swaps directly to third parties without
      paying fronting fees.
 
 ·
                Beginning
      in the fourth quarter of 2007, we began purchasing syndicated debt in
      anticipation of a future collateralized loan obligation
      transaction.  Principally as a result of current market
      conditions, we did not purchase any additional syndicated corporate debt
      during the first six months of 2008. We expect to liquidate these assets
      in the third quarter of 2008 in connection with the repayment of the
      related credit facility.
 Our
transformation also changed our revenue profile to be more heavily weighted to
revenues derived from asset management as compared to bond interest income. For
the first six months of 2008, our earnings streams are comprised primarily of
investment management fees (e.g., fund sponsorship, asset management, servicing
and incentive fees) and transactional fees (e.g., origination fees, credit
intermediation fees) and, to a lesser extent, income from investments we hold
for our own account.  In 2007, mortgage revenue bond interest income
was the most significant component of our earnings streams.
 
 RESULTS OF
OPERATIONS
 
 PERIOD ENDED JUNE 30, 2008
AND 2007
 
 Profitability
 
 Beginning
in the first quarter of 2008, we utilize Adjusted Net Income (on a segment
basis) and Adjusted Earnings Per Share (“Adjusted EPS”) (on a consolidated
basis), for purposes of measuring performance and capital allocation. We define
Adjusted Net Income or Adjusted EPS as net income or EPS computed pursuant to
GAAP and adjusted for non-cash amortization of acquired intangible assets and
acquisition-related, share-based compensation.  There is no generally
accepted accounting method for computing Adjusted Net Income and Adjusted EPS
and our computation may not be comparable to similar measurements reported by
other companies.  For further information, see Note 19 to our
condensed consolidated financial statements.
 
 Three
      Months Ended June 30,
              
              Six
      Months Ended June 30,(in
      thousands, except per share amounts)
              
              2008
              
              2007
              
              2008
              
              2007Net
      (loss) income
              
              $
              (2,329
              )
              $
              4,980
              
              $
              (23,968
              )
              $
              (9,765
              )Amortization
      of acquired intangible assets, net of minority interests
              
              
              2,492
              
              
              2,672
              
              
              4,968
              
              
              5,349Amortization
      of acquisition-related share-based compensation, net of minority
      interests
              
              
              373
              
              
              3,338
              
              
              1,774
              
              
              6,684Adjusted
      Net Income (Loss)
              
              $
              536
              
              $
              10,990
              
              $
              (17,226
              )
              $
              2,268Adjusted
      EPS (1)
              
              $
              (0.14
              )
              $
              0.17
              
              $
              (0.80
              )
              $
              --(1)Adjusted EPS in 2008 includes a higher level of preferred dividends
      following our issuance of 11.0% Preferred Shares in January 2008, as well
      as adjustments associated with converting certain of our outstanding
      shares to redeemable securities (see Notes 13 and 16 to the condensed
      consolidated financial statements).
 
  Our
consolidated results reflect our ongoing business transformation to an
alternative asset manager, as well as the following items impacting
comparability:
 
 - 44
-
 Management’s
Discussion and Analysis of
 Financial
Condition and Results of Operations
 (continued)
  ·
              The
      December 2007 re-securitization of our mortgage revenue bonds, as more
      fully discussed in our 2007 Form 10-K, substantially reduced our mortgage
      revenue bond interest income when compared with the period ended June 30,
      2007.  This reduction in mortgage revenue bond interest income
      was partially offset by interest earned on Freddie Mac certificates,
      interest income from a stabilization escrow account established at the
      time of the transaction and lower levels of interest
    expense.
 
 ·
              The
      impact of credit value adjustments as a result of SFAS 157 which resulted
      in a decrease in the fair value of our liabilities of $5.7 million for the
      six months ended June 30, 2008, which we reflected as a reduction in
      interest expense in the Condensed Consolidated Statement of
      Operations.
 
 We
recorded year to date net losses for the 2008 and 2007 periods and the quarterly
2008 period and net income for the 2007 period that principally reflect the
following items:
 
 ·
              A
      reduction in the value of the Series B Freddie Mac certificates we
      retained as part of the 2007 re-securitization of our mortgage revenue
      bond portfolio.  The reduction was a result of revised estimates
      as to the timing of payments from the residual cash flows with respect to
      assumed defaults.  While the revised estimates did not reduce
      the gross expected losses, in accordance with GAAP, we reflected the
      reduction in fair value as an impairment charge of $7.7 million in the
      second quarter of 2008;
 
 ·
              Impairment
      charges on mortgage revenue bonds of $4.1 million for the quarter ended
      June 30, 2008 and $10.9 million for the six months ended June 30, 2008,
      compared to $2.9 million for the quarter ended June 30, 2007 and $19.4
      million for the six months ended June 30, 2007.  Additionally
      there was a $4.8 million charge to reserve against associated receivables
      in the 2007 period;
 
 ·
              Impairment
      charges of $2.8 million in 2008, ($1.3 million of which was recorded in
      the first quarter), related to syndicated corporate debt and other
      investments for which there was no comparable amount in
    2007;
 
 ·
              Losses
      of $7.6 million in 2008, the majority of which were recorded in the first
      quarter, associated with the sale of investments (see Other Items later in
      this section); and
 
 ·
              General
      economic conditions which resulted in decreased mortgage origination
      volume and overall reduced margins due to spread compression in the
      markets related to LIHTC fund origination fees and mortgage banking
      fees.  Mortgage originations were $323.9 million for the three
      months ended June 30, 2008 and $567.5 for the six months ended June 30,
      2008, respectively, as compared to $670.4 million for the three months
      ended June 30, 2007 and $1.1 billion for the six months ended June 30,
      2007 respectively.
 
 In
addition to these factors, changes in the fair value of free standing
derivatives affected the reported results.  The second quarter of 2008
includes $15.5 million of non-cash income representing the increase in the fair
value of derivatives.  As this non-cash income offset non-cash expense
recorded in the previous quarter, the six months ended June 30, 2008 includes
net non-cash income of $6.5 million.  The year-to-date amount includes
the $5.7 million reduction due to the adoption of SFAS 157 described
above.  These amounts compared to non-cash income of $1.6 million for
the second quarter of 2007 and $0.9 million for 2007 year-to-date
period.
 
 Additionally,
our earnings per share were reduced by a higher level of preferred
dividends.  In January 2008, we issued 11.0% Preferred Shares in a
private placement resulting in net proceeds of $129.5 million.  For
the three and six months ended June 30, 2008, we declared $3.6 million and $6.2
million of dividends, respectively associated with the 11.0% Preferred Shares.
Earnings per share were also reduced by charges to equity associated with equity
shares that we reclassified as “redeemable securities” (see Notes 13 and 16 to
the condensed consolidated financial statements).
 
 Consolidated
Results
 
 Our
summary consolidated results of operations are presented below for the three
months ended June 30, 2008 and 2007:
  - 45
-
 Management’s
Discussion and Analysis of
 Financial
Condition and Results of Operations
 (continued)
 (dollars
      in thousands)
              
              2008
              
              %
      of Revenues
              
              2007
              
              %
      of Revenues
              
              %
      ChangeRevenues
              
              $
              129,774
              
              100.0
              %
              $
              135,064
              
              100.0
              %
              (3.9
              )%Expenses
              
              
              (153,312
              )
              118.1
              
              
              (143,067
              )
              105.9
              
              7.2Other
      items
              
              
              21,164
              
              16.3
              
              
              12,670
              
              9.4
              
              67.0(Loss)
      income before income taxes
              
              
              (2,374
              )
              (1.8
              )
              
              4,667
              
              3.5
              
              (150.9
              )Income
      tax benefit
              
              
              45
              
              --
              
              
              313
              
              0.2
              
              (85.6
              )Net
      (loss) income
              
              $
              (2,329
              )
              (1.8
              )%
              $
              4,980
              
              3.7
              %
              (146.8
              )%
 
 
 Our
summary consolidated results of operations are presented below for the six
months ended June 30, 2008 and 2007:
 
 (dollars
      in thousands)
              
              2008
              
              %
      of Revenues
              
              2007
              
              %
      of Revenues
              
              %
      ChangeRevenues
              
              $
              263,961
              
              100.0
              %
              $
              252,229
              
              100.0
              %
              4.7
              %Expenses
              
              
              (315,761
              )
              119.6
              
              
              (308,309
              )
              122.2
              
              2.4Other
      items
              
              
              28,836
              
              10.9
              
              
              43,056
              
              17.1
              
              (33.0
              )Loss
      before income taxes
              
              
              (22,964
              )
              (8.7
              )
              
              (13,024
              )
              (5.2
              )
              (76.3
              )Income
      tax (provision) benefit
              
              
              (1,004
              )
              (0.4
              )
              
              3,259
              
              1.3
              
              (130.8
              )Net
      loss
              
              $
              (23,968
              )
              (9.1
              )%
              $
              (9,765
              )
              (3.9
              )%
              (145.4
              )%
 
 
 Revenues
 
 The
following table presents our revenues for the periods ended June 30, 2008 and
2007:
 
 Three
      Months Ended June 30,
              
              Six
      Months Ended June 30,(dollars
      in thousands)
              
              2008
              
              2007
              
              %
      Change
              
              2008
              
              2007
              
              %
      ChangeInterest
      income
              
              $
              27,176
              
              $
              53,240
              
              (49.0
              )
      %
              $
              53,292
              
              $
              102,860
              
              
              (48.2
              )%Fee
      income
              
              
              14,874
              
              
              18,225
              
              (18.4
              )
              
              32,034
              
              
              34,609
              
              
              (7.4
              )Other
      revenues
              
              
              3,663
              
              
              2,842
              
              28.9
              
              
              5,807
              
              
              5,255
              
              
              10.5Subtotal
              
              
              45,713
              
              
              74,307
              
              (38.5
              )
              
              91,133
              
              
              142,724
              
              
              (36.1
              )Revenues
      of LIHTC Fund and Property Partnerships
              
              
              22,476
              
              
              18,878
              
              19.1
              
              
              43,999
              
              
              36,120
              
              
              21.8Revenues
      of CMBS and High-Yield Debt Fund Partnerships
              
              
              61,585
              
              
              41,879
              
              47.1
              
              
              128,829
              
              
              73,385
              
              
              75.6Subtotal
              
              
              84,061
              
              
              60,757
              
              38.4
              
              
              172,828
              
              
              109,505
              
              
              57.8Total
      revenues
              
              $
              129,774
              
              $
              135,064
              
              (3.9
              )%
              $
              263,961
              
              $
              252,229
              
              
              4.7
              %
 
  The
growth in revenues for the six months ended June 30, 2008 is primarily
attributable to the growth in revenues of consolidated partnerships of $23.3
million for the quarter and $63.3 million for the year to date.  This
is reflective of the increases in assets under management for both our
Affordable Housing and Commercial Real Estate Groups.  CMBS Fund III,
which closed in August 2007, contributed $20.3 million of revenue in the quarter
and $43.4 million year to date.  Partially offsetting this increase
was a net reduction of interest income related to mortgage revenue bonds
re-securitized with Freddie Mac in December 2007.  Revenues were down
in the current quarter as compared to prior year as the growth in revenues of
consolidated partnerships did not exceed the decline in interest income that
resulted from the Freddie Mac re-securitization.
 - 46
-
 Management’s
Discussion and Analysis of
 Financial
Condition and Results of Operations
 (continued)
 Further
detailed discussion of revenues is included in Results by Segment later in
this section.
 
 Expenses
 
 The
following table represents our expenses for the periods ended June 30, 2008 and
2007:
 
 Three
      Months Ended June 30,
              
              
              Six
      Months Ended June 30,(dollars
      in thousands)
              
              2008
              
              2007
              
              %
      Change
              
              
              2008
              
              2007
              
              
              %
      ChangeInterest
      expense
              
              $
              6,205
              
              $
              29,241
              
              (78.8
              )%
              
              $
              33,354
              
              $
              57,743
              
              
              (42.2
              )%Interest
      expense – preferred shares of subsidiary
              
              
              4,725
              
              
              4,725
              
              --
              
              
              
              9,449
              
              
              9,449
              
              
              --Salaries
      and benefits
              
              
              24,070
              
              
              27,028
              
              (10.9
              )
              
              
              50,801
              
              
              63,888
              
              
              (20.5
              )Other
      general and administrative
              
              
              19,155
              
              
              15,010
              
              27.6
              
              
              
              36,326
              
              
              34,673
              
              
              4.8Subtotal
      general and administrative
              
              
              43,225
              
              
              42,038
              
              2.8
              
              
              
              87,127
              
              
              98,561
              
              
              (11.6
              )Depreciation
      and amortization
              
              
              11,446
              
              
              10,594
              
              8.0
              
              
              
              23,347
              
              
              21,692
              
              
              7.6Loss
      on impairment of assets
              
              
              13,417
              
              
              2,938
              
              356.7
              
              
              
              21,440
              
              
              19,385
              
              
              10.6Subtotal
      before consolidated partnerships
              
              
              79,018
              
              
              89,536
              
              (11.7
              )
              
              
              174,717
              
              
              206,830
              
              
              (15.5
              )Interest
      expense of consolidated LIHTC Fund and Property
    Partnerships
              
              
              5,394
              
              
              5,263
              
              2.5
              
              
              
              8,418
              
              
              12,448
              
              
              (32.4
              )Interest
      expense of consolidated CMBS and High-Yield Debt Fund
      Partnerships
              
              
              27,519
              
              
              18,739
              
              46.9
              
              
              
              59,387
              
              
              33,866
              
              
              75.432,913
              
              
              24,002
              
              37.1
              
              
              
              67,805
              
              
              46,314
              
              
              46.4Other
      expenses of consolidated LIHTC Fund and Property
    Partnerships
              
              
              35,033
              
              
              28,634
              
              22.3
              
              
              
              64,232
              
              
              52,934
              
              
              21.3Other
      expense of consolidated CMBS and High-Yield Debt Fund
      Partnerships
              
              
              6,348
              
              
              895
              
              609.3
              
              
              
              9,007
              
              
              2,231
              
              
              303.741,381
              
              
              29,529
              
              40.1
              
              
              
              73,239
              
              
              55,165
              
              
              32.8Subtotal
      expense of consolidated partnerships
              
              
              74,294
              
              
              53,531
              
              38.8
              
              
              
              141,044
              
              
              101,479
              
              
              39.0Total
      expenses
              
              $
              153,312
              
              $
              143,067
              
              7.2
              %
              
              $
              315,761
              
              $
              308,309
              
              
              2.4
              %
 
 
 ·
              Interest expense – The
      decrease in interest expense reflects the lower amount of average debt
      outstanding, which resulted from debt repaid in December 2007 at the time
      of the Freddie Mac re-securitization and a lower level of general
      corporate debt.  Partially offsetting this factor is the higher
      average rate of interest on the remaining debt due to the terms of the
      credit facility we entered into in December 2007.  Our average
      borrowing rate increased to 6.69% for the six months ended June 30, 2008
      as compared to 4.74% for the 2007
period.
 
 Also
contributing to the year-to-date decrease was the change in fair value of
derivatives.  The adoption of SFAS 157 resulted in a $5.7 million
reduction in interest expense for the six months ended June 30, 2008 ($1.2
million for the second quarter).  Changes in the fair value of
free-standing derivatives resulted in non-cash income of $15.5 million for the
second quarter, reversing most of the similar expense we recognized in the first
quarter.  These amounts compared to non-cash income of $2.5 million
for the 2007 quarter and year-to-date period
 
 - 47
-
 Management’s
Discussion and Analysis of
 Financial
Condition and Results of Operations
 (continued)
 
 Interest
expense also includes amounts paid and received pursuant to swap agreements as
part of our risk management strategy.
 
 Three
      Months Ended June 30,
              
              Six
      Months Ended June 30,(dollars
      in thousands)
              
              2008
              
              2007
              
              %
      Change
              
              2008
              
              2007
              
              %
      ChangeAverage
      borrowing rate
              
              
              7.09
              %
              
              4.82
              %
              
              
              
              6.69
              %
              
              4.74
              %Average
      borrowings
              
              $
              1,010,812
              
              $
              2,473,332
              
              (59.1
              )%
              $
              1,006,459
              
              $
              2,422,386
              
              
              (58.5
              )%Average
      LIBOR rate
              
              
              2.59
              %
              
              5.32
              %
              
              
              
              2.94
              %
              
              5.32
              %Average
      SIFMA rate
              
              
              1.91
              %
              
              3.77
              %
              
              
              
              2.22
              %
              
              3.68
              %Swap
      agreements – notional amount at June 30
              
              $
              387,310
              
              $
              936,137
              
              (58.6
              )
   ·
                Interest expense–
      preferred shares of
      subsidiary – Represents dividends of Equity Issuer preferred shares
      that are subject to mandatory repurchase.  The preferred shares
      of Equity Issuer, including those not subject to mandatory repurchase (see
      Other Items
      below) entitle their holders to a claim on certain residual interests
      acquired in connection with the re-securitization of the Affordable
      Housing bond portfolio in December 2007, and for economic purposes are
      defeased.  The expense recorded is offset by interest income of
      the Series A-1 Freddie Mac Certificates with terms that match the
      preferred shares.
 
 ·
                Salaries and benefits–
      The decrease in salaries and benefits expense of $13.1 million in the
      year-to-date period is primarily attributable to the following
      items:
 
 o
                lower
      share-based compensation expense for shares issued in connection with our
      acquisition of Centerline Investors I LLC in August 2006 (the 2007 period
      included $9.2 million relating to amortization of these shares compared to
      amortization of $2.5 million in the 2008
  period);
 o
                a
      reduction of $1.9 million in promote-sharing compensation related to the
      CMBS funds we sponsor (due to a lower projected level of incentive income
      to the Company); and
 o
                $2.7
      million of severance charges in 2007 compared to $0.8 million in
      2008.
 
 ·
                Other general and
      administrative– Other general and administrative expenses
      increased by $4.1 million during the quarter and $1.7 million for the year
      to date.  This primarily relates
to:
 
 o
                An
      increase of $1.9 million in rent expense related to our new office
      headquarters (all of which was recorded in the second
      quarter);
 o
                An
      increase of $1.7 million year-to-date related to an increased professional
      fees, particularly audit and legal costs;
and
 o
                $0.4
      million of additional structuring fees paid monthly to Natixis by CFH
      following the achievement of its counterparty rating to pursue its
      business expansion.
 
 Partially
offsetting the year-to-date increases was $4.8 million of charges recorded in
the first quarter of 2007 to reserve against advances made to our sponsored
funds in connection with troubled property investments.  There were no
comparable charges in 2008.
 
 ·
                Loss on impairment –Loss on impairment of assets in 2008 includes (see Note 2 of the
      condensed consolidated financial
statements):
 
 o
                $10.9
      million related to two mortgage revenue bonds that we plan to sell and
      another property experiencing substandard performance ($4.1 million
      recorded in the second quarter);
 o
                $7.7
      million related to our Series B Freddie Mac certificates (recorded in the
      second quarter);
   - 48
-
  Management’s
Discussion and Analysis of
 Financial
Condition and Results of Operations
 (continued)
 o
              $1.3
      million related to other-than-temporary impairments on syndicated
      corporate debt investments ($1.2 million recorded in the first quarter);
      and
 o
              $1.1
      million related to retained CMBS certificates (recorded in the second
      quarter).
 
 During
2007, in connection with properties experiencing substandard performance, we
recognized approximately $19.4 million of mortgage revenue bond impairments
(nine bonds in total), of which $2.9 million (two bonds) was recognized in the
second quarter.
 
 ·
              Consolidated Partnerships– The increase over prior year relates to an increase in the number
      of consolidated entities as well as an increase in assets under management
      in those entities since March 2007.  The increase in interest
      expense in both periods is primarily attributable to CMBS Fund III which
      commenced in August 2007.
 
 Other
Items
 
 Three
      Months Ended June 30,
              
              
              Six
      Months Ended June 30,(dollars
      in thousands)
              
              2008
              
              2007
              
              %
      Change
              
              
              2008
              
              2007
              
              %
      ChangeEquity
      and other income (loss):Equity
      income from consolidated partnerships
              
              $
              4,580
              
              $
              3,213
              
              42.5
              %
              
              $
              11,944
              
              $
              10,281
              
              
              16.2
              %Elimination
      of equity income from consolidated partnerships
              
              
              (4,580
              )
              
              (3,213
              )
              (42.5
              )
              
              
              (11,944
              )
              
              (10,281
              )
              
              (16.2
              )Other
      equity and other loss:Equity
      in loss of AMAC
              
              
              (288
              )
              
              15
              
              N/M
              
              
              
              (2,282
              )
              
              15
              
              
              N/MOther
              
              
              (196
              )
              
              (169
              )
              (16.0
              )
              
              
              (97
              )
              
              (419
              )
              
              (76.8
              )$
              (484
              )
              $
              (154
              )
              (214.3
              )%
              
              $
              (2,379
              )
              $
              (404
              )
              
              (488.9
              )%Other
      income (loss):Gain
      (loss) on repayment or sale of mortgage revenue bonds and other
      investments
              
              $
              3,654
              
              $
              131
              
              N/M
              
              
              $
              (3,618
              )
              $
              886
              
              
              (508.4
              )Gain
      on sale or repayment of mortgage loans
              
              
              2,311
              
              
              1,078
              
              114.4
              
              
              
              4,413
              
              
              2,702
              
              
              63.3Gain
      on repayment or sale of investments
              
              $
              5,965
              
              $
              1,209
              
              393.4
              %
              
              $
              795
              
              $
              3,588
              
              
              (77.8
              )%(Income)/loss
      allocations:Preferred
      shares of subsidiary
              
              $
              (1,557
              )
              $
              (1,557
              )
              --
              
              
              $
              (3,113
              )
              $
              (3,113
              )
              
              --SCUs
              
              $
              2,683
              
              $
              (1,929
              )
              239.1
              
              
              $
              12,616
              
              $
              4,027
              
              
              213.3SCIs
              
              
              37
              
              
              (25
              )
              248.0
              
              
              
              171
              
              
              51
              
              
              235.3SMUs
              
              
              --
              
              
              (26
              )
              100.0
              
              
              
              --
              
              
              53
              
              
              (100.0
              )Other
      minority interests
              
              
              293
              
              
              272
              
              7.7
              
              
              
              383
              
              
              278
              
              
              37.8Minority
      interests in subsidiaries, net
              
              $
              3,013
              
              $
              (1,708
              )
              276.4
              %
              
              $
              13,170
              
              $
              4,409
              
              
              198.7
              %Limited
      partners of consolidated partnerships
              
              $
              86,748
              
              $
              97,776
              
              (11.3
              )%
              
              $
              187,685
              
              $
              178,887
              
              
              4.9
              %N/M
      – Not meaningful.
   - 49
-
 Management’s
Discussion and Analysis of
 Financial
Condition and Results of Operations
 (continued)
 Equity
and other income (loss)
 
 We
co-invest in CMBS and High-Yield Debt Fund Partnerships and earn equity income
from those investments, positively affecting our results (see further discussion
in Commercial Real
Estate and Consolidated
Partnershipsegment discussions below).
 
 Other
equity and other income (loss) alsoinclude income related
to entities in which we invest but do not consolidate.  This includes
our investments in tax advantaged investment vehicles similar to those we
sponsor (which often produce equity losses) and in AMAC, in which our investment
began in May 2007.  The higher level of AMAC losses in the 2008
periods is primarily due to impairment charges and losses on asset sales that
AMAC has incurred due to market volatility (see Note 17 to the condensed
consolidated financial statements).
 
 Other
Income (Loss)
  Included
within the loss on repayment or sale of mortgage revenue bonds and other
investments in 2008 are incremental losses in 2008 (primarily recorded in the
first quarter) associated with the re-securitization of our mortgage revenue
bond portfolio in December 2007.  These losses primarily resulted from
valuation adjustments for the stabilization escrow maintained for certain bonds
(see Note 4 to the condensed consolidated financial statements).  Upon
the final deposit of funds to the escrow, the difference between the cash
deposit and its present value was recognized as a loss.  Similar to
previous losses recognized with respect to the net present value adjustments to
the escrow and the retained residual interests, offsets will be recognized over
the lives of the instruments through accretion of the net present value
adjustments.  Other components include the write off of certain
receivable balances associated with mortgage revenue bonds that we now deem
uncollectible.  These losses were partially offset by $4.8 million
gain on sale in the 2008 year to date period ($4.6 million in the second
quarter) for mortgage revenue bonds included in the re-securitization
transaction for which our guarantee of payment has now expired.  As a
result, we have no continuing involvement with the assets thereby allowing
recognition of them as sold.
 
 Also
included within the loss on repayment or sale of mortgage revenue bonds and
other investments in 2008 is a loss of $0.6 million related to the sale of five
syndicated corporate debt investments (see Note 2 to the condensed consolidated
financial statements).
 
 Gain on
sale or repayment of mortgage loans relates both to premiums earned from sale of
mortgage loans to Fannie Mae and Freddie Mac as well as gains we record in
connection with recognizing mortgage servicing rights.  Gains related
to these items increased $1.7 million in the 2008 year-to-date period ($1.2
million in the quarter) as compared to the prior period representing higher
origination activity for servicing-retained loans in the current
year.  Offsetting this amount, we recorded a $1.3 million charge in
the quarter ended June 30, 2008, for expected losses under our mortgage loan
loss sharing agreement with Fannie Mae (see Note 20 to the condensed
consolidated financial statements).
 
 Income/(Loss)
Allocations
 
 The
income allocation to SCUs, SMUs, and SCIs of subsidiaries represents the
proportionate share of after-tax income attributable to holders of subsidiary
equity as if they were converted to common shares and, therefore, fluctuates
with net income.  Other minority interest principally represents the
portion of CFH owned by Natixis.  All SMUs were redeemed in 2007;
hence there is no allocation to SMUs in 2008.
 
 Loss
allocated to Limited Partners of Consolidated Partnerships
 
 The loss
allocation to partners of consolidated partnerships represents the allocation of
operating losses of LIHTC Fund and Property Partnerships and the income or
losses of CMBS Fund Partnerships and High-Yield Debt Fund Partnerships to
outside investors which hold the majority ownership in these
partnerships.  With respect to the LIHTC Fund Partnerships and LIHTC
Property Partnerships, we have an insignificant equity interest or none at
all.  With respect to the CMBS Fund Partnerships and High-Yield Debt
Fund Partnership, we have ownership of up to 25.0%.
  - 50
-
 Management’s
Discussion and Analysis of
 Financial
Condition and Results of Operations
 (continued)
 INCOME
TAXES
 
 The
following tables detail the taxable and non-taxable components of our reported
income (loss), for the three and six months ended June 30, 2008 and
2007:
 Three
      Months Ended June 30,(dollars
      in thousands)
                
                2008
                
                %
      of Revenues
                
                
                2007
                
                %
      of Revenues
                
                
                %
      ChangeTaxable
      (loss) income
                
                $
                (18,951
                )
                
                (14.6
                )%
                
                $
                (8,031
                )
                
                (5.9
                )%
                
                (136.0
                )%Income
      (loss) not subject to tax
                
                $
                16,577
                
                
                12.8
                %
                
                $
                12,698
                
                
                9.4
                %
                
                30.5
                %(Loss)
      income before income taxes
                
                $
                (2,374
                )
                
                (1.8
                )%
                
                $
                4,667
                
                
                3.5
                %
                
                (150.9
                )%Income
      tax benefit
                
                $
                45
                
                
                --
                %
                
                $
                313
                
                
                0.2
                %
                
                (85.6
                )%Effective
      tax rate – consolidated basis
                
                
                1.9
                %
                
                
                
                
                
                (6.7
                )%Effective
      tax rate for corporate subsidiaries subject to tax
                
                
                0.2
                %
                
                
                
                
                
                3.9
                %
 
 
 Six
      Months Ended June 30,(dollars
      in thousands)
                
                2008
                
                %
      of Revenues
                
                
                2007
                
                %
      of Revenues
                
                
                %
      ChangeTaxable
      (loss) income
                
                $
                (33,622
                )
                
                (12.7
                )%
                
                $
                (26,440
                )
                
                (10.5
                )%
                
                (27.2
                )%Income
      not subject to tax
                
                $
                10,658
                
                
                4.0
                %
                
                $
                13,416
                
                
                5.3
                %
                
                (20.6
                )%(Loss)
      income before income taxes
                
                $
                (22,964
                )
                
                (8.7
                )%
                
                $
                (13,024
                )
                
                (5.2
                )%
                
                (76.3
                )%Income
      tax (provision) benefit
                
                $
                (1,004
                )
                
                (0.4
                )%
                
                $
                3,259
                
                
                1.3
                %
                
                (130.8
                )%Effective
      tax rate – consolidated basis
                
                
                (4.4
                )%
                
                
                
                
                
                25.0
                %Effective
      tax rate for corporate subsidiaries subject to tax
                
                
                (3.0
                )%
                
                
                
                
                
                12.3
                %
 
 Some of
our pre-tax income is derived from our tax-exempt mortgage revenue bond
investments included in our Affordable Housing group, which is held within
flow-through entities. Likewise, the CMBS and High-Yield Debt Fund Partnerships
which are included in our Commercial Real Estate group, are held in vehicles
which, if certain requirements are met, do not incur taxes. As such, the income
from those businesses does not subject us to income taxes.
 
 LIHTC
fund management, the other Commercial Real Estate businesses and our Portfolio
Management and Credit Risk Products businesses, however, are conducted in
corporations and are subject to income taxes.  Our Corporate Group is
also housed in a corporate entity subject to taxation.  Our corporate
entities generally have losses for book purposes principally because the
distributions paid on the minority interests in our corporate subsidiaries
effectively provide a tax deduction, as well as other factors within these
businesses.
 
 We
provide for income taxes for these corporate subsidiaries in accordance with
SFAS No. 109, Accounting for
Income Taxes (“SFAS 109”), which requires the recognition of deferred tax
assets and liabilities for the expected future tax consequences of temporary
differences between the financial statement carrying amounts and the tax bases
of assets and liabilities.
 
 Management
determined that, in light of projected taxable losses in the corporate
subsidiaries for the foreseeable future, any benefit from current losses and
deferred tax assets will likely not be realized; hence a valuation allowance was
provided.
 
 - 51
-
 Management’s
Discussion and Analysis of
 Financial
Condition and Results of Operations
 (continued)
 
 INFLATION
 
 Inflation
did not have a material effect on our results of operations for the periods
presented.
 
 RESULTS BY
SEGMENT
 
 The
following table presents segment revenues, expenses and operating income for the
periods ended June 30, 2008 and 2007 in accordance with
GAAP.  Transactions between segments are accounted for as third-party
arrangements for the purposes of presenting segment results of
operations.  Typical intersegment eliminations include fees earned
from Consolidated Partnerships, asset management fees earned by Portfolio
Management with respect to assets held by our other segments and intercompany
interest.  The table also includes Adjusted Net Income, which, as
stated earlier, is used for performance measurement and capital allocation
effective January 1, 2008 (see also Note 19 to the condensed consolidated
financial statements).
  - 52
-
 Management’s
Discussion and Analysis of
 Financial
Condition and Results of Operations
 (continued)
 Three
      Months Ended June 30,
              
              
              Six
      Months Ended June 30,(dollars
      in thousands)
              
              2008
              
              2007
              
              %
      Change
              
              
              2008
              
              2007
              
              %
      ChangeRevenues:Affordable
      Housing
              
              $
              40,655
              
              $
              67,872
              
              (40.1
              )%
              
              $
              84,103
              
              $
              130,452
              
              (35.5
              )%Commercial
      Real Estate
              
              
              16,033
              
              
              16,377
              
              (2.1
              )
              
              
              30,377
              
              
              31,379
              
              (3.2
              )Portfolio
      Management
              
              
              11,696
              
              
              15,303
              
              (23.6
              )
              
              
              23,080
              
              
              29,286
              
              (21.2
              )Credit
      Risk Products
              
              
              2,242
              
              
              4,187
              
              (46.5
              )
              
              
              4,545
              
              
              7,579
              
              (40.0
              )Corporate
              
              
              5,571
              
              
              5,547
              
              0.4
              
              
              
              11,902
              
              
              12,168
              
              (2.2
              )Consolidated
      Partnerships
              
              
              84,061
              
              
              60,757
              
              38.4
              
              
              
              172,828
              
              
              109,505
              
              57.8Eliminations
              
              
              (30,484
              )
              
              (34,979
              )
              12.9
              
              
              
              (62,874
              )
              
              (68,140
              )
              7.7Total
      revenues
              
              $
              129,774
              
              $
              135,064
              
              (3.9
              )%
              
              $
              263,961
              
              $
              252,229
              
              4.7
              %Expenses:Affordable
      Housing
              
              $
              40,206
              
              $
              47,443
              
              (15.3
              )%
              
              $
              73,013
              
              $
              116,522
              
              (37.3
              )%Commercial
      Real Estate
              
              
              10,112
              
              
              22,322
              
              (54.7
              )
              
              
              37,637
              
              
              50,395
              
              (25.3
              )Portfolio
      Management
              
              
              9,292
              
              
              10,420
              
              (10.8
              )
              
              
              17,656
              
              
              19,986
              
              (11.7
              )Credit
      Risk Products
              
              
              4,075
              
              
              7,231
              
              (43.6
              )
              
              
              8,996
              
              
              10,617
              
              (15.3
              )Corporate
              
              
              26,999
              
              
              28,870
              
              (6.5
              )
              
              
              60,378
              
              
              59,332
              
              1.8Consolidated
      Partnerships
              
              
              93,708
              
              
              72,424
              
              29.4
              
              
              
              181,247
              
              
              137,800
              
              31.5Eliminations
              
              
              (31,080
              )
              
              (45,643
              )
              31.9
              
              
              
              (63,166
              )
              
              (86,343
              )
              26.8Total
      expenses
              
              $
              153,312
              
              $
              143,067
              
              7.2
              %
              
              $
              315,761
              
              $
              308,309
              
              2.4
              %Other
      income (loss):Affordable
      Housing
              
              $
              3,843
              
              $
              (154
              )
              N/M
              
              
              $
              (3,026
              )
              $
              249
              
              N/MCommercial
      Real Estate (1)
              
              
              4,507
              
              
              4,092
              
              10.1
              
              
              
              12,048
              
              
              12,558
              
              (4.1
              )Credit
      Risk Products
              
              
              (2
              )
              
              --
              
              (100.0
              )
              
              
              (527
              )
              
              --
              
              (100.0
              )Corporate
              
              
              (84
              )
              
              --
              
              (100.0
              )
              
              
              (89
              )
              
              --
              
              (100.0
              )Consolidated
      Partnerships (2)
              
              
              14,227
              
              
              14,880
              
              (4.4
              )
              
              
              20,363
              
              
              38,576
              
              (47.2
              )Eliminations
              
              
              (2,783
              )
              
              (2,883
              )
              3.5
              
              
              
              (9,990
              )
              
              (9,623
              )
              (3.8
              )Total
      other income (loss)
              
              $
              19,708
              
              $
              15,935
              
              23.7
              %
              
              $
              18,779
              
              $
              41,760
              
              (55.0
              )%Income
      (loss) before other allocations:Affordable
      Housing
              
              $
              4,292
              
              $
              20,275
              
              (78.8
              )%
              
              $
              8,064
              
              $
              14,179
              
              (43.1
              )%Commercial
      Real Estate
              
              
              10,428
              
              
              (1,853
              )
              662.8
              
              
              
              4,788
              
              
              (6,458
              )
              174.1Portfolio
      Management
              
              
              2,404
              
              
              4,883
              
              (50.8
              )
              
              
              5,424
              
              
              9,300
              
              (41.7
              )Credit
      Risk Products
              
              
              (1,835
              )
              
              (3,044
              )
              39.7
              
              
              
              (4,978
              )
              
              (3,038
              )
              (63.9
              )Corporate
              
              
              (21,512
              )
              
              (23,323
              )
              7.8
              
              
              
              (48,565
              )
              
              (47,164
              )
              (3.0
              )Consolidated
      Partnerships
              
              
              4,580
              
              
              3,213
              
              42.5
              
              
              
              11,944
              
              
              10,281
              
              16.2Eliminations
              
              
              (2,187
              )
              
              7,781
              
              (128.1
              )
              
              
              (9,698
              )
              
              8,580
              
              (213.0
              )Total
      (loss) income before other allocations
              
              $
              (3,830
              )
              $
              7,932
              
              (148.3
              )%
              
              $
              (33,021
              )
              $
              (14,320
              )
              (130.6
              )%Adjusted
      Net Income (Loss):Affordable
      Housing
              
              $
              2,872
              
              $
              18,719
              
              (84.7
              )%
              
              $
              4,803
              
              $
              11,066
              
              (56.6
              )%Commercial
      Real Estate
              
              
              9,820
              
              
              62
              
              N/M
              
              
              
              4,669
              
              
              (2,647
              )
              276.4Portfolio
      Management
              
              
              3,096
              
              
              5,797
              
              (46.6
              )
              
              
              6,716
              
              
              11,136
              
              (39.7
              )Credit
      Risk Products
              
              
              (1,717
              )
              
              (2,767
              )
              37.9
              
              
              
              (4,771
              )
              
              (2,761
              )
              (72.8
              )Corporate
              
              
              (15,928
              )
              
              (21,815
              )
              26.7
              
              
              
              (30,889
              )
              
              (33,387
              )
              7.5Consolidated
      Partnerships
              
              
              4,580
              
              
              3,213
              
              42.5
              
              
              
              11,944
              
              
              10,281
              
              16.2Eliminations
              
              
              (2,187
              )
              
              7,781
              
              (128.1
              )
              
              
              (9,698
              )
              
              8,580
              
              (213.0
              )$
              536
              
              $
              10,990
              
              (95.1
              )%
              
              $
              (17,226
              )
              $
              2,268
              
              (859.5
              )%
 
 (1)
              Includes
      equity income of CMBS Fund and High-Yield Debt Fund Partnerships as more
      fully described below.
 (2)
              Includes
      losses allocated to partners of consolidated
  partnerships.
 N/M – Not
Meaningful.
 
 - 53
-
 Management’s
Discussion and Analysis of
 Financial
Condition and Results of Operations
 (continued)
 Affordable
Housing
 
 Revenues
 
 Three
      Months Ended June 30,
              
              
              Six
      months ended June 30,(dollars
      in thousands)
              
              2008
              
              2007
              
              %
      Change
              
              
              2008
              
              2007
              
              %
      ChangeMortgage
      revenue bond interest income
              
              $
              12,715
              
              $
              43,819
              
              (71.0
              )%
              
              $
              24,977
              
              $
              87,419
              
              (71.4
              )%Other
      interest income
              
              
              11,848
              
              
              821
              
              N/M
              
              
              
              23,006
              
              
              1,459
              
              N/MFee
      income from fund sponsorship
              
              
              14,340
              
              
              20,693
              
              (30.7
              )
              
              
              33,058
              
              
              36,818
              
              10.2Expense
      reimbursements
              
              
              874
              
              
              1,902
              
              (54.0
              )
              
              
              1,854
              
              
              3,678
              
              (49.6
              )Other
      revenues
              
              
              878
              
              
              637
              
              37.8
              
              
              
              1,208
              
              
              1,078
              
              12.1Total
      revenues
              
              $
              40,655
              
              $
              67,872
              
              (40.1
              )%
              
              $
              84,103
              
              $
              130,452
              
              (35.5
              )%N/M
      – Not meaningful.
 
 
 A
description of the revenue streams for our Affordable Housing operations can be
found in our 2007 Form 10-K.  Provided below is statistical
information that is useful in analyzing the Affordable Housing segment revenues
segregated by Mortgage Revenue Bond investing and LIHTC Fund
Sponsorship.
 
 MORTGAGE
REVENUE BOND INVESTING
 
 Three
      Months Ended June 30,
              
              
              Six
      Months Ended June 30,(dollars
      in thousands)
              
              2008
              
              2007
              
              %
      Change
              
              
              2008
              
              2007
              
              %
      ChangeTotal
      acquisition and funding activity
              
              $
              26,096
              
              $
              43,680
              
              (40.3
              )%
              
              $
              26,096
              
              $
              72,073
              
              (63.8
              )%Mortgage
      revenue bonds repaid
              
              
              24,854
              
              
              --
              
              100.0
              
              
              
              24,854
              
              
              2,622
              
              847.9Re-securitized
      mortgage revenue bonds recognized as sold
              
              
              163,092
              
              
              --
              
              100.0
              
              
              
              178,265
              
              
              --
              
              100.0Average
      portfolio balance (fair value)
              
              
              775,597
              
              
              2,861,973
              
              (72.9
              )
              
              
              782,253
              
              
              2,834,451
              
              (72.4
              )Weighted
      average permanent interest rate of bonds acquired
              
              
              5.75
              %
              
              6.03
              %
              
              
              
              
              5.75
              %
              
              5.99
              %Weighted
      average yield of portfolio
              
              
              6.44
              %
              
              6.18
              %
              
              
              
              
              6.30
              %
              
              6.18
              %
 
 
 The
decrease in mortgage revenue bond interest income is due to the smaller
portfolio balance as a result of the December 2007 re-securitization with
Freddie Mac. Mortgage revenue bond interest income of $31.7 million earned in
the three months ended June 30, 2007 ($64.3 million for the six months ended
June 30, 2007) related to mortgage revenue bonds included in that
transaction.  We expect mortgage revenue bond interest income to
further decline in future periods as we recognized certain re-securitized bonds
as sold in the second quarter of 2008.  Continuing involvement with
those bonds had precluded such treatment at the re-securitization
date.
 Other
interest income for the three months ended June 30, 2008 includes $9.2 million
($18.5 million for the six months ended June 30, 2008) related to interest
earned on our retained interests in the re-securitized bonds and $2.4 million
($4.0 million for the six months ended June 30, 2008) of interest on the
stabilization escrow account established at the time of the
re-securitization.  There were no comparable investments in the 2007
period.  We expect interest income earned from the stabilization
escrow, as well as the Freddie Mac A-1 and B certificates to increase over the
remainder of the year.
 - 54
-
  Management’s
Discussion and Analysis of
 Financial
Condition and Results of Operations
 (continued)
 
 LIHTC
FUND SPONSORSHIP STATISTICS
 
 Three
      Months Ended June 30,
              
              
              Six
      Months Ended June 30,(dollars
      in thousands)
              
              2008
              
              2007
              
              %
      Change
              
              
              2008
              
              2007
              
              %
      ChangeFees based on equity
      raisedPartnership
      management fees
              
              $
              2,746
              
              $
              2,226
              
              23.4
              %
              
              $
              5,505
              
              $
              4,440
              
              24.0
              %Fees based on equity
      investedProperty
      acquisition fees
              
              
              3,193
              
              
              5,715
              
              (44.1
              )
              
              
              9,647
              
              
              8,351
              
              15.5Organization,
      offering and acquisition allowance fees
              
              
              1,596
              
              
              3,166
              
              (49.6
              )
              
              
              4,697
              
              
              4,699
              
              --Fees based on
      management of sponsored fundsAsset
      management fees
              
              
              5,437
              
              
              6,867
              
              (20.8
              )
              
              
              11,187
              
              
              12,726
              
              (12.1
              )Other
      fee income
              
              
              1,368
              
              
              2,719
              
              (49.7
              )
              
              
              2,022
              
              
              6,602
              
              (69.4
              )$
              14,340
              
              $
              20,693
              
              (30.7
              )%
              
              $
              33,058
              
              $
              36,818
              
              (10.2
              )%Assets
      under management – LIHTC Funds (balance at June 30)
              
              $
              9,816,374
              
              $
              8,899,977
              
              10.3
              %Equity
      raised by LIHTC funds
              
              $
              21,042
              
              $
              410,143
              
              (94.9
              )%
              
              $
              121,945
              
              $
              416,587
              
              (70.7
              )%Equity
      invested by LIHTC funds (1)
              
              $
              124,520
              
              $
              173,889
              
              (28.4
              )%
              
              $
              376,743
              
              $
              287,868
              
              30.9
              %(1)Excludes warehoused properties that have not yet closed into an
      investment fund.
 
 Since the
beginning of 2008, we have seen a change in the investor base for our Affordable
Housing Group such that traditional investors have reduced their demand for tax
credits which, although we have originated the same number of funds, they have
been significantly less in amounts raised through the first half of 2008 as
compared to prior periods.
 Fees
Based on Equity Raised
 
 We
collect partnership management fees at the time a fund closed and recognize them
over the service period.  The increase in these fees in both periods
is primarily the result of funds closed in the past twelve months.  As
the fees collected are a percentage of the gross equity in the fund, the amount
collected will increase the revenue recognized over the five-year service period
following the funds’ inception.  Due to the expiration of the
five-year service period for certain funds, these fees should stabilize during
the second half of 2008.
 
 Fees
Based on Equity Invested
 
 We
collect property acquisition fees at the time a fund is closed and recognize
them as the fund acquires its investments.  These fees increased in
the 2008 year-to-date period due to an increase in the equity invested,
partially offset by a lower fee rate realized in the 2008
period.  These fees decreased in the 2008 quarter compared to the 2007
quarter due to a decrease in both the equity invested as well as the fee rate
realized.
 
 Organization,
offering and acquisition allowance fees are recorded on a basis similar to the
property acquisition fees.  Thus, the changes period over period are
similar to the changes in property acquisition fees and a reduction over both
periods due to a decrease in the fee rate realized relating to certain types of
funds.
 
 Fees
Based on Management of Sponsored Funds
 
 Asset
management fees in both periods decreased primarily due to a lower fee earned
related to our public funds as a result of dispositions that occurred since June
30, 2007.
 
  - 55
-
  Management’s
Discussion and Analysis of
 Financial
Condition and Results of Operations
 (continued)
 Other
Fee Income
 
 Other fee
income includes construction service fees, administration fees, credit
intermediation fees and bond acquisition fees as described in our 2007 Form
10-K.  Since mid-2006, the Affordable Housing Group no longer provides
credit intermediation for new funds (as credit intermediation of new funds is
provided by and fees are earned directly by our Credit Risk Products
Group).  This segment continues to recognize fees for transactions
prior to mid-2006, however this fee stream continues to decline as amortization
ends for fees related to older transactions.
 
 Expenses and Other Income
(Loss)
 
 Three
      Months Ended June 30,
              
              
              Six
      Months Ended June 30,(dollars
      in thousands)
              
              2008
              
              2007
              
              %
      Change
              
              
              2008
              
              2007
              
              %
      ChangeInterest
              
              $
              13,062
              
              $
              32,885
              
              (60.3
              )%
              
              $
              24,212
              
              $
              63,553
              
              (61.9
              )%Interest
      - preferred shares of subsidiary
              
              
              4,725
              
              
              4,725
              
              --
              
              
              
              9,449
              
              
              9,449
              
              --General
      and administrative
              
              
              9,906
              
              
              6,673
              
              48.4
              
              
              
              19,537
              
              
              23,658
              
              (17.4
              )Depreciation
      and amortization
              
              
              250
              
              
              222
              
              12.6
              
              
              
              720
              
              
              477
              
              50.9Impairment
      of assets
              
              
              12,263
              
              
              2,938
              
              317.4
              
              
              
              19,095
              
              
              19,385
              
              (1.5
              )Total
      expenses
              
              $
              40,206
              
              $
              47,443
              
              (15.3
              )%
              
              $
              73,013
              
              $
              116,522
              
              (37.3
              )%Equity
      and other (loss) income
              
              $
              (146
              )
              $
              (154
              )
              5.2
              %
              
              $
              6
              
              $
              (404
              )
              101.5
              %Repayment
      or sale of investments
              
              
              3,989
              
              
              --
              
              100.0
              
              
              
              (3,032
              )
              
              653
              
              (564.3
              )Total
      other income (loss)
              
              $
              3,843
              
              $
              (154
              )
              N/M
              
              
              $
              (3,026
              )
              $
              249
              
              N/MAverage
      borrowing rate (1)
              
              
              6.01
              %
              
              4.81
              %
              
              
              
              
              6.06
              %
              
              4.85
              %Average
      SIFMA rate
              
              
              1.91
              %
              
              3.77
              %
              
              
              
              
              2.22
              %
              
              3.68
              %
 
 (1)Includes effect of swaps.
                N/M
      – Not meaningful.
 
 
 The
decrease in interest expense in this segment is attributed to the reduction in
direct financing costs related to on-balance sheet financing of our mortgage
revenue bonds as a result of the December 2007 re-securitization
transaction.  With the decrease in our average mortgage revenue bond
portfolio balance, our level of securitizations also decreased, which reduced
interest expense for the 2008 periods.
 
 The
increase in general and administrative expenses in the current quarter is
primarily related to an increase in salaries and benefits expense due to
reorganization of personnel between our Affordable Housing and Commercial Real
Estate groups and an increase in reserves against advances made to our sponsored
funds. There was a year to date decrease in general and administrative expenses
primarily due to $5.5 million of reserves recorded in the first quarter of 2007
(of which $0.7 million was reversed in the second quarter) against advances made
to our sponsored funds.
 
 Loss on
impairment of assets in 2008 related to two mortgage revenue bonds that we plan
to sell and another property experiencing substandard
performance.  During 2007, in connection with properties experiencing
substandard performance, we recognized approximately $19.4 million of mortgage
revenue bond impairments (nine bonds in total), of which $2.9 million (two
bonds) was recognized in the second quarter.  In the second quarter of
2008, the amount also includes a $7.7 million charge related to our Series B
Freddie Mac certificates.  A change in the estimated timing of cash flows
as they relate to assumed credit defaults of the underlying mortgage revenue
bonds led to a decline in the fair value of these certificates.  In
accordance with GAAP, this decline in fair value is recorded as an impairment of
the asset.
 
 We
recognized $4.8 million of other income in 2008 year to date ($4.6 million in
the second quarter) related to 18 mortgage revenue bonds (17 in the second
quarter) re-securitized with Freddie Mac in December 2007, but for which
continuing involvement had precluded sale treatment.  Due to the
lapsing of this involvement in the current quarter, these bonds received sale
treatment for accounting purposes.  The 2008 year to date period
includes $7.6 million of incremental losses, the majority of which were recorded
in the first quarter, associated with the re-securitization transaction as
discussed in the “Other Income (Loss)” section of the Consolidated Results
discussion above.
  - 56
-
 Management’s
Discussion and Analysis of
 Financial
Condition and Results of Operations
 (continued)
 Profitability
 
 Three
      Months Ended June 30,
              
              Six
      Months Ended June 30,(dollars
      in thousands)
              
              2008
              
              2007
              
              %
      Change
              
              2008
              
              2007
              
              %
      ChangeIncome
      (loss) before other allocations
              
              $
              4,292
              
              $
              20,275
              
              (78.8
              )%
              $
              8,064
              
              $
              14,179
              
              (43.1
              )%Adjusted
      Net Income (Loss)
              
              
              2,872
              
              
              18,719
              
              (84.7
              )
              
              4,803
              
              
              11,066
              
              (56.6
              )
 
 
 The
change in income (loss) before other allocations reflects the revenues and
expense changes discussed above.  Incremental costs incorporated in
Adjusted Net Income (Loss) include the impact of taxes and allocations to the
preferred shares of subsidiaries.  See Note 19 to the condensed
consolidated financial statements for a description of Adjusted Net Income and a
reconciliation to GAAP net income.
 
 Commercial
Real Estate
 
 Assets under
Management
 
 Assets
under management in our Commercial Real Estate Group are broken down as follows
at June 30:
 
 (dollars
      in thousands)
              
              2008
              
              
              2007
              
              
              %
      ChangeCMBS
      funds (1)
              
              $
              1,475,397
              
              
              $
              890,134
              
              
              
              65.7
              %High-yield
      debt investment entities (1)
              
              
              535,665
              
              
              
              462,275
              
              
              
              15.9Joint
      venture equity funds (1)
              
              
              221,641
              
              
              
              220,000
              
              
              
              0.7CDO
      collateral management
              
              
              1,429,062
              
              
              
              --
              
              
              
              100.0Third-Party
      commercial loan portfolio
              
              
              767,777
              
              
              
              --
              
              
              
              100.0$
              4,429,542
              
              
              $
              1,572,409
              
              
              
              181.7
              %(1)Figures represent equity of the managed entities
 
 
 Revenues
 
 Revenues
for the period are broken down as follows:
 
 Three
      Months Ended June 30,
              
              
              Six
      Months Ended June 30,(dollars
      in thousands)
              
              2008
              
              2007
              
              %
      Change
              
              
              2008
              
              2007
              
              %
      ChangeInterest
      income
              
              $
              5,707
              
              $
              6,203
              
              (8.0
              )%
              
              $
              11,449
              
              $
              11,136
              
              2.8
              %Mortgage
      origination fees
              
              
              1,364
              
              
              1,585
              
              (13.9
              )
              
              
              2,803
              
              
              3,967
              
              (29.3
              )Mortgage
      servicing fees
              
              
              4,895
              
              
              5,015
              
              (2.4
              )
              
              
              9,918
              
              
              9,668
              
              2.6Other
      fee income
              
              
              1,651
              
              
              1,017
              
              62.3
              
              
              
              2,659
              
              
              1,702
              
              56.2Prepayment
      penalties
              
              
              565
              
              
              1,389
              
              (59.3
              )
              
              
              984
              
              
              2,042
              
              (51.8
              )Other
      revenues
              
              
              1,851
              
              
              1,168
              
              58.5
              
              
              
              2,564
              
              
              2,864
              
              (10.5
              )Total
      revenues
              
              $
              16,033
              
              $
              16,377
              
              (2.1
              )%
              
              $
              30,377
              
              $
              31,379
              
              (3.2
              )%
 
 
 A
description of the revenue streams for our Commercial Real Estate operations can
be found in our 2007 Form 10-K.
 
 Investments
 
 The
decrease in interest income for the quarterly period is due to the varying
levels of investments in CMBS securities for our own account.  During
the 2007 quarter, we acquired investments with a face amount of $336.5 million
that we subsequently sold to the fund we originated in the third quarter of
2007; in the 2008 quarter, the investments for our own account have a face
amount of $57.2 million.  For the six month period in 2008, the higher
level of interest reflects the increased loan to AMAC as well as interest on a
higher level of mortgage loans held for sale in the current period, which offset
the lower level of current year CMBS investment interest.
  - 57
-
 Management’s
Discussion and Analysis of
 Financial
Condition and Results of Operations
 (continued)
 Originations
 
 Mortgage
originations for the three months ended June 30, are broken down as
follows:
 
 2008
              
              2007(dollars
      in thousands)
              
              
              
              
              %
      of Total
              
              
              
              
              %
      of Total
              
              %
      ChangeFannie
      Mae
              
              $
              234,246
              
              72.3
              %
              $
              187,092
              
              27.9
              %
              25.2
              %Freddie
      Mac
              
              
              89,662
              
              27.7
              
              
              33,059
              
              4.9
              
              171.2Centerline
      Direct
              
              
              --
              
              --
              
              
              428,587
              
              63.9
              
              (100.0
              )Conduit
      and other
              
              
              --
              
              --
              
              
              21,640
              
              3.3
              
              (100.0
              )Total
              
              $
              323,908
              
              100.0
              %
              $
              670,378
              
              100.0
              %
              (51.7
              )%
 
 
 Mortgage
originations for the six months ended June 30, are broken down as
follows:
 
 2008
              
              2007(dollars
      in thousands)
              
              
              
              
              %
      of Total
              
              
              
              
              %
      of Total
              
              %
      ChangeFannie
      Mae
              
              $
              351,588
              
              62.0
              %
              $
              256,273
              
              22.7
              %
              37.2
              %Freddie
      Mac
              
              
              204,919
              
              36.1
              
              
              177,779
              
              15.8
              
              15.3Centerline
      Direct
              
              
              --
              
              --
              
              
              632,272
              
              56.1
              
              (100.0
              )Conduit
      and other
              
              
              11,000
              
              1.9
              
              
              60,570
              
              5.4
              
              (81.8
              )Total
              
              $
              567,507
              
              100.0
              %
              $
              1,126,894
              
              100.0
              %
              (49.6
              )%
 
 
 Origination
fees decreased in the 2008 periods due to a lower level of originations period
over period, partially offset by an increase in the average origination fee rate
from a higher proportion of agency and risk-sharing loans (which generally
result in higher origination fees).  We originated no mortgages under
our lending program for AMAC and CRESS (“Centerline Direct”) and there was a
decline in conduit originations as a result of market conditions.  In
addition, a portion of the origination volume in the second quarter of 2008
consisted of large loans for which we received lower than average origination
fees.
 
 Servicing
 
 As
      of June 30,(dollars
      in thousands)
              
              2008
              
              
              2007
              
              
              %
      ChangePrimary
      servicing mortgage portfolio
              
              $
              8,795,641
              
              
              $
              8,397,643
              
              
              
              4.7
              %Carrying
      value of MSRs
              
              $
              50,950
              
              
              $
              50,835
              
              
              
              0.2
              %
 
 
 The
increase in servicing fees in the 2008 year to date period is primarily due to
the growth in the servicing portfolio and includes fees earned from Freddie Mac
on the mortgage revenue bonds re-securitized in December 2007.
 
 Other
Revenues
 
 Other
revenues increased in the second quarter of 2008 primarily due to new revenue
streams earned in connection with the CDO collateral management agreement we
entered into during the quarter (see Note 5 to the condensed consolidated
financial statements). However, other revenues decreased in the six months ended
June 30, 2008 as these new revenue streams were more than offset by a reduction
in management, expense reimbursement and other fees related to AMAC as a result
of the lower level of business activity and asset sales by that
business.  In addition, a lower level of refinancing activity in the
servicing portfolio led to a decline in prepayment fees received in the 2008
periods.
  - 58
-
 Management’s
Discussion and Analysis of
 Financial
Condition and Results of Operations
 (continued)
 Expenses and Other
Income
 
 Three
      Months Ended June 30,
              
              
              Six
      Months Ended June 30,(dollars
      in thousands)
              
              2008
              
              2007
              
              %
      Change
              
              
              2008
              
              2007
              
              %
      ChangeInterest
      expense
              
              $
              (6,375
              )
              $
              240
              
              N/M
              
              
              $
              4,296
              
              $
              2,770
              
              55.1
              %General
      and administrative expenses
              
              
              12,333
              
              
              18,192
              
              (32.2
              )%
              
              
              26,099
              
              
              39,174
              
              (33.4
              )Depreciation
      and amortization
              
              
              3,077
              
              
              3,890
              
              (20.9
              )
              
              
              6,165
              
              
              8,451
              
              (27.1
              )Impairment
      of assets
              
              
              1,077
              
              
              --
              
              100.0
              
              
              
              1,077
              
              
              --
              
              100.0Total
      expenses
              
              $
              10,112
              
              $
              22,322
              
              (54.7
              )%
              
              $
              37,637
              
              $
              50,395
              
              (25.3
              )%Equity
      income
              
              $
              2,452
              
              $
              2,885
              
              (15.0
              )%
              
              $
              7,635
              
              $
              9,625
              
              (20.7
              )%Gain
      on sale or repayment of loans
              
              
              2,055
              
              
              1,207
              
              70.3
              
              
              
              4,413
              
              
              2,933
              
              50.5Total
      other income
              
              $
              4,507
              
              $
              4,092
              
              10.1
              %
              
              $
              12,048
              
              $
              12,558
              
              (4.1
              )%N/M
      – Not meaningful.
  Interest
expense decreased in the 2008 quarter primarily as a result of $7.6 million
non-cash income in the quarter ($1.1 million expense year to date) as compared
to $1.8 million income in the 2007 quarter ($1.1 million income year to date),
related to the change in the fair value of free-standing interest rate
derivatives.  We intend to transfer these derivatives to one of the
CMBS Fund Partnerships upon approval from the swap counterparty.  If
that transfer takes place, we expect to reverse the derivative asset or
liability at the time of the transfer through the statement of operations and
the fund would record a similar but opposite amount in the fund’s statement of
operations.
 
 The
change in origination volume also contributed to the variance in interest
expense.  While mortgage originations declined in the period, a larger
percentage were loans we funded through our warehouse lines prior to
settlement.  The increased borrowings contributed to the increased
expense, partially offset by the decline in LIBOR rates.
 
 General
and administrative expense decreased mostly as a result of decreased
compensation expense including share-based payments, promote-sharing, and bonus
accrual.  Partially offsetting the reduction in compensation was an
increase in other general and administrative expenses, including an increase in
professional fees.
 
 Equity
income in the 2008 quarter includes a $0.3 million equity loss ($2.3 million
year-to-date) related to our investments in AMAC (in which we co-invested
beginning in May 2007 and for which there was a de minimis 2007
amount).  Also included in the 2008 quarter is $4.7 of income ($11.9
million year-to-date) related to equity income from the CMBS Fund Partnerships
and the High-Yield Debt Fund Partnership, as compared to $2.9 million in the
2007 quarter ($9.6 million year-to date).  The 2008 amounts include
our proportionate share of $26.8 million of asset impairment charges recognized
at two of the CMBS Fund Partnerships.
 
 Profitability
 
 Three
      Months Ended June 30,
              
              
              Six
      Months Ended June 30,(dollars
      in thousands)
              
              2008
              
              2007
              
              %
      Change
              
              
              2008
              
              2007
              
              %
      ChangeIncome
      (loss) before other allocations
              
              $
              10,428
              
              $
              (1,853
              )
              662.8
              %
              
              $
              4,788
              
              $
              (6,458
              )
              174.1
              %Adjusted
      net income (loss)
              
              
              9,820
              
              
              62
              
              N/M
              
              
              
              4,669
              
              
              (2,647
              )
              276.4N/M
      – Not meaningful.
 
 
 The
change in income (loss) before other allocations reflects the revenues and
expense changes discussed above.  Adjusted net income (loss) is
adjusted for acquisition-related deferred compensation.  The 2008
adjustment for acquisition-related deferred compensation is lower than the 2007
adjustment due to vesting of related compensation.  See Note 19 to the
condensed consolidated financial statements for a reconciliation to GAAP net
income.
  - 59
-
 Management’s
Discussion and Analysis of
 Financial
Condition and Results of Operations
 (continued)
 Portfolio
Management
 
 Revenues
 
 Three
      Months Ended June 30,
              
              
              Six
      Months Ended June 30,(dollars
      in thousands)
              
              2008
              
              2007
              
              %
      Change
              
              
              2008
              
              2007
              
              %
      ChangeInterest
      income
              
              $
              1,523
              
              $
              6,541
              
              (76.7
              )%
              
              $
              4,014
              
              $
              11,807
              
              (66.0
              )%Asset
      management and servicing fees
              
              
              6,954
              
              
              6,807
              
              2.2
              
              
              
              13,693
              
              
              13,118
              
              4.4Other
      fees
              
              
              2,893
              
              
              1,853
              
              56.1
              
              
              
              4,830
              
              
              3,945
              
              22.4Total
      fee income
              
              
              9,847
              
              
              8,660
              
              13.7
              
              
              
              18,523
              
              
              17,063
              
              8.6Other
      revenues
              
              
              326
              
              
              102
              
              219.6
              
              
              
              543
              
              
              416
              
              30.5Total
      revenues
              
              $
              11,696
              
              $
              15,303
              
              (23.6
              )%
              
              $
              23,080
              
              $
              29,286
              
              (21.2
              )%Servicing
      portfolio at June 30:Primary
      servicing (1)
              
              $
              24,989,833
              
              $
              31,541,985
              
              (20.8
              )%Special
      servicing
              
              
              1,285,174
              
              
              235,666
              
              445.3Carrying
      value of MSRs atJune
      30:
              
              
              4,230
              
              
              9,186
              
              (54.0
              )
 
 (1)
              Includes
      sub-servicing of the Commercial Real Estate servicing
      portfolio.
 
 
 A
description of the revenue streams for our Portfolio Management operations can
be found in our 2007 Form 10-K.
 
 Interest
Income
 
 In
addition to an overall decrease in the servicing portfolio, interest income
decreased due to lower rates earned on the servicing escrow cash balances
resulting from general interest rate declines period over period.
 
 Asset management and
servicing fees
 
 The
decline in our servicing portfolio as of June 30, 2008, as compared June 30,
2007, is principally due to the pre-securitization component of the
portfolio.  As securitization volume has declined substantially since
the third quarter of 2007 throughout the credit markets, this portion of our
business has likewise been affected.  Despite that factor, the level
of fees earned by this segment increased in the 2008 periods due to the overall
increase in our assets under management.
 
 Expenses
 
 Three
      Months Ended June 30,
              
              
              Six
      Months Ended June 30,(dollars
      in thousands)
              
              2008
              
              2007
              
              %
      Change
              
              
              2008
              
              2007
              
              %
      ChangeInterest
      expense
              
              $
              127
              
              $
              --
              
              100.0
              %
              
              $
              129
              
              $
              --
              
              100.0
              %General
      and administrative expenses
              
              
              8,203
              
              
              8,862
              
              (7.4
              )
              
              
              15,292
              
              
              16,884
              
              (9.4
              )Depreciation
      and amortization
              
              
              962
              
              
              1,558
              
              (38.3
              )
              
              
              2,235
              
              
              3,102
              
              (27.9
              )Total
      expenses
              
              $
              9,292
              
              $
              10,420
              
              (10.8
              )%
              
              $
              17,656
              
              $
              19,986
              
              (11.7
              )%
 
 
 - 60
-
 Management’s
Discussion and Analysis of
 Financial
Condition and Results of Operations
 (continued)
 
 Profitability
 
 Three
      Months Ended June 30,
              
              
              Six
      Months Ended June 30,(dollars
      in thousands)
              
              2008
              
              2007
              
              %
      Change
              
              
              2008
              
              2007
              
              %
      ChangeIncome
      before other allocations
              
              $
              2,404
              
              $
              4,883
              
              (50.8
              )%
              
              $
              5,424
              
              $
              9,300
              
              (41.7
              )%Adjusted
      net income
              
              
              3,096
              
              
              5,797
              
              (46.6
              )
              
              
              6,716
              
              
              11,136
              
              (39.7
              )
 
 
 The
change in income (loss) before other allocations reflects the revenues and
expense changes discussed above adjusted net income for the second quarter and
year to date reflects the reductions in segment revenues discussed earlier as
well as an adjustment for acquisition-related share-based
compensation.  The 2008 adjustment for acquisition-related deferred
compensation is lower than the 2007 adjustment due to vesting of share
grants.  See Note 19 to the condensed consolidated financial
statements for a reconciliation to GAAP net income.
 
 Credit
Risk Products
 
 Revenues
 
 Three
      Months Ended June 30,
              
              
              Six
      Months Ended June 30,(dollars
      in thousands)
              
              2008
              
              2007
              
              %
      Change
              
              
              2008
              
              2007
              
              %
      ChangeCredit
      intermediation fees
              
              $
              1,172
              
              $
              2,914
              
              (59.8
              )%
              
              $
              2,365
              
              $
              5,384
              
              (56.1
              )%Interest
      income
              
              
              849
              
              
              1,136
              
              (25.3
              )
              
              
              1,867
              
              
              2,058
              
              (9.3
              )Other
      revenues
              
              
              221
              
              
              137
              
              61.3
              
              
              
              313
              
              
              137
              
              128.5Total
      revenues
              
              $
              2,242
              
              $
              4,187
              
              (46.5
              )%
              
              $
              4,545
              
              $
              7,579
              
              (40.0
              )%
 
 
 A
description of the revenue streams for our Credit Risk Products operations can
be found in our 2007 Form 10-K.
 
 Credit
intermediation fees declined as a result of the re-securitization transaction in
December 2007 and the absence of fees related to the previous securitization
program.  Interest income on capital balances maintained at Centerline
Financial decreased due to declines in interest rates period over period which
was partially offset by increased interest income due to investments in
syndicated corporate debt which began at the end of 2007.
  - 61
-
 Management’s
Discussion and Analysis of
 Financial
Condition and Results of Operations
 (continued)
 Expenses
 
 Three
      Months Ended June 30,
              
              Six
      Months Ended June 30,(dollars
      in thousands)
              
              2008
              
              2007
              
              %
      Change
              
              2008
              
              2007
              
              %
      ChangeInterest
      expense
              
              $
              633
              
              $
              806
              
              (21.5
              )%
              $
              879
              
              $
              836
              
              5.1
              %Change
      in fair value of derivatives
              
              
              --
              
              
              3,443
              
              (100.0
              )
              
              --
              
              
              4,649
              
              (100.0
              )General
      and administrative expenses
              
              
              3,322
              
              
              2,961
              
              12.2
              
              
              6,770
              
              
              5,094
              
              32.9Depreciation
      and amortization
              
              
              43
              
              
              21
              
              104.8
              
              
              79
              
              
              38
              
              107.9Impairment
      of assets
              
              
              77
              
              
              --
              
              100.0
              
              
              1,268
              
              
              --
              
              100.0Total
      expenses
              
              $
              4,075
              
              $
              7,231
              
              (43.6
              )%
              $
              8,996
              
              $
              10,617
              
              (15.3
              )%Loss
      on sale of assets
              
              $
              (2
              )
              $
              --
              
              (100.0
              )%
              $
              (527
              )
              $
              --
              
              (100.0
              )%Total
      other loss
              
              $
              (2
              )
              $
              --
              
              (100.0
              )%
              $
              (527
              )
              $
              --
              
              (100.0
              )%
 
 
 Total
expenses declined in 2007 included credit default swap fair value changes, all
of which were included in our operating results.  There were no
corresponding expenses in 2008 as the credit default swaps terminated as part of
the December 2007 re-securitization.
 
 General
and administrative expenses increased in the current periods due to growth in
personnel and miscellaneous expense, including professional fees.
 
 In 2008,
we sold five syndicated corporate debt investments at a loss of $0.6 million, of
which $0.1 million we recognized as an impairment charge in 2007.  In
addition, we recognized impairment charges in 2008 due to recent market
fluctuations for the remaining securities for which we concluded that the
declines in fair value were other-than-temporary as we expect to sell the
investments upon termination of the associated financing.
 
 Profitability
 
 Three
      Months Ended June 30,
              
              
              Six
      Months Ended June 30,(dollars
      in thousands)
              
              2008
              
              2007
              
              %
      Change
              
              
              2008
              
              2007
              
              %
      Change(Loss)
      income before other allocations
              
              $
              (1,835
              )
              $
              (3,044
              )
              39.7
              %
              
              $
              (4,978
              )
              $
              (3,038
              )
              (63.9
              )%Adjusted
      net loss
              
              
              (1,717
              )
              
              (2,767
              )
              37.9
              
              
              
              (4,771
              )
              
              (2,761
              )
              (72.8
              )
 
 
 The
change in income (loss) before other allocations reflects the revenues and
expense changes discussed above. Adjusted net loss includes the minority
interest allocation to Natixis.  See Note 19 to the condensed
consolidated financial statements for a reconciliation to GAAP net
income.
 Corporate
Expenses
 
 Expenses
in our Corporate Group include central business functions such as executive,
finance and legal as well as costs related to general corporate
debt.  The 2008 amounts reflect higher insurance costs, professional
fees and amortization of deferred financing costs related to our credit
facilities.  These increases were offset by non-cash income related to
the change in fair value of free-standing derivatives.
 Consolidated
Partnerships
 
 The
results of Consolidated Partnerships reflect entities in which we have a
substantive controlling general partner or managing member interest or in which
we have concluded we are the primary beneficiary of a variable interest entity
in accordance with FASB Interpretation No. 46 (as revised) Consolidation of Variable Interest
Entities(“FIN46(R)”).  With respect to the LIHTC Fund
Partnerships and LIHTC Property Partnerships, we have no equity interest or, in
the case of 39 partnerships, an insignificant equity interest.  With
respect to the CMBS Fund Partnerships and the High-Yield Fund Partnerships, we
have ownership of between 5.0% and 25.0% and also receive additional equity
income allocations as manager.
 
 - 62
-
 Management’s
Discussion and Analysis of
 Financial
Condition and Results of Operations
 (continued)
 
 Three
      Months Ended June 30,2008
              
              2007(in
      thousands)
              
              LIHTC
      Fund
                and
      Property Partnerships
              
              CMBS
      and
                High-Yield
                Debt
      Fund
                Partnerships
              
              Total
              
              LIHTC
      Fund
                and
      Property
                Partnerships
              
              CMBS
      and
                High-Yield
                Debt
      Fund
                Partnerships
              
              TotalRevenues
              
              $
              22,476
              
              $
              61,585
              
              $
              84,061
              
              $
              18,878
              
              $
              41,879
              
              $
              60,757Interest
      expense
              
              
              (5,394
              )
              
              (27,519
              )
              
              (32,913
              )
              
              (5,263
              )
              
              (18,739
              )
              
              (24,002
              )Other
      expenses
              
              
              (35,033
              )
              
              (6,348
              )
              
              (41,381
              )
              
              (28,634
              )
              
              (895
              )
              
              (29,529
              )Partnership
      expenses eliminated in consolidation
              
              
              (19,208
              )
              
              (206
              )
              
              (19,414
              )
              
              (18,893
              )
              
              --
              
              
              (18,893
              )Gain
      (loss) on investments
              
              
              (47,530
              )
              
              (24,991
              )
              
              (72,521
              )
              
              (91,497
              )
              
              8,601
              
              
              (82,896
              )Allocations
      to limited partners
              
              
              84,573
              
              
              2,175
              
              
              86,748
              
              
              125,738
              
              
              (27,962
              )
              
              97,776Net
      impact
              
              $
              (116
              )
              $
              4,696
              
              $
              4,580
              
              $
              329
              
              $
              2,884
              
              $
              3,213
 
 
 Six
      Months Ended June 30,2008
              
              2007(in
      thousands)
              
              LIHTC
      Fund
                and
      Property Partnerships
              
              CMBS
      and
                High-Yield
                Debt
      Fund
                Partnerships
              
              Total
              
              LIHTC
      Fund
                and
      Property
                Partnerships
              
              CMBS
      and
                High-Yield
                Debt
      Fund
                Partnerships
              
              TotalRevenues
              
              $
              43,999
              
              $
              128,829
              
              $
              172,828
              
              $
              36,120
              
              $
              73,385
              
              $
              109,505Interest
      expense
              
              
              (8,418
              )
              
              (59,387
              )
              
              (67,805
              )
              
              (12,448
              )
              
              (33,866
              )
              
              (46,314
              )Other
      expenses
              
              
              (64,232
              )
              
              (9,007
              )
              
              (73,239
              )
              
              (52,934
              )
              
              (2,231
              )
              
              (55,165
              )Partnership
      expenses eliminated in consolidation
              
              
              (39,932
              )
              
              (271
              )
              
              (40,203
              )
              
              (36,321
              )
              
              --
              
              
              (36,321
              )Gain
      (loss) on investments
              
              
              (141,643
              )
              
              (25,679
              )
              
              (167,322
              )
              
              (148,912
              )
              
              8,601
              
              
              (140,311
              )Allocations
      to limited partners
              
              
              210,238
              
              
              (22,553
              )
              
              187,685
              
              
              215,151
              
              
              (36,264
              )
              
              178,887Net
      impact
              
              $
              12
              
              $
              11,932
              
              $
              11,944
              
              $
              656
              
              $
              9,625
              
              $
              10,281
 
 
 The net
impact represents the equity income we earn on our co-investments which is
included in our net income (loss).
 
 The
following table summarizes the number of Consolidated Partnerships at June
30:
 
 2008
              
              2007LIHTC
      Fund Partnerships
              
              
              134
              
              120LIHTC
      Property Partnerships
              
              
              55
              
              53CMBS
      Fund Partnerships
              
              
              3
              
              2High-Yield
      Debt Fund Partnership
              
              
              1
              
              1
 
 
  - 63
-
 Management’s
Discussion and Analysis of
 Financial
Condition and Results of Operations
 (continued)
 LIHTC
Fund Partnerships and LIHTC Property Partnerships
 
 The
increased revenue, expense, equity loss and allocation amounts in 2008 are due
to the higher number of LIHTC Fund Partnerships at June 30, 2008 as compared to
the prior period.
 
 CMBS
Fund Partnerships and High-Yield Debt Fund Partnership
 
 The
higher amounts of revenue and expenses associated with these funds are primarily
due to the launching of a third CMBS fund in the third quarter of 2007 and an
increase in the size of the High-Yield Debt fund since the fourth quarter of
2007.  The 2008 results also reflect asset impairment charges with
respect to investments in CMBS and retained CMBS certificates of $25.0 million
in the second quarter and $25.7 million year-to-date.
 
 
 LIQUIDITY
AND CAPITAL RESOURCES
 
 Liquidity
 
 A
significant part of managing our liquidity includes the ongoing ability to
accommodate growth of assets under management, fund and maintain investments
including ongoing commitments, pay compensation and fund other general business
operations, including our contractual obligations.  Liquidity
management involves forecasting funding requirements and maintaining sufficient
capital to meet the fluctuating needs inherent in our business operations as
well as unanticipated events.
 
 We fund
our short-term business needs (including investments) primarily with cash
provided by operations, securitization of investments, repurchase agreements and
revolving or warehouse credit facilities.  Our primary sources of
capital to meet long-term liquidity needs (including acquisitions) are debt and
various types of equity offerings, including equity of our
subsidiaries.
 
 Turbulence
in the credit markets that began in 2007 has led to decreased availability of
many forms of financing.  Specifically, since mid-2007 we have
experienced a sharp decline in our common share price and more constrained
credit in the following areas:
 
 ·
              for
      our new corporate credit facility and 11.0% Preferred Shares, the terms
      include a higher rate of interest or dividends, a more rapid amortization
      of principal and more stringent covenants than had been the norm in prior
      periods;
 
 ·
              with
      respect to short term repurchase financing, which we use to accumulate
      investments in our Commercial Real Estate Group and CMBS Fund Partnerships
      within the Consolidated Partnerships segment, advance rates for such
      agreements have declined and costs have increased, compounding the effect
      on borrowing capacity as market values of the collateral assets have
      declined.  Lenders on these facilities have also recently
      notified us of their intent to terminate some of the
      facilities.  Additionally, the market for issuing CDO financing
      has deteriorated substantially, impeding our ability to replace the
      repurchase financing with more cost effective permanent financing;
      and
 
 ·
              Steady
      declines in the advance rates on repurchase facilities as the fair value
      of the assets securing the lines have decreased.  We have
      terminated many of these facilities and one remaining line will be
      terminated no later than November
2008.
 
 We are
pursuing various strategies to maintain and improve our liquidity.  In
the coming months these strategies will include:
 
 ·
              Monetization
      of the Series B Freddie Mac Certificates and other existing assets through
      securitization transactions;
 ·
              Strategic
      asset sales such as syndicated corporate debt investments to repay the
      associated warehouse line that expires in August 2008;
  and
 ·
              The
      sale of mortgage revenue bond investments that do not meet our long term
      investment criteria.
 
 As other
asset backed financing facilities come due, we expect to use the proceeds from
these sources, as well as operating cash flows, to retire the obligations while
also seeking alternative sources of financing.
 
  - 64
-
 Management’s
Discussion and Analysis of
 Financial
Condition and Results of Operations
 (continued)
 Along
with the strategies noted above, we believe that our existing financing capacity
and cash flow from current operations will be adequate to meet our immediate and
long-term liquidity requirements with respect to our current
operations.  Nonetheless, as business needs warrant, we may need to
issue other types of debt or equity in the future, although current market
conditions could make such forms of financing very costly.
 
 Cash
Flows
 
 Six
      Months Ended June 30,(in
      thousands)
              
              2008
              
              
              2007Cash
      flow from operating activities
              
              $
              3,629
              
              
              $
              108,250Cash
      flow from investing activities
              
              
              (82,418
              )
              
              
              (384,458
              )Cash
      flow from financing  activities
              
              
              54,819
              
              
              
              194,858Net
      change in cash
              
              $
              (23,970
              )
              
              $
              (81,350
              )
 
 
 Operating
Activities
 
 The
decline in operating cash flows was due in large part to a lower level of income
exclusive of non-cash items.  Contributing to the decrease was the net
change in operating assets and liabilities.  Working capital
requirements increased as compared to the prior year principally as a result of
the timing of payment for salaries, distributions and investment settlements in
the 2008 period while the 2007 period also included a significant amount of
advances repaid to us from sponsored funds.  The decline was offset by
a higher level of cash inflows from the settlement of originated mortgage
loans.
 
 Investing
Activities
 
 Due to
current market conditions, we acquired fewer investment securities including
mortgage revenue bonds, CMBS and other available-for-sale
securities.
 
 Financing
Activities
 
 In
connection with the December 2007 re-securitization, at which time we repaid
most of our previous securitization debt and amended our revolver and term loan
agreements, we have had a significant net decrease in financing arrangements and
notes payable in 2008 under these new arrangements as compared to the prior
period.  Partially offsetting this decrease are the net proceeds from
the 11.0% Preferred Shares (as more fully described in Note 13 to the condensed
consolidated financial statements) as well as lower distributions to
shareholders reflecting the reduced common dividend rate of $0.225 per share
year-to-date as compared to $0.84 per share in the prior period.
 
 Liquidity
Requirements after June 30, 2008
 
 Equity
distributions declared through June 30, 2008, which will be paid through
September 30, 2008 are as follows:
  - 65
-
 Management’s
Discussion and Analysis of
 Financial
Condition and Results of Operations
 (continued)
 (in
      thousands)Common/non-redeemable
      CRA shares
                  
                  $
                  4,158SCUs/SCIs
                  
                  
                  1,5324.4
      % CRA Preferred shares
                  
                  
                  1,412Equity
      Issuer Preferred shares
                  
                  
                  6,282Redeemable
      CRA shares
                  
                  
                  44411.0%
      Preferred shares
                  
                  
                  3,592Total
                  
                  $
                  17,420
 
 
 Under the
terms of the agreement, our Term Loan must be paid down to $75.0 million by
August 31, 2008 and to $50.0 million by October 31, 2008.  The term
loan must be repaid in full by December 31, 2008.
 
 During
July 2008, CRESS sold several investments to a CDO in which it has an equity
interest.  The proceeds were used to repay its repurchase facility
borrowings in their entirety.
 
 In July
2008, we were notified by Merrill Lynch that we will need to post additional
collateral with respect to credit intermediation transactions whereby we agree
to provide agreed-upon rates of return to investors in certain LIHTC funds (see
Note 20 to the condensed consolidated financial statements). While we are in
negotiations as to the amount of collateral, the amount required could range
from $5.0 to $15.0 million.
 
 In August
2008, our syndicated corporate debt warehouse line will expire as
scheduled.  We expect to sell the associated assets and use the
proceeds to repay the borrowings in full at that time.
 
 Management
is not aware of any trends or events, commitments or uncertainties, which have
not otherwise been disclosed, that will or are likely to impact liquidity in a
material way (see also Commitments and Contingencies
below).
 
 Fair
Value Disclosures
 
 In
January 2008, we adopted SFAS 157 which defines fair value, establishes a
framework for measuring fair value and expands disclosures about fair value
measurements.  In accordance with SFAS 157, we have categorized our
assets and liabilities recorded at fair value based on the priority of the
inputs to the valuation technique, into a three-level hierarchy.  More
information regarding the fair value hierarchy is provided in Note 10 of the
condensed consolidated financial statements.
 
 In liquid
markets, readily available or observable prices are used in valuing mortgage
related positions.  In less liquid markets, such as those we have
encountered since the second half of 2007, we may be required to utilize other
available information and modeling techniques to approximate fair value for our
positions.
 
 The
current lack of liquidity in the financial markets has caused investment spreads
between the cost of funds and investment income to widen dramatically on
investments, which could result in current fair values that are materially lower
than we may realize from cash income or from proceeds on settlement or
maturity.
 
 Many of
our investments are currently illiquid. In most cases, however, we have the
intent and ability to hold the investments until maturity or recovery, and as
such the fair value presented, considering current market conditions, may
diverge materially from the amounts that we will ultimately
realize.  This is because the premise under GAAP is that assets
generally should be valued on the basis of their current market value and, if no
market exists, on a hypothetical market value, regardless of whether we plan to
sell or would sell under market conditions such as those we are currently
experiencing. We have not historically sold investment assets in market
transactions, but rather have held them until optional redemption dates or
allowed early redemption in exchange for penalty fees we earn.
 
 Similar
to other market participants, we are confronted by valuation related issues,
particularly since the second half of 2007.  These
include:
  - 66
-
 Management’s
Discussion and Analysis of
 Financial
Condition and Results of Operations
 (continued)
 ·
                  uncertainty
      resulting from a drastic decline in market activity for certain of our
      mortgage backed products, including
CMBS;
 ·
                  significant
      increase in dependence on model-related assumptions and/or unobservable
      inputs;
 ·
                  doubts
      about the quality of the market information utilized as inputs;
      and,
 ·
                  in
      limited cases, the downgrades of certain trusts in which we may hold
      certificates.
 
 Provided
below is the percentage of “Level 3” assets as compared to total assets measured
at fair value.  We had no Level 3 financial liabilities for the
periods presented.
 (in
      thousands)
              
              June
      30,
                2008
              
              
              December
      31,
                2007Level
      3 assets held for our own account (note 10):Series
      A-1 Freddie Mac Certificates
              
              $
              302,116
              
              
              $
              288,672Series
      B Freddie Mac Certificates
              
              
              160,682
              
              
              
              153,468Mortgage
      revenue bonds
              
              
              186,232
              
              
              
              376,432Retained
      CMBS certificates
              
              
              33,152
              
              
              
              75,328CMBS
              
              
              11,139
              
              
              
              13,361Mortgage
      servicing rights (1)
              
              
              55,180
              
              
              
              58,529Level
      3 assets held by Consolidated Partnerships (note 18):CMBS
              
              
              795,315
              
              
              
              1,235,059Retained
      CMBS certificates
              
              
              378,230
              
              
              
              482,424CDO
      equity
              
              
              76,221
              
              
              
              65,060Total
      Level 3 assets
              
              $
              1,998,267
              
              
              $
              2,748,333Level
      3 assets as a percentage of total fair value assets
              
              
              94.3
              %
              
              
              94.0
              %(1)Financial asset fair-valued on a non-recurring
    basis.
 
 The
primary decrease in Level 3 assets relates to CMBS held by our Consolidated
Partnership segment.  These assets decreased principally due to the
continuing decline in marks provided by certain dealers who make a market in
these financial instruments.  The declines in fair value increased the
frequency and magnitude of margin calls on repurchase financing and interest
rate swap contracts at one of the CMBS Fund Partnerships.  In
connection with these margin calls, we (along with other investors in the fund)
loaned monies to the partnership to allow it to terminate the repurchase
financing and swap contracts (see also Note 18 to the condensed consolidated
financial statements).
 
 While, as
noted above, we have the ability and intent to hold most of our assets until
maturity or recovery, we have recorded impairment charges for certain assets for
which we either do not have such ability or intent, or for which the underlying
credit quality had deteriorated and, therefore, we may not recover our full
investment.
 
 We
recorded the following impairments of Level 3 assets for the periods presented
(see Notes 2 and 18 to the condensed consolidated financial
statements):
 - 67
-
 Management’s
Discussion and Analysis of
 Financial
Condition and Results of Operations
 (continued)
 Three
      Months Ended June 30,
                  
                  Six
      Months Ended June 30,(in
      thousands)
                  
                  2008
                  
                  2007
                  
                  2008
                  
                  2007Series
      B Freddie Mac certificates
                  
                  $
                  7,668
                  
                  $
                  --
                  
                  $
                  7,668
                  
                  $
                  --Mortgage
      revenue bonds
                  
                  
                  4,096
                  
                  
                  2,938
                  
                  
                  10,928
                  
                  
                  19,385CMBS
                  
                  
                  1,077
                  
                  
                  --
                  
                  
                  1,077
                  
                  
                  --Subtotal
      (excluding Consolidated Partnerships)
                  
                  
                  12,841
                  
                  
                  2,938
                  
                  
                  19,673
                  
                  
                  19,385CMBS
      (held by Consolidated Partnerships)
                  
                  
                  7,985
                  
                  
                  --
                  
                  
                  7,985
                  
                  
                  --Retained
      CMBS certificates (held by Consolidated Partnerships)
                  
                  
                  17,006
                  
                  
                  --
                  
                  
                  17,694
                  
                  
                  --Total
                  
                  $
                  37,832
                  
                  $
                  2,938
                  
                  $
                  45,352
                  
                  $
                  19,385
 
 
 For
additional information, including a discussion of the related valuation
techniques for level 3 assets, see Notes 10 and 18 to the condensed consolidated
financial statements.  - 68
-
   Management’s
Discussion and Analysis of
 Financial
Condition and Results of Operations
 (continued)
 Capital
Resources
 
 Financing
Obligations
 
 The table
below reflects our financing obligations at the dates presented:
 
 June
      30, 2008(in
      thousands)
              
              June
      30,
                2008
              
              December
      31,
                2007
              
              Available
      to
                Borrow
              
              Maximum
                CommitmentCredit
      Facilities:Term
      loan
              
              $
              109,040
              
              $
              140,000
              
              $
              --
              
              $
              109,040Revolving
      credit facility
              
              
              211,000
              
              
              210,000
              
              
              34,000
              
              
              245,000Other
      Notes Payable:CMC
      warehouse line
              
              
              --
              
              
              32,302
              
              
              150,000
              (1)
              
              150,000Multifamily
      ASAP plus facility
              
              
              39,617
              
              
              58,413
              
              
              N/A
              (1)
              
              N/ACommercial
      real estate repurchase lines
              
              
              30,987
              
              
              56,912
              
              
              174,013
              (2)
              
              205,000
              (2)Centerline
      Financial facilities
              
              
              --
              
              
              --
              
              
              155,000
              
              
              155,000Syndicated
      corporate debt warehouse line
              
              
              17,014
              
              
              5,423
              
              
              82,986
              (3)
              
              100,000Other
              
              
              2,711
              
              
              2,838
              
              
              N/A
              
              
              N/AFinancing
      Arrangements:Bond
      securitizations
              
              
              62,757
              
              
              14,275
              
              
              N/A
              
              
              N/ASubtotal
              
              
              473,126
              
              
              520,163
              
              
              595,999
              
              
              964,040Freddie
      Mac Secured Financing
              
              
              416,834
              
              
              548,227
              
              
              N/A
              (4)
              
              N/ACapital
      Structure (excluding Consolidated Partnerships)
              
              
              889,960
              
              
              1,068,390
              
              
              595,999
              
              
              964,040Consolidated
      Partnerships
              
              
              1,894,541
              
              
              1,997,332
              
              
              N/A
              
              
              N/ATotal
              
              $
              2,784,501
              
              $
              3,065,722
              
              $
              595,999
              
              $
              964,040
 
 (1)Borrowings under these facilities are limited to available assets
      to serve as collateral.
                  (2)Borrowings under these facilities are limited to available assets
      to serve as collateral.  In May 2008, we received notice from
      one lender that the $80.0 million repurchase agreement would not be
      extended and a termination date of November 27, 2008 was established on
      this facility.  There are no borrowings outstanding under the
      other facilities as of June 30, 2008.
                  (3)Borrowings under these facilities are limited to available assets
      to serve as collateral. This facility will expire according to its terms
      on August 15, 2008.  We expect to sell the associated assets to
      repay the borrowings in full at that time.
                  (4)As more fully discussed in our 2007 Form 10-K and note 8 to the
      condensed consolidated financial statements, the secured financing
      liability relates to mortgage revenue bonds that we re-securitized but for
      which the transaction was not recognized as a sale.
 Credit
Facilities
 
 Our term
loan and revolving credit facility require us to maintain certain financial and
other covenants including (as defined in the agreement):
 
 ·
              a
      minimum level of consolidated net worth (as
      defined in the credit
agreement);
 
 ·
              a
      minimum ratio of consolidated EBITDA to fixed charges (both as defined in
      the credit agreement);
 
 ·
              a
      minimum ratio of funded debt to consolidated EBITDA;
  and
  - 69
-
 Management’s
Discussion and Analysis of
 Financial
Condition and Results of Operations
 (continued)
 ·
                  certain
      limitations on distributions (including distributions to minority interest
      holders).
 
 Consolidated
Partnerships
 
 The
capital structure of our Consolidated Partnerships comprises debt facilities
that are non-recourse to us, including:
 
 ·
              three
      CDO financing arrangements of the CMBS Fund
  Partnerships;
 
 ·
              notes
      payable by the LIHTC Fund Partnerships collateralized either by the funds’
      limited partners’ equity subscriptions or by the underlying investments of
      the funds;
 
 ·
              repurchase
      agreements for the CMBS Fund Partnerships and the High-Yield Debt Fund
      Partnership (the latter of which was repaid in July 2008);
    and
 
 ·
              bridge
      loans extended to a CMBS Fund Partnership by its investors (including
      us).
 
 During
the six months ended June 30, 2008, our CMBS Fund Partnerships made net cash
payments due to increased margin call/margin receipts on repurchase
facilities.  The margin calls, which were due to the continuing
volatility in CMBS markets and tightening of credit by many lenders, led us to
secure the bridge financing noted above during the period to replace the
existing repurchase facilities.
 
 Equity
 
 Other
than our common shares, we have several classes of equity outstanding, the
carrying amounts of which are provided in the table below, with varying claims
upon our income and cash flows:
 
 (in
      thousands)
              
              June
      30,
                2008
              
              
              December
      31,
                2007Mezzanine
      equity:Minority
      interests in subsidiaries
              
              $
              159,593
              
              
              $
              176,616Preferred
      shares of subsidiary (not subject to mandatory repurchase)
              
              
              104,000
              
              
              
              104,000Redeemable
      CRA shares
              
              
              195,166
              
              
              
              69,88811.0%
      Preferred shares
              
              
              129,457
              
              
              
              --Shareholders’
      equity:Convertible
      CRA shares
              
              
              5,886
              
              
              
              118,160
 
 
 11.0%
Preferred Shares
 
 In
January 2008, we issued 11.2 million 11.0% Preferred Shares in a private
placement.  The entire issue was purchased by an affiliate of
TRCLP.  The shares have a liquidation preference of $11.70 per share,
are convertible into 12.2 million common shares and are entitled to voting
rights as if converted into common shares.
 
 In March
2008, we commenced a rights offering that entitled shareholders to purchase
these shares with the TRCLP affiliate retaining any shares not purchased as part
of the rights offering.  Subsequent to the rights offering, under
which shareholders purchased 0.4 million shares for $4.4 million, the TRCLP
affiliate owns 10.8 million shares.  Proceeds from the issuance were
$129.5 million, net of $1.7 million of offering costs.
 
 Shelf
Registration
 
 In
October 2004, we filed a shelf registration with the SEC providing for the
issuance of up to $400.0 million in common shares, preferred shares and debt
securities.  The shelf registration was declared effective on March 1,
2005 and has been available for use since April 1, 2006.
  - 70
-
 Management’s
Discussion and Analysis of
 Financial
Condition and Results of Operations
 (continued)
 Commitments
and Contingencies
 
 Off Balance Sheet
Arrangements
 The
following table reflects our maximum exposure and the carrying amounts as of
June 30, 2008, for guarantees we and our subsidiaries have entered into and
other contingent liabilities:
 
 (in
      thousands)
              
              Maximum
                Exposure
              
              Carrying
                AmountLIHTC
      credit intermediation (1)
              
              $
              1,587,685
              
              $
              33,814Mortgage
      banking loss sharing agreements (2)
              
              
              870,358
              
              
              13,116Credit
      support to developers (3)
              
              
              199,231
              
              
              298Centerline
      Financial credit default swaps (4)
              
              
              44,015
              
              
              1,170$
              2,701,289
              
              $
              48,398(1)We see these transactions as opportunities to expand our Affordable
      Housing business by offering broad capital solutions to
      customers.  To date, we have had minimal exposure to losses and
      anticipate no material liquidity requirements in satisfaction of any
      arrangement.  The carrying values disclosed above relate to the
      fees we earn for the transactions, which we recognize as their fair
      values.
                
                (2)The loss sharing agreements with Fannie Mae and Freddie Mac are a
      normal part of the DUS and DUI lender programs and afford a higher level
      of fees than we earn for other comparable funding sources.  The
      carrying value disclosed above is our estimate of potential exposure under
      the guarantees, although any funding requirements for such exposure is
      based on the contractual requirements of the underlying loans we sell to
      Fannie Mae and Freddie Mac, which vary as to amount and duration, up
      to  a maximum of 30 years. The carrying value disclosed above
      represents the reserve we have recorded as a reduction of mortgage
      servicing rights, which we recognize as the fair value of the
      agreements.
                
                (3)Generally relate to business requirements for developers to obtain
      construction financing.  As part of our role as co-developer of
      certain properties, we issue these guarantees in order to secure
      properties as assets for the funds we manage.  To date, we have
      had minimal exposure to losses under these guarantees.  The
      carrying values disclosed above relate to the fees we earn for the
      transactions, which we recognize as their fair values.
                
                (4)We see these transactions as opportunities to expand our Credit
      Risk Products business by offering broad capital solutions to
      customers.  To date, we have had minimal exposure to losses and
      anticipate no material liquidity requirements in satisfaction of any
      arrangement.  The carrying values disclosed above relate to the
      fees we earn for the transactions, which we recognize as their fair
      values.
 
 
 The
maximum exposure amount is not indicative of our expected losses under the
guarantees.  For details of these transactions, see Note 20 to the
condensed consolidated financial statements.
 
 Forward-Looking
Statements
 
 Certain
statements made in this report may constitute “forward-looking statements”
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended.  These
forward-looking statements are not historical facts, but rather our beliefs and
expectations and are based on our current estimates, projections and assumptions
about our Company and industry.  Words such as “anticipates,”
”expects,” “intends,” “plans,” “believes,” “seeks,” “estimates” and similar
expressions are intended to identify forward-looking
statements.  These statements are not guarantees of future performance
and are subject to risk, uncertainties and other factors, some of which are
beyond our control, are difficult to predict and could cause actual results to
differ materially from those expressed or forecasted in the forward-looking
statements.  Some of these risks include, among other
things:
 ·
                adverse
      changes in real estate and credit markets, general economic and business
      conditions;
 ·
                adverse
      changes in credit markets and risks related to the form and structure of
      our financing arrangements;
 ·
                our
      ability to generate new income sources, raise capital for investment funds
      and maintain business relationships with providers and users of
      capital;
   - 71
-
 Management’s
Discussion and Analysis of
 Financial
Condition and Results of Operations
 (continued)
  ·
                    changes
      in applicable laws and regulations;
 ·
                    our
      tax treatment, the tax treatment of our subsidiaries and the tax treatment
      of our investments;
 ·
                    competition
      with other companies;
 ·
                    risk
      of loss from direct and indirect investments in CMBS and
    CDOs;
 ·
                    risk
      of loss under mortgage banking loss sharing agreements;
  and
 ·
                    risks
      associated with providing credit
intermediation.
 
 These
risks are more fully described in our Form 10-K for the year ended December 31,
2007.  We caution you not to place undue reliance on these
forward-looking statements, which reflect our view only as of the date of this
report.  Centerline expressly disclaims any obligation or undertaking
to release publicly any updates or revisions to any  forward-looking
statements contained herein to reflect any change in Centerline’s expectations
with regard thereto or change in events, conditions, or circumstances on which
any such statement is based.
  - 72
-
  Item
3.  Quantitative and Qualitative Disclosures about Market
Risks.
 
 We invest
in certain financial instruments that are subject to various forms of market
risk, including interest rate risk.  We seek to prudently and actively
manage such risks to earn sufficient compensation to justify the undertaking of
such risks and to maintain capital levels which are commensurate with the risks
we undertake.
 
 The
assumptions related to the following discussion of market risk involve judgments
concerning future economic market conditions, future corporate decision and
other interrelating factors, many of which are beyond our control and all of
which are difficult or impossible to predict with precise
accuracy.  Although we believe that the assumptions underlying the
forward-looking information are reasonable, any of the assumptions could be
inaccurate and, therefore, there can be no assurance that the forward-looking
information included herein will prove to be accurate.  Due to the
significant uncertainties inherent in forward-looking information, the inclusion
of such information should not be regarded as our representation that our
objectives and plans would be achieved.
 
 Interest Rate
Risk
 
 The
nature of our investments and the instruments used to raise capital for their
acquisition expose us to income and expense volatility due to fluctuations in
market interest rates.  Market interest rates are highly sensitive to
many factors, including governmental policies, domestic and international
economic and political considerations and other factors beyond our
control.  A rising interest rate environment could reduce the demand
for multifamily tax-exempt and taxable financing, which could limit our ability
to invest in mortgage revenue bonds or to structure
transactions.  Conversely, falling interest rates may prompt
historical renters to become homebuyers, in turn potentially reducing the demand
for multifamily housing.
 
 Impact
on Earnings
 
 Many of
our investments bear interest at fixed rates, or pay interest which does not
fluctuate with changes in market interest rates.
 
 In
contrast, we have variable-rate debt related to our credit and warehouse
facilities, with rates based on LIBOR.  Other long-term sources of
capital, such as our preferred shares of our subsidiary and our preferred
shares, carry a fixed dividend rate and as such, are not impacted by changes in
market interest rates.
 
 Of the
June 30, 2008, total amount of our liabilities labeled on our Condensed
Consolidated Balance Sheet as “Financing Arrangements and Secured Financing” and
“Notes Payable”, $198.1 million is variable rate debt and not hedged via
interest rate swap agreements.  We also have large escrow balances
maintained by our Portfolio Management Group and we are entitled to the interest
earned on those balances.  A 1.0% increase in interest rates would
therefore result in a net decrease of our pre-tax income by $1.0
million.
 
 We manage
this risk through the use of interest rate swaps as described in Note 11 to the
condensed consolidated financial statements.  In addition, we manage
our exposure by striving for diversification in our businesses, including
analysis of our susceptibility to interest rate changes and by managing our
leverage.
 
 Credit Spread and Margin
Risk
 
 Credit
spreads measure the yield demanded on loans and securities by the market based
on their credit relative to U.S. Treasuries, for fixed rate credit or LIBOR, for
floating rate credit.  Our fixed rate loans and securities are valued
based on a market credit spread over the rate payable on fixed rate U.S.
Treasuries of like maturity.  Our variable rate investments are valued
based on a market credit spread over LIBOR.  Excessive supply of such
loans and securities combined with reduced demand will generally cause the
market to require a higher yield on such loans and securities, resulting in the
use of higher (or “wider”) spread over the benchmark rate used to value
them.
 
 Widening
credit spreads would result in higher yields being required by the marketplace
on loans and securities.  This widening would reduce the value of the
loans and securities we hold at the time because higher required yields result
in lower prices on existing securities in order to adjust their yields upward to
meet the market.
 
 At June
30, 2008, a 1.0% movement in credit spreads would impact the book value of the
applicable assets by approximately 3.1%.  Under the terms of our
repurchase agreements, when the estimated fair value of the existing collateral
declines, the lenders may demand additional collateral or repayment of debt
(i.e., a margin call).  This could result from principal reductions
due to scheduled amortization payments, unscheduled principal payments on the
mortgages underlying our investments, changes in market interest rates and other
market factors.
 
 Should
market interest rates and/or prepayment speeds on our investments increase,
margin calls on our repurchase agreements could substantially increase, causing
an adverse change in our liquidity position and strategy.  The sources
mentioned above may not be sufficient to meet our obligations, including margin
calls, as they come due; as a result, further margin calls may result in asset
sales.
 
 - 73
-
  Item 4.  Controls and
Procedures.
 
 a)
              Evaluation
      of Disclosure Controls and
Procedures
 
 Our Chief
Executive Officer and Chief Financial Officer have evaluated the effectiveness
of our disclosure controls and procedures (as defined in Rule 13a-15(e) or Rule
15a-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange
Act”)) as of the end of the period covered by this quarterly
report.  Based on such evaluation, such officers have concluded that
our disclosure controls and procedures as of the end of the period covered by
this quarterly report were effective to ensure that information required to be
disclosed by us in the reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the SEC rules and forms, and to ensure that such information is accumulated
and communicated to our management, including the Chief Executive Officer and
Chief Financial Officer, as appropriate, to allow timely decisions regarding
required disclosure.
 
 b)
              Internal
      Control over Financial Reporting
 
 There
were no changes in our internal control over financial reporting (as defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the
quarter ended June 30, 2008, that have materially affected, or are reasonably
likely to materially affect, our internal control over financial
reporting.
 
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-
 
 PART
II – OTHER INFORMATION
 
 
 Item
1.  Legal Proceedings.
 
 We are
subject to routine litigation and administrative proceedings arising in the
ordinary course of business.  In addition, we are party to the
following actions:
 
 Putative Class and
Derivative Actions
 
 Through
August 7, 2008, we and our trustees have been named as defendants in fourteen
shareholder putative class and/or derivative actions arising out of our
announcements that (i) we have taken steps to transition our business to more of
a fund manager and in connection with such action intend to reduce the dividend
payable on our common shares from that which has been paid in prior years and
(ii) we committed to sell and then sold the 11.0% Preferred Shares to an
affiliate of TRCLP (see Note 13 to the condensed consolidated financial
statements).  Six of these cases are putative class actions pending in
federal court in New York that assert claims under the federal securities
laws.  The other eight cases are primarily derivative actions,
although some purport also to assert class claims, arising under state
law.  Each of the actions is summarized below.
 
 Federal
Securities Cases
 
 On
January 18, 2008, the first of the federal securities putative class actions was
filed against us and certain of our officers and trustees in the United States
District Court for the Southern District of New York.  Thereafter,
five other, essentially duplicative putative class actions were also filed in
the same court.  The complaint in each case asserted that we and other
defendants allegedly violated federal securities law by failing to disclose in a
timely fashion our December 2007 transaction with Freddie Mac.  On May
5, 2008, the Court designated Centerline Investor Group, which is made up of
several shareholders, as lead plaintiff for these cases.  Pursuant to
the Court’s stipulation and order dated March 3, 2008, the lead plaintiff filed
a consolidated complaint on July 7, 2008 in this action, In re Centerline
Holding Company Securities Litigation, No. 08 CV 00505.  The
consolidated complaint also alleges violations of the federal securities laws in
connection with our announcement of the Freddie Mac transaction, changes to the
Company’s business model, and the reduction in dividend guidance policy, and
seeks an unspecified amount of compensatory damages and other relief on behalf
of all persons or entities that purchased the common stock of Centerline Holding
Company during the period March 12, 2007 through December 28,
2007.  The defendants in this action are scheduled to file a motion to
dismiss the consolidated complaint by August 21, 2008.  We intend to
defend vigorously the claims that have been asserted against us and our officers
and trustees.
 
 Derivative
Lawsuits
 
 On
January 15, 2008, the first of the state law cases, a putative class and
derivative action, entitled Off v. Ross, CA No. 3468-VCP,
was filed against us, our Board of Trustees and TRCLP in the Delaware Court of
Chancery.  The lawsuit concerns our sale of a new issue of convertible
preferred stock to an affiliate of TRCLP.  The lawsuit alleges claims
for breach of fiduciary duty against the Trustees and seeks an unspecified
amount of compensatory damages from them as well as injunctive relief against
all defendants.  Thereafter, seven other derivative lawsuits asserting
the same or similar claims were filed in state and federal courts in New York
and in the Delaware Chancery Court.  Four of these later-filed actions
also allege that the trustees breached their fiduciary duties to us by allegedly
violating the federal securities laws (as alleged in the federal securities
lawsuits described above).  We are named solely as a nominal defendant
in all eight derivative actions and no monetary relief is sought against us in
any of those cases.  The seven derivative actions filed subsequent to
the Off case
are:
 
 ·
              On
      January 18, 2008, Kramer v. Ross, et al., Index. No. 100861-08, was filed
      against us and our board of trustees, in New York County Supreme
      Court;
 ·
              On
      January 25, 2008, Carfagno v. Schnitzer, et al., No. 08 CV 00912, was
      filed against us and our board of trustees in the United States District
      Court for the Southern District of New
York;
 ·
              On
      January 30, 2008, Ciszerk v. Ross, et al., CA No. 3511, was filed against
      us, our board of trustees and The Related Companies, L.P. in the Delaware
      Court of Chancery;
 ·
              On
      February 22, 2008, Kanter v. Ross, et al., 08 Civ. 01827, was filed
      against us, our board of trustees and The Related Companies, L.P. in the
      United States District Court for the Southern District of New
      York;
 ·
              On
      February 27, 2008, Broy v. Centerline Holding Company et al., No. 08 CV
      01971, was filed against us and certain of our officers and trustees in
      the United States District Court for the Southern District of New
      York;
 ·
              On
      April 10, 2008, Kastner v. Schnitzer et al, Index No. 601043-08, was filed
      against us and our board of trustees, in New York Supreme Court;
      and
 ·
              On
      April 10, 2008, Kostecka v. Schnitzer et al, Index No. 601044-08, was
      filed against us and our board of trustees, in New York Supreme
      Court.
 
 On April
28, 2008, a consolidated amended verified complaint alleging breaches of
fiduciary duties of loyalty, candor, due care, fair dealing, waste of corporate
assets and unjust enrichment, was filed against us and our board of trustees in
Carfagno v. Schnitzer et al., 08 CV 912 (SAS) and Broy v. Blau, 08 CV 1971
(SAS), pending in the U.S. District Court for the Southern District of New
York.  The action is styled both as a derivative suit and as a class
action on behalf of all holders of Centerline securities who qualified to
purchase our 11.0% Preferred Shares pursuant to the rights offering but who did
not do so.
 
 - 75
-
  We have
negotiated a settlement with the plaintiff in the Offcase based on the rights
offering (see Note 13 to the condensed consolidated financial statements) and
which is subject to court approval.  We believe that the settlement in
Offwill also resolve
the similar claims that have been asserted in several of the other derivative
lawsuits.  If the court does not approve the settlement in Off, and/or to the extent
that the Off settlement
does not resolve all of the claims in the other cases, the defendants intend to
defend themselves vigorously in all of the lawsuits.   An initial
hearing for approval of the settlement of the Off case was held on May 23,
2008 and a second hearing was held July 15, 2008.  We are currently
awaiting the judge’s decision regarding the settlement.
 
 In
addition, the outside members of the Board of Trustees have received a letter
from one of our purported shareholders demanding that they investigate potential
claims against our officers and others arising out of the allegations asserted
in the federal securities litigation. The independent Trustees determined, at
their meeting on March 12, 2008, to defer further consideration of the letter
until after the Court before which the securities litigation is pending had
decided the motion to dismiss that we and the other defendants expect to
file.
 
 Other
 
 Claims
have been asserted against our subsidiaries in two separate but interrelated
lawsuits relating to two properties for which we have provided debt and equity
financing, but associated with the same developers. The lawsuits allege, among
other things:
 
 ·
              breach
      of fiduciary duty;
 ·
              breach
      of the implied covenant of good faith and fair
  dealing;
 ·
              intentional
      misrepresentation, fraud and
deceit;
 ·
              negligent
      misrepresentation; and
 ·
              tortious
      interference with contracts.
 
 One of
the lawsuits, which was originally filed in Pierce County Superior Court, and
thereafter transferred to King County Superior Court, in the State of
Washington, is entitled Silverwood Alliance Apartments, LLC,
et al. v. Affordable Housing Partnership Alliance LLC, et al., Case No.
06-2-40705-9SEA.  Silverwood involves
counterclaims against our subsidiaries for unspecified damages.  The
other lawsuit, also was originally filed in Pierce County Superior Court in the
State of Washington and thereafter was removed to the United States District
Court for the Western District of Washington, is entitled Viewcrest Bremerton, LLC v. Related
Capital Housing Partnership I, L.P. - Series 3, et al., Case No.
C06-5459RSM.  Viewcrest alleges damages of
at least $10 to 15 million against our subsidiaries.  The parties have
entered into a settlement agreement that, if consummated, will result in the
global resolution of both lawsuits and all disputes between the
parties.  No Centerline entity will be required to make any payment as
part of the settlement other than payments contemplated under the original
Viewcrest deal documents.  The settlement is, however, subject to
certain contingencies and the parties are currently working on the satisfaction
of those contingencies.  Both lawsuits have been stayed pending the
consummation or termination of the settlement. If the settlement cannot be
effectuated, our subsidiaries intend to defend vigorously against the claims and
to prosecute their own claims.  We are unable at the present time to
estimate what potential losses, if any, may arise in connection with this
litigation if the settlement is not effectuated.
 
 Item
1A.  Risk Factors.
 
 There
have been no material changes to the risk factors as disclosed on our Form 10-K
for the year ended December 31, 2007.
 
 - 76
-
 
 Item 2.  Unregistered Sales
of Equity Securities and Use of Proceeds.
 
 Equity Securities purchased
by us
 
 The
following table presents information related to our repurchases of our equity
securities during the second quarter of 2008 and other information related to
our repurchase program:
 
 Period
              
              Total
                number
      of
                shares
                purchased
              
              Weighted
                average
                price
      paid
                per
      share
              
              Total
      number
                of
      shares
                purchased
      as
                part
      of publicly
                announced
      plans
                or
      programs
              
              Maximum
      number
                of
      shares that may
                yet
      be purchased
                under
      the
                plans
      or programsCommon
      shares (1):April
      1-30, 2008
              
              1,334
              
              $
              3.62
              
              --May
      1-31, 2008
              
              486
              
              
              2.96
              
              --June
      1-30, 2008
              
              2,944
              
              
              2.32
              
              --Total
      common shares
              
              4,764
              
              $
              2.75
              
              --
              
              303,854Preferred
      shares (2):April
      1-30, 2008
              
              373,136
              
              $
              11.70
              
              --May
      1-31, 2008
              
              --
              
              
              --
              
              --June
      1-30, 2008
              
              --
              
              
              --
              
              --Total
      preferred shares
              
              373,136
              
              $
              11.70
              
              --
              
              N/A
  (1)All of the share repurchases were in payment of tax
      withholding obligations incurred by holders of newly vested restricted
      shares and were outside of our share repurchase program.
                  (2)These shares were redeemed in connection with a rights offering
      associated with our 11.0% Preferred Shares and were sold to those
      participating in the rights offering (see Note 13 to the condensed
      consolidated financial statements).
 Item
      3.
              Defaults upon Senior
      Securities.None.Item
      4.
              Submission
      of Matters to a Vote of Security Holders.We
      held our annual meeting of shareholders on June 12,
      2008.  Robert L. Loverd, Marc D. Schnitzer and Thomas W. White
      were elected as trustees for three-year terms expiring in
      2011.  Continuing to serve their current terms are the following
      trustees: Jeff T. Blau, Leonard W. Cotton, Robert J. Dolan, Nathan
      Gantcher, Jerome Y. Halperin, Robert A. Meister and Stephen M.
      Ross.  The three individuals elected, and the number of votes
      cast for and abstaining, with respect to each of them, were as follows (no
      votes were cast “against”):
   - 77
-
 
 For
              
              Abstain/WithheldRobert
      L. LoverdCommon
      Shares
              42,774,288
              
              3,858,851Restricted
      Common Shares
              1,421,043
              
              1,63311.0%
      Preferred Shares
              11,824,715
              
              4,281Special
      Preferred Voting Shares
              935,269
              
              --Marc
      D SchnitzerCommon
      Shares
              42,128,426
              
              4,504,713Restricted
      Common Shares
              1,421,043
              
              1,63311.0%
      Preferred Shares
              11,824,465
              
              4,531Special
      Preferred Voting Shares
              935,269
              
              --Thomas
      W. WhiteCommon
      Shares
              42,283,677
              
              4,349,462Restricted
      Common Shares
              1,421,043
              
              1,63311.0%
      Preferred Shares
              11,824,483
              
              4,513Special
      Preferred Voting Shares
              935,269
              
              --
 
 
 At
      the same meeting, shareholders ratified Deloitte & Touche LLP as our
      independent registered public accounting firm.  Votes cast were
      as follows:
 
 For
              
              Abstain/Withheld
              
              AgainstRatification
      of Deloitte & Touche LLPCommon
      Shares
              45,209,790
              
              1,091,695
              
              331,654Restricted
      Common Shares
              1,422,676
              
              --
              
              --11.0%
      Preferred Shares
              11,828,257
              
              118
              
              621Special
      Preferred Voting Shares
              935,269
              
              --
              
              --
 
 Item
      5.
              Other
      Information.None.Item
      6.
              Exhibits.31.1
              Certification
      by the Chief Executive Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.*31.2
              Certification
      by the Chief Financial Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.*32.1
              Certification
      by  the Chief Executive Officer and Chief Financial Officer
      pursuant to Section 906 of the Sarbanes-Oxley Act of
  2002.**
              Filed
      herewith.
 
 
 - 78
-
  
 SIGNATURES
 
 
 
 Pursuant
to the requirements 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.
 
 
 
 CENTERLINE
HOLDING COMPANY
 (Registrant)
 
 
 
 Date:
      August 8, 2008
              By:
              /s/
      Marc D. SchnitzerMarc
      D. Schnitzer
                Managing
      Trustee, Chief Executive Officer and President
                (Principal
      Executive Officer)Date:
      August 8, 2008
              By:
              /s/
      Robert L. LevyRobert
      L. Levy
                Chief
      Financial Officer
                (Principal
      Financial Officer and Principal Accounting
  Officer)
  
 - 79
-