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 March 31, 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 xNo
[  ]
 
 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):
 
 Large
      Accelerated filer x
              
              Accelerated
      filer [  ]Non-
      accelerated filer [  ]
              
              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
April 15, 2008, there were 51,019,017 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 and
                  Results
      of Operations
                40Item
      3
                Quantitative
      and Qualitative Disclosures about Market Risk
                64Item
      4
                Controls
      and Procedures
                65PART
      II – Other InformationItem
      1
                Legal
      Proceedings
                66Item
      1A
                Risk
      Factors
                67Item
      2
                Unregistered
      Sales of Equity Securities and Use of Proceeds
                68Item
      3
                Defaults
      Upon Senior Securities
                68Item
      4
                Submission
      of Matters to a Vote of Security Holders
                67Item
      5
                Other
      Information
                68Item
      6
                Exhibits
                68SIGNATURES
                
                69
    - 2
-
  PART
1.  FINANCIAL INFORMATION
 Item
1.  Financial Statements
 
 CENTERLINE
HOLDING COMPANY
 CONDENSED
CONSOLIDATED BALANCE SHEETS
 (in
thousands)
 
 March
      31,
                2008
              
              December
      31,
                2007(Unaudited)ASSETSCash
      and cash equivalents
              
              $
              109,562
              
              $
              137,111Restricted
      cash
              
              
              47,685
              
              
              32,548Investments:Available-for-sale
      (Note 2)
              
              
              896,878
              
              
              938,378Equity
      method (Note 3)
              
              
              24,483
              
              
              38,760Other
      (Note 4)
              
              
              316,541
              
              
              184,200Investments
      in and loans to affiliates (Note 17)
              
              
              105,064
              
              
              107,175Goodwill
      and intangible assets, net (Note 5)
              
              
              498,431
              
              
              504,273Deferred
      costs and other assets, net (Note 6)
              
              
              136,695
              
              
              140,902Consolidated
      partnerships (Note 18):Investments:Available-for-sale
              
              
              1,495,095
              
              
              1,782,543Equity
      method
              
              
              4,256,384
              
              
              4,178,206Other
              
              
              408,321
              
              
              414,377Land,
      buildings and improvements, net
              
              
              704,853
              
              
              661,380Other
      assets
              
              
              382,793
              
              
              371,735Total
      assets
              
              $
              9,382,785
              
              $
              9,491,588LIABILITIES
      AND EQUITYLiabilities:Notes
      payable (Note 7)
              
              $
              602,252
              
              $
              505,888Financing
      arrangements and secured financing (Note 8)
              
              
              570,680
              
              
              562,502Accounts
      payable, accrued expenses and other liabilities (Note 9)
              
              
              276,854
              
              
              313,252Preferred
      shares of subsidiary (subject to mandatory repurchase)
              
              
              273,500
              
              
              273,500Consolidated
      partnerships (Note 18):Financing
      arrangements
              
              
              1,123,001
              
              
              1,122,906Notes
      payable
              
              
              704,855
              
              
              458,367Repurchase
      agreements
              
              
              103,373
              
              
              416,059Due
      to property partnerships
              
              
              957,311
              
              
              970,602Other
      liabilities
              
              
              198,869
              
              
              193,020Total
      liabilities
              
              
              4,810,695
              
              
              4,816,096Minority
      interests in consolidated subsidiaries, net of tax (Note
    12)
              
              
              164,118
              
              
              176,716Preferred
      shares of subsidiary (not subject to mandatory repurchase)
              
              
              104,000
              
              
              104,000Redeemable
      securities (Note 13)
              
              
              319,776
              
              
              69,888Limited
      partners’ interests in consolidated partnerships (Note 18)
              
              
              3,760,340
              
              
              3,782,912Commitments
      and contingencies (Note 20)Shareholders’
      equity:4.4%
      Convertible CRA preferred shares; no par value; 40 shares issued andoutstanding
      in 2008 and 1,060 shares issued and outstanding 2007
              
              
              1,935
              
              
              51,281Convertible
      CRA preferred shares; no par value; 687 shares issued andoutstanding
      in 2008 and 5,306 shares issued and outstanding in 2007
              
              
              8,321
              
              
              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; 54,517 issued and51,014
      outstanding in 2008 and 53,943 issued and 50,567 outstanding in
      2007
              
              
              546,065
              
              
              592,505Treasury
      shares of beneficial interest – common, at cost; 3,503 shares in 2008 and3,376
      shares in 2007
              
              
              (64,487
              )
              
              (64,312
              )Accumulated
      other comprehensive loss
              
              
              (268,119
              )
              
              (104,520
              )Total
      shareholders’ equity
              
              
              223,856
              
              
              541,976Total
      liabilities and equity
              
              $
              9,382,785
              
              $
              9,491,588
   
  - 3
-
  CENTERLINE
HOLDING COMPANY
 CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
 (in
thousands, except per share amounts)
 (Unaudited)
 
 
 Three
      Months Ended
                March
      31,2008
              
              2007Revenues:Interest
      income
              
              $
              26,116
              
              $
              49,620Fee
      income
              
              
              17,160
              
              
              16,384Other
              
              
              2,144
              
              
              2,413Consolidated
      partnerships (Note 18):Interest
      income
              
              
              70,136
              
              
              34,900Rental
      income
              
              
              16,989
              
              
              12,151Other
              
              
              1,642
              
              
              1,697Total
      revenues
              
              
              134,187
              
              
              117,165Expenses:Interest
              
              
              27,149
              
              
              28,502Interest
      – consolidated partnerships (Note 18 )
              
              
              34,892
              
              
              22,312Interest
      – distributions to preferred shareholders of subsidiary
              
              
              4,724
              
              
              4,724General
      and administrative (Note 15)
              
              
              43,902
              
              
              56,523Depreciation
      and amortization
              
              
              11,901
              
              
              11,098Impairment
      of mortgage revenue bonds and other assets
              
              
              8,023
              
              
              16,447Other
      expenses of consolidated partnerships (Note 18)
              
              
              31,858
              
              
              25,636Total
      expenses
              
              
              162,449
              
              
              165,242Loss
      before other income
              
              
              (28,262
              )
              
              (48,077
              )Other
      income (loss):Equity
      and other income (loss)
              
              
              (1,895
              )
              
              (250
              )(Loss)
      gain from repayment or sale of investments
              
              
              (5,170
              )
              
              2,379Investments
      held by consolidated partnerships (Note 18)
              
              
              (94,801
              )
              
              (57,415
              )Loss
      before allocations
              
              
              (130,128
              )
              
              (103,363
              )(Income)
      loss allocations:Preferred
      shares of subsidiary
              
              
              (1,556
              )
              
              (1,556
              )Minority
      interests in subsidiaries, net of tax (Note 12)
              
              
              10,157
              
              
              6,117Limited
      partners of consolidated partnerships, net (Note 18)
              
              
              100,937
              
              
              81,111Loss
      before income taxes
              
              
              (20,590
              )
              
              (17,691
              )Income
      tax (provision) benefit
              
              
              (1,049
              )
              
              2,946Net
      loss
              
              
              (21,639
              )
              
              (14,745
              )Dividends
      for preferred and redeemable securities
              
              
              (5,019
              )
              
              (1,188
              )(26,658
              )
              
              (15,933
              )Effect
      of redeemable share conversions
              
              
              (11,920
              )
              
              --Net
      loss for earnings per share calculations
              
              $
              (38,578
              )
              $
              (15,933
              )Net
      loss per share (Note 16):Basic
      and diluted
              
              $
              (0.76
              )
              $
              (0.27
              )Weighted
      average shares outstanding (Note 16):Basic
      and diluted
              
              
              50,754
              
              
              57,957Dividends
      declared per share
              
              $
              0.15
              
              $
              0.42
 
  - 4
-
  CENTERLINE
HOLDING COMPANY
 CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
 (In
thousands)
 (Unaudited)
 
 
 Three
      Months Ended
                March
      31,2008
              
              2007CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      loss
              
              $
              (21,639
              )
              $
              (14,745
              )Reconciling
      items:Gain
      (loss) from repayment or sale of investments
              
              
              5,170
              
              
              (2,379
              )Impairment
      of mortgage revenue bonds and other assets
              
              
              8,023
              
              
              16,447Depreciation
      and amortization
              
              
              11,901
              
              
              11,098Equity
      in unconsolidated entities
              
              
              1,895
              
              
              250Income
      allocated to preferred shares of subsidiary
              
              
              1,556
              
              
              1,556Loss
      allocated to minority interests in subsidiaries
              
              
              (10,157
              )
              
              (6,117
              )Non-cash
      compensation expense
              
              
              5,006
              
              
              9,057Other
      non-cash expense
              
              
              1,450
              
              
              3,514Deferred
      taxes
              
              
              356
              
              
              (54
              )Reserves
      for bad debt
              
              
              975
              
              
              5,573Changes
      in fair value of interest rate derivatives
              
              
              9,149
              
              
              690Changes
      in operating assets and liabilities, net of acquisitions:Mortgage
      loans held for sale
              
              
              (111,897
              )
              
              73,082Deferred
      revenues
              
              
              (8,706
              )
              
              (2,053
              )Receivables
              
              
              (5,937
              )
              
              34,244Other
      assets
              
              
              7,088
              
              
              1,391Accounts
      payable, accrued expenses and other liabilities
              
              
              (46,615
              )
              
              (15,421
              )Net
      cash flow from operating activities
              
              
              (152,382
              )
              
              116,133CASH
      FLOWS FROM INVESTING ACTIVITIES:Sale
      and repayments of mortgage revenue bonds
              
              
              1,601
              
              
              8,001Acquisition
      and funding of mortgage revenue bonds
              
              
              --
              
              
              (28,393
              )Acquisition
      of mortgage loans held for investment
              
              
              (649
              )
              
              (12,155
              )Repayments
      of mortgage loans held for investment
              
              
              5,232
              
              
              3,026Advances
      to partnerships
              
              
              (16,498
              )
              
              (32,369
              )Collection
      of advances to partnerships
              
              
              30,775
              
              
              22,230Deferred
      investment acquisition costs
              
              
              (590
              )
              
              (1,218
              )Increase
      in restricted cash, escrows and other cash collateral
              
              
              (45,136
              )
              
              (1,238
              )Return
      of capital from equity investees
              
              
              127
              
              
              --Purchases
      of CMBS and other available-for-sale securities
              
              
              (3,664
              )
              
              (31,160
              )Sale
      of CMBS and other securities
              
              
              7,268
              
              
              --Loan
      to (repayment from) AMAC
              
              
              (1,146
              )
              
              4,810Equity
      investments and other investing activities
              
              
              (63,256
              )
              
              (14,083
              )Net
      cash flow from investing activities
              
              
              (85,936
              )
              
              (82,549
              )
 
  - 5
-
  
 CENTERLINE
HOLDING COMPANY
 CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
 (In
thousands)
 (Unaudited)
 
 
 Three
      Months Ended
                March
      31,2008
              
              2007CASH
      FLOWS FROM FINANCING ACTIVITIES:Repayments
      of financing arrangements
              
              
              --
              
              
              (72,426
              )Proceeds
      from financing arrangements and secured financing
              
              
              --
              
              
              146,800Distributions
      to shareholders
              
              
              (8,259
              )
              
              (26,385
              )Distributions
      to preferred shareholders of subsidiary
              
              
              (1,556
              )
              
              (1,556
              )Distributions
      to minority interests in consolidated subsidiaries
              
              
              (6,340
              )
              
              (8,883
              )Increase
      (decrease) in notes payable
              
              
              96,364
              
              
              (147,625
              )Minority
      interest contribution
              
              
              1,800
              
              
              3,225Proceeds
      from 11.0% Preferred shares
              
              
              131,235
              
              
              --Offering
      costs of 11.0% Preferred shares
              
              
              (649
              )
              
              --Retirement
      of minority interests and special preferred voting shares
              
              
              (1,504
              )
              
              (2,803
              )Treasury
      stock purchases
              
              
              --
              
              
              (3,529
              )Deferred
      financing costs
              
              
              (321
              )
              
              (12
              )Net
      cash flow from financing activities
              
              
              210,769
              
              
              (113,194
              )Net
      decrease in cash and cash equivalents
              
              
              (27,549
              )
              
              (79,610
              )Cash
      and cash equivalents at the beginning of the period
              
              
              137,111
              
              
              178,907Cash
      and cash equivalents at the end of the period
              
              $
              109,562
              
              $
              99,927Non-cash
      investing and financing activities:Additions
      to secured financing liability
              
              $
              8,841
              
              $
              --Share
      grants issued
              
              $
              5,077
              
              $
              8,998Conversion
      of minority interests to common shares
              
              $
              2,977
              
              $
              --Treasury
      stock purchase via employee withholding
              
              $
              636
              
              $
              2,270
 
 
  - 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 and more than $12.0 billion
of assets under management as of March 31, 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 (see Note 16) there have been
no material changes to these policies since December 31, 2007.  New
accounting pronouncements pending adoption 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 in a
subsidiary 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.  We are currently evaluating the impact of adopting SFAS 160 on
our consolidated financial condition, results of operations and cash
flows.
 
  - 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)
              
              March
      31,
                2008
              
              December
      31, 2007Freddie
      Mac Certificates:Series
      A-1
              
              $
              285,957
              
              $
              288,672Series
      B
              
              
              150,761
              
              
              153,468Mortgage
      revenue bonds
              
              
              352,914
              
              
              376,432Retained
      CMBS certificates
              
              
              73,672
              
              
              75,328CMBS
              
              
              11,413
              
              
              13,361Syndicated
      corporate debt
              
              
              19,054
              
              
              27,749Marketable
      securities
              
              
              3,107
              
              
              3,368$
              896,878
              
              $
              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 Freddie Mac.  The Series
A-1 Freddie Mac Certificates are fixed rate interests, whereas the Series B
Freddie Mac Certificates are residual interests of the re-securitization
trust.  Key fair value assumptions used in measuring the Series B
Freddie Mac Certificates are provided in the table below:
 
 March
      31,
                2008
              
              December
      31,
                2007Weighted
      average discount rate
              
              11.0
              %
              11.0
              %Constant
      prepayment rate
              
              90.0
              %
              90.0
              %Weighted
      average life
              
              11.4
              years
              11.6
              yearsConstant
      default rate
              
              2.0
              %
              2.0
              %
 
 B.  Mortgage
Revenue Bonds
 
 Information
regarding our portfolio of mortgage revenue bonds is provided in the table
below:
 
 (in
      thousands)
                
                March
      31,
                  2008
                
                December
      31, 2007Amortized
      cost basis
                
                $
                780,095
                
                $
                774,594Gross
      unrealized gains
                
                
                1,696
                
                
                2,351Gross
      unrealized losses
                
                
                (3,853
                )
                
                (3,624
                )Subtotal/fair
      value
                
                
                777,938
                
                
                773,321Less:
      eliminations (1)
                
                
                (425,024
                )
                
                (396,889
                )Consolidated
      fair value
                
                $
                352,914
                
                $
                376,432(1)  
      Certain bonds are recorded as liabilities on the balance sheets of certain
      consolidated partnerships and therefore eliminated in
      consolidation.
 
 
 For
mortgage revenue bonds in an unrealized loss position as of the dates presented,
the fair value and gross unrealized losses of our mortgage revenue bonds,
aggregated by length of time that individual bonds have been in a continuous
unrealized loss position, is summarized in the table below:
  - 8
-
  CENTERLINE
HOLDING COMPANY
 NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
  
 (dollars
      in thousands)
                
                Less
      than
                  12
      Months
                
                12
      Months
                  or
      More
                
                TotalMarch
      31, 2008Number
                
                
                29
                
                
                1
                
                
                30Fair
      value
                
                $
                271,565
                
                $
                1,644
                
                $
                273,209Gross
      unrealized losses
                
                $
                3,851
                
                $
                2
                
                $
                3,853December
      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 reflective of the operating
performance of the assets.
 
 As of
March 31, 2008, one mortgage revenue bond with a fair value of $14.6 million was
securitized.  In April 2008, the securitization was terminated in
connection with the redemption of the bond (see Note 8).  Under our
new term loan agreement which became effective in December 2007 (see Note 7),
six bonds with an aggregate fair value of $50.6 million as of March 31, 2008,
were pledged as collateral.
 
 During
2008, we recognized $6.8 million of mortgage revenue bond impairment
charges.  With respect to such charges, in March 2008, we reached an
agreement to sell two mortgage revenue bonds in the second quarter of 2008,
resulting in impairment charges of $6.3 million, representing the difference
between the sale price and the carrying value for the two bonds.  As
the terms of the sale agreement indicated a permanent decline in the value of
the investments, we recorded the loss as an impairment in the first
quarter.  The remaining $0.5 million relates to one bond which
resulted from substandard performance at the underlying property.
 
 C.  Retained
CMBS Certificates
 
 Retained
commercial mortgage backed securities (“CMBS”) certificates pertain to our
retained investments in securitization trusts that hold CMBS
investments.  Retained CMBS certificates we hold for our own account
as of March 31, 2008 are composed of the following classes:
 
  - 9
-
  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
      RatingAAA
      IO
                
                $
                --
                
                $
                11,609
                
                $
                5,766
                
                $
                --
                
                $
                17,375
                
                23.6
                %AA+
                
                
                26,150
                
                
                14,645
                
                
                4,968
                
                
                --
                
                
                19,613
                
                26.6BBB-
                
                
                12,536
                
                
                5,363
                
                
                1,532
                
                
                --
                
                
                6,895
                
                9.4BB+
                
                
                8,784
                
                
                5,563
                
                
                --
                
                
                (3,367
                )
                
                2,196
                
                3.0BB
                
                
                11,635
                
                
                4,916
                
                
                1,050
                
                
                (751
                )
                
                5,215
                
                7.1BB-
                
                
                11,635
                
                
                3,569
                
                
                1,809
                
                
                (701
                )
                
                4,677
                
                6.3B+
                
                
                3,871
                
                
                1,776
                
                
                --
                
                
                (1,079
                )
                
                697
                
                0.9B
                
                
                17,754
                
                
                2,664
                
                
                4,294
                
                
                (378
                )
                
                6,580
                
                8.9B-
                
                
                8,501
                
                
                1,072
                
                
                1,684
                
                
                (294
                )
                
                2,462
                
                3.3CCC+
                
                
                9,402
                
                
                574
                
                
                1,776
                
                
                --
                
                
                2,350
                
                3.2CCC
                
                
                9,402
                
                
                321
                
                
                1,089
                
                
                --
                
                
                1,410
                
                1.9CCC-
                
                
                9,402
                
                
                253
                
                
                687
                
                
                --
                
                
                940
                
                1.3D
                
                
                9,402
                
                
                174
                
                
                766
                
                
                --
                
                
                940
                
                1.3Non-rated
                
                
                32,644
                
                
                1,903
                
                
                --
                
                
                (271
                )
                
                1,632
                
                2.2Non-rated
      IO
                
                
                --
                
                
                275
                
                
                415
                
                
                --
                
                
                690
                
                1.0Total
                
                $
                171,118
                
                $
                54,677
                
                $
                25,836
                
                $
                (6,841
                )
                $
                73,672
                
                100.0
                %
 
 
 At March
31, 2008, the AAA interest only certificate had a notional amount of $481.0
million and the non-rated interest only certificates had a combined notional
amount of $194.7 million.
 
 The
unrealized losses on retained CMBS certificates (all of which have been in an
unrealized loss position for less than 12 months) are due to widening interest
rate spreads resulting from market conditions and are not reflective of 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.
 
 In April
2008, Fitch Ratings Ltd. (“Fitch”) downgraded the certificates of certain trusts
in which we hold investments. The downgrade reduced the fair value of the
investments by $10.5 million and led to a margin call on a repurchase facility
(see Notes 7 and 21).
 
 D.  CMBS
 
 CMBS
investments we hold for our account were comprised of the following as of March
31, 2008:
 
 (dollars
      in thousands)
                
                Face
                  Amount
                
                Accreted
                  Cost
                
                Unrealized
                  Gain
                
                Unrealized
                  Loss
                
                Fair
                  Value
                
                Percentage
      of
                  Fair
      ValueSecurity
      rating:AAA
                
                $
                15,424
                
                $
                3,090
                
                $
                --
                
                $
                (346
                )
                $
                2,744
                
                24.0
                %BB+
                
                
                3,898
                
                
                2,222
                
                
                --
                
                
                (1,133
                )
                
                1,089
                
                9.5BB
                
                
                3,898
                
                
                2,074
                
                
                --
                
                
                (1,063
                )
                
                1,011
                
                8.9BB-
                
                
                3,898
                
                
                1,939
                
                
                --
                
                
                (1,001
                )
                
                938
                
                8.2B+
                
                
                10,395
                
                
                4,361
                
                
                --
                
                
                (2,152
                )
                
                2,209
                
                19.4B
                
                
                2,599
                
                
                534
                
                
                --
                
                
                (84
                )
                
                450
                
                3.9B-
                
                
                6,698
                
                
                1,357
                
                
                --
                
                
                (185
                )
                
                1,172
                
                10.3Non-rated
                
                
                10,395
                
                
                2,137
                
                
                --
                
                
                (337
                )
                
                1,800
                
                15.8Total
                
                $
                57,205
                
                $
                17,714
                
                $
                --
                
                $
                (6,301
                )
                $
                11,413
                
                100.0
                %
 
  - 10
-
  CENTERLINE
HOLDING COMPANY
 NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 
  
 During
the first three months of 2008, we purchased additional 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 of which have
been in an unrealized loss position for less than 12 months) are due to widening
interest rate spreads and are not reflective of 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.
 
 E.  Syndicated
Corporate Debt
 
 Syndicated
corporate debt primarily represents term loans, the purchase of which have been
funded through a warehouse line.  Information regarding our syndicated
corporate debt investments for the periods presented is provided
below:
 
 (in
      thousands)
                
                March
      31,
                  2008
                
                December
      31,
                  2007Amortized
      cost basis
                
                $
                19,054
                
                $
                27,839Gross
      unrealized losses
                
                
                --
                
                
                (90
                )Consolidated
      fair value
                
                $
                19,054
                
                $
                27,749
 
 
 In 2008,
we sold five syndicated corporate debt investments at a loss of $0.6 million,
$0.1 million of which we recognized as an impairment charge in
2007.  In addition, we recognized impairment charges of $1.2 million
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 may
not hold the investments until maturity or until the investments recover their
value.
 
 
 NOTE
3 – Equity Method Investments
 
 Equity
method investments for the periods presented are provided below:
 
 (in
      thousands)
                
                March
      31,
                  2008
                
                December
      31,
                  2007Equity
      interests in LIHTC partnerships
                
                $
                24,483
                
                $
                38,760
 
 
 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.
 
 For
discussion regarding American Mortgage Acceptance Company (“AMAC”) and
Centerline Urban Capital I, LLC (“CUC”), for which our interests held are
accounted for under the equity method, refer to Note 17.
 
 
 NOTE
4 – Other Investments
 
 Other
investments consisted of the following categories:
 
 (in
      thousands)
                
                March
      31,
                  2008
                
                December
      31,
                  2007Mortgage
      loans held for sale
                
                $
                204,884
                
                $
                92,987Mortgage
      loans held for investment
                
                
                11,104
                
                
                15,687Stabilization
      escrow
                
                
                90,558
                
                
                62,566Construction
      loans to LIHTC partnerships or properties
                
                
                2,992
                
                
                6,379Miscellaneous
      investments
                
                
                7,003
                
                
                6,581$
                316,541
                
                $
                184,200
 
  - 11
-
  CENTERLINE
HOLDING COMPANY
 NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 A.  Mortgage
Loans Held for Sale
 
 Mortgage
loans held for sale include originated loans sold to government sponsored
entities, such as Federal National Mortgage Association (“Fannie Mae”), Federal
Home Loan Mortgage Corporation (“Freddie Mac”) and Government National Mortgage
Association (“GNMA”) within three months of origination.
 
 B.  Stabilization
Escrow
 
 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.  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.  As there is risk to the
projected stabilization of the underlying properties, we record the escrow
balance at its net present value assuming a 15.0% discount rate.  The
additional funding increased the value of the stabilization escrow and the
difference between the amount deposited and the incremental value was recognized
as a loss of $3.5 million, which we recorded in “Loss from repayment or sale of
investments” in the Condensed Consolidated Statement of
Operations.  Giving effect to escrow releases (including $22.0 million
subsequent to March 31, 2008), the stabilization escrow is fully funded as of
April 2008.
 
 C.  Construction
Loans to LIHTC Properties
 
 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.
 
 
 NOTE
5 – Goodwill and Intangible Assets, Net
 
 Goodwill
and intangible assets, net consisted of the following:
 
 (in
      thousands)
                
                March
      31,
                  2008
                
                December
      31,
                  2007Goodwill
                
                $
                342,311
                
                $
                342,667Other
      intangible assets, net
                
                
                99,537
                
                
                103,077Mortgage
      servicing rights, net
                
                
                56,583
                
                
                58,529Total
                
                $
                498,431
                
                $
                504,273
 
 
 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 March 31, 2008
                
                $
                342,311
 
 
 The
reduction in goodwill relates to the redemption of 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
 
 The
components of other intangible assets, net for the periods presented are
provided below:
  - 12
-
 CENTERLINE
HOLDING COMPANY
 NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 (dollars
      in thousands)
                
                Estimated
      Useful
                  Life
                  (in
      Years)
                
                Gross
      Carrying Amount
                
                Accumulated
      Amortization
                
                NetMarch
      31,
                  2008
                
                December
      31,
                  2007
                
                March
      31,
                  2008
                
                December
      31,
                  2007
                
                March
      31,
                  2008
                
                December
      31,
                  2007Amortized
      intangible assets:Transactional
      relationships
                
                16.7
                
                $
                103,000
                
                $
                103,000
                
                $
                36,828
                
                $
                34,721
                
                $
                66,172
                
                $
                68,279Partnership
      service contracts
                
                9.4
                
                
                47,300
                
                
                47,300
                
                
                29,014
                
                
                28,057
                
                
                18,286
                
                
                19,243General
      partner interests
                
                8.5
                
                
                6,016
                
                
                6,016
                
                
                2,728
                
                
                2,547
                
                
                3,288
                
                
                3,469Joint
      venture developer relationships
                
                5.0
                
                
                4,800
                
                
                4,800
                
                
                4,195
                
                
                3,955
                
                
                605
                
                
                845Mortgage
      banking broker relationships
                
                5.0
                
                
                1,080
                
                
                1,080
                
                
                667
                
                
                612
                
                
                413
                
                
                468Weighted
      average life/subtotal
                
                13.8
                
                
                162,196
                
                
                162,196
                
                
                73,432
                
                
                69,892
                
                
                88,764
                
                
                92,304Unamortized
      intangible assets:Mortgage
      banking licenses and approvals with no expiration
                
                
                
                
                10,773
                
                
                10,773
                
                
                --
                
                
                --
                
                
                10,773
                
                
                10,773Total
      other intangible assets, net
                
                
                
                $
                172,969
                
                $
                172,969
                
                $
                73,432
                
                $
                69,892
                
                $
                99,537
                
                $
                103,077
 
 
 Three
      Months Ended
                  March
      31,(in
      thousands)
                
                2008
                
                2007Amortization
      expense
                
                $
                3,540
                
                $
                4,081
 
 
 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)
                
                March
      31,
                  2008
                
                December
      31,
                  2007Deferred
      financing and other costs
                
                $
                39,296
                
                $
                39,599Less:  Accumulated
      amortization
                
                
                (7,733
                )
                
                (5,176
                )Net
      deferred costs
                
                
                31,563
                
                
                34,423Collateral
      deposits receivable
                
                
                66,655
                
                
                59,957Interest
      receivable
                
                
                8,083
                
                
                10,550Fees
      receivable
                
                
                15,763
                
                
                14,057Furniture,
      fixtures and leasehold improvements, net
                
                
                7,786
                
                
                8,366Interest
      rate swaps at fair value (Note 11)
                
                
                384
                
                
                --Other
                
                
                6,461
                
                
                13,549Total
                
                $
                136,695
                
                $
                140,902
 
 
  - 13
-
 CENTERLINE
HOLDING COMPANY
 NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 NOTE
7 – Notes Payable
 
 Notes
payable included the following:
 
 (in
      thousands)
                
                March
      31,
                  2008
                
                December
      31,
                  2007Term
      loan
                
                $
                135,000
                
                $
                140,000Revolving
      credit facility
                
                
                205,000
                
                
                210,000CMC
      warehouse line
                
                
                66,450
                
                
                32,302Multifamily
      ASAP plus facility
                
                
                136,632
                
                
                58,413Commercial
      real estate repurchase lines
                
                
                38,855
                
                
                56,912Syndicated
      corporate debt warehouse line
                
                
                17,604
                
                
                5,423Other
                
                
                2,711
                
                
                2,838Total
                
                $
                602,252
                
                $
                505,888
 
 
 A.  Term
Loan and Revolving Credit Facility
 
 As of
March 31, 2008, we have a $135.0 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.  On March 31, 2008, we repaid $15.0
million of the Term Loan in accordance with the associated repayment
schedule.
 
 B.  Commercial
Real Estate Repurchase Lines
 
 In April
2008, the decline in value caused by a Fitch downgrade of retained CMBS
certificate collateral (see Note 2) led to a margin call of $7.1 million on one
of the repurchase lines, which was paid from available cash.
 
 C.  Covenants
 
 As of
March 31, 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)
                
                March
      31,
                  2008
                
                December
      31,
                  2007Secured
      financing
                
                $
                556,405
                
                $
                548,227P-FLOATs/RITES
                
                
                14,275
                
                
                14,275Total
                
                $
                570,680
                
                $
                562,502
 
 
 As more
fully discussed in our 2007 Form 10-K, the secured financing liability relates
to mortgage revenue bonds that we re-securitized but for which the transaction
was not recognized as a sale.
 
 In April
2008, the outstanding P-FLOATS/RITES amount was repaid in connection with the
redemption of the underlying mortgage revenue bond (see Notes 2 and
21).
 
  - 14
-
 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)
                
                March
      31,
                  2008
                
                December
      31,
                  2007Deferred
      revenues
                
                $
                91,904
                
                $
                100,610Transactions
      costs payable
                
                
                35,014
                
                
                35,314Interest
      rate swaps at fair value (Note 11)
                
                
                69,193
                
                
                50,445Distributions
      payable
                
                
                22,376
                
                
                41,016Accounts
      payable
                
                
                14,552
                
                
                15,976Salaries
      and benefits
                
                
                10,737
                
                
                30,513Accrued
      fund organization and offering expenses
                
                
                7,227
                
                
                8,484Escrow/deposits
      payable
                
                
                4,963
                
                
                5,641Accrued
      interest payable
                
                
                7,488
                
                
                1,334Unsettled
      investments
                
                
                186
                
                
                15,000Income
      tax reserves
                
                
                2,438
                
                
                2,442Other
                
                
                10,776
                
                
                6,477Total
                
                $
                276,854
                
                $
                313,252
 
 
 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.  The adoption of SFAS 157 as of January
1, 2008 resulted in a $4.2 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 $0.7 million increase in the fair value of
cash flow hedges, which we recorded as a component of accumulated other
comprehensive income.  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
March 31, 2008, and indicate the fair value hierarchy of the valuation
techniques we utilize to determine fair value:
 
  - 15
-
 CENTERLINE
HOLDING COMPANY
 NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 (dollars
      in thousands)
                
                Level
      1
                
                Level
      2
                
                Level
      3
                
                Balance
                  as
      of
                  March
      31,
                  2008Measured
      on a recurring basis:AssetsAvailable-for-sale
      investments:Freddie
      Mac Certificates:Series
      A-1
                
                $
                --
                
                $
                285,957
                
                $
                
                
                $
                285,957Series
      B
                
                
                --
                
                
                --
                
                
                150,761
                
                
                150,761Mortgage
      revenue bonds
                
                
                --
                
                
                --
                
                
                352,914
                
                
                352,914Retained
      CMBS certificates (1)
                
                
                --
                
                
                --
                
                
                73,672
                
                
                73,672CMBS
                
                
                --
                
                
                --
                
                
                11,413
                
                
                11,413Syndicated
      corporate debt
                
                
                19,054
                
                
                --
                
                
                --
                
                
                19,054Marketable
      securities
                
                
                3,107
                
                
                --
                
                
                --
                
                
                3,107Total
      available-for-sale investments
                
                $
                22,161
                
                $
                285,957
                
                $
                588,760
                
                $
                896,878Derivatives
                
                $
                --
                
                $
                384
                
                $
                --
                
                $
                384LiabilitiesDerivatives
                
                $
                --
                
                $
                69,193
                
                $
                --
                
                $
                69,193Measured
      on a non-recurring basis:AssetsMortgage
      loans held-for-sale
                
                $
                --
                
                $
                204,884
                
                $
                --
                
                $
                204,884Mortgage
      servicing rights
                
                
                --
                
                
                --
                
                
                56,583
                
                
                56,583(1)  
      See Note 2 regarding a decline in the fair value of certain of these
      investments subsequent to March 31, 2008.
 
 
 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, credit enhanced
      certificates that have terms consistent with preferred shares of our
      Centerline Equity Issuer Trust I (“Equity Issuer”)
subsidiary.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.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 against any similar market
      transactions.
  - 16
-
 CENTERLINE
HOLDING COMPANY
 NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 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.
                  
                  The
      Company performs 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
      servicing rights
                Although
      we have elected to account for our mortgage servicing rights under the
      amortized 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.
 
 
 The
following table presents additional information about assets measured at fair
value on a recurring basis and for which we utilized Level 3 inputs to determine
fair value:
 
  - 17
-
 CENTERLINE
HOLDING COMPANY
 NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 (dollars
      in thousands)
                
                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
                
                $
                588,760Amount
      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 March 31, 2008
                
                $
                --
                
                $
                (6,832
                )(1)
                $
                --
                
                $
                --
                
                $
                (6,832
                )
 
 (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 unobservable long–dated volatilities)
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, we record the amount considered
ineffective in the Condensed Consolidated Statement of Operations if the
ineffectiveness is within the limits allowed by SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, as amended and
interpreted.  If the ineffectiveness exceeds the allowable limit, we
would record the entire fair value (and subsequent changes) in our Condensed
Consolidated Statement of Operations.  When we terminate a derivative
that we have accounted for as a hedge (or determine that the hedged transaction
is no longer likely to occur), we reclassify any unrealized gains or loss in
accumulated other comprehensive income and recognize it in our Condensed
Consolidated Statement of Operations.  With respect to the
free-standing derivatives, we include all changes in their 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 March 31,
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 3.28% in
2008.
 
  - 18
-
 CENTERLINE
HOLDING COMPANY
 NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 Through
our Commercial Real Estate Group, we entered into four cash flow hedging
instruments to manage the interest rate risk of planned debt offerings by a CMBS
fund.  The swaps outstanding at March 31, 2008 had an aggregate
notional amount of $112.2 million, expire at various dates from August 2017 to
March 2022 and have a weighted average fixed rate of 5.63%.
 
 At
inception, we designated these swaps as cash flow hedging instruments, with the
hedged item being the variable 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 income (loss)
are reclassified into earnings in the same period during which the hedged
forecasted transaction affects earnings.  Since we are hedging the
variable interest payments in our variable-rate debt, the forecasted
transactions are the interest payments.  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 March 31, 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 March 31, 2008, these swaps had an aggregate notional
amount of $281.4 million, a weighted average interest rate of 6.10% and a
weighted average remaining term of 14.3 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
March 31, 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 9.4 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 March 31,(in
      thousands)
                
                2008
                
                2007Interest
      payments – cash flow hedges
                
                $
                5,223
                
                $
                4Interest
      receipts – cash flow hedges
                
                
                (3,207
                )
                
                (688
                )Change
      in fair value of free- standing derivatives
                
                
                8,949
                
                
                690Ineffectiveness
                
                
                200
                
                
                200Interest
      expense, net
                
                $
                11,165
                
                $
                206
 
 
 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:
 
 (in
      thousands)
                
                March
      31,
                  2008
                
                December
      31,
                  2007Net
      asset position
                
                $
                384
                
                $
                --Net
      liability position
                
                $
                69,193
                
                $
                50,445
 
  - 19
-
 CENTERLINE
HOLDING COMPANY
 NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 We
estimate that $7.6 million of the net unrealized loss included in accumulated
other comprehensive income 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)
                
                March
      31,
                  2008
                
                December
      31,
                  2007Convertible
      Special Common Units  (“SCUs”) of a subsidiary;14,131
      outstanding in 2008 and 14,298 outstandingin
      2007
                
                $
                151,595
                
                $
                165,717Convertible
      Special Common Interests (SCIs”) of a subsidiary;268
      outstanding in 2008 and 2007
                
                
                3,805
                
                
                3,984Other
                
                
                8,718
                
                
                7,015Total
                
                $
                164,118
                
                $
                176,716
 
 
 Loss
allocated to minority interests, net of tax, was as follows:
 
 Three
      Months Ended
                  March
      31,(in
      thousands)
                
                2008
                
                2007SCUs
                
                $
                (9,933
                )
                $
                (5,956
                )SCIs
                
                
                (134
                )
                
                (76
                )Special
      Membership Units (“SMUs”)
                
                
                --
                
                
                (79
                )Other
                
                
                (90
                )
                
                (6
                )Total
                
                $
                (10,157
                )
                $
                (6,117
                )
 
 
 All SMUs
were redeemed by their holders by December 31, 2007.
 
 Conversions
 
 Holders
of SCUs redeemed units as follows:
 
 Three
      Months Ended
                  March
      31,
                
                Number
      redeemed
                
                Common
      shares issued
                
                Cash
      paid(in
      thousands)2007
                
                132,000
                
                --
                
                $
                2,8022008
                
                166,120
                
                166,120
                
                
                --
 
 
 For any
SCU redemptions, we also redeemed the special preferred voting shares related to
the converted SCUs at par ($0.01 per share).
 
 Other
 
 “Other”
minority interests at March 31, 2008, primarily represent the 10% interest in
Centerline Financial Holdings, LLC, (“CFH”) owned by Natixis Capital Markets
North America, Inc. (“Natixis”).
   - 20
-
 CENTERLINE
HOLDING COMPANY
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 NOTE
13– Redeemable Securities
 
 Redeemable
securities consisted of the following for the periods presented:
 
 (in
      thousands)
                
                March
      31, 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
                
                $
                85,095
                
                5,593
                
                5,529
                
                $
                13,893
                
                974
                
                652Redeemable
      CRA Shares
                
                
                4,544
                
                271
                
                --
                
                
                4,502
                
                271
                
                --Convertible
      Redeemable CRA Preferred Shares
                
                
                47,739
                
                1,020
                
                1,109
                
                
                --
                
                --
                
                --Redeemable
      CRA Preferred Shares
                
                
                51,813
                
                1,100
                
                --
                
                
                51,493
                
                1,100
                
                --11.0%
      Cumulative Convertible Preferred Shares
                
                
                130,585
                
                11,217
                
                12,208
                
                
                --
                
                --
                
                --Total
                
                $
                319,776
                
                19,201
                
                18,846
                
                $
                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 certain of our Convertible Community Reinvestment Act
Preferred Shares (“Convertible CRA Shares”) shareholders and 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.  Effective January 1, 2008, and March 31, 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.  For the
quarter ended March 31, 2008, the charges to shareholders’ equity were $11.9
million.
 
 B.
11.0% Cumulative Convertible Preferred Shares
 
 In
January 2008, we issued 11.2 million 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 $130.6 million, net of offering costs of $0.6 million.
 
 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.
 
 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.
 
  - 21
-
 CENTERLINE
HOLDING COMPANY
 NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 NOTE
14 – Comprehensive Income
 
 Components
of comprehensive (loss) income were as follows:
  Three
      months Ended
                    March
      31,(In
      thousands)
                  
                  2008
                  
                  2007Net
      loss
                  
                  $
                  (21,639
                  )
                  $
                  (14,745
                  )Net
      unrealized loss on interest rate derivatives
                  
                  
                  (9,209
                  )
                  
                  (1,200
                  )Net
      unrealized loss on marketable securities and other
      investments:Unrealized
      loss during the period
                  
                  
                  (6,759
                  )
                  
                  (1,880
                  )Reclassification
      adjustment to net income
                  
                  
                  1,192
                  
                  
                  --Net
      unrealized (loss) gain on equity investees
                  
                  
                  (148,154
                  )
                  
                  240Net
      unrealized (loss) gain on mortgage revenue bonds:Unrealized
      (loss) gain during the period
                  
                  
                  (7,500
                  )
                  
                  27,036Reclassification
      adjustment to net income
                  
                  
                  6,831
                  
                  
                  16,447Comprehensive
      (loss) income
                  
                  $
                  (185,238
                  )
                  $
                  25,898
 
  NOTE
15 – General and Administrative Expenses
 
 General
and administrative expenses consisted of the following:
 
 Three
      Months Ended
                  March
      31,(in
      thousands)
                
                2008
                
                2007Salaries
      and benefits
                
                $
                26,731
                
                $
                36,860Professional
      fees
                
                
                4,251
                
                
                2,425LIHTC
      Fund origination and property acquisition
                
                
                2,252
                
                
                1,690Other
      general and administrative
                
                
                10,668
                
                
                15,548Total
                
                $
                43,902
                
                $
                56,523
 
 
 NOTE
16 – Earnings per Share (“EPS”)
 
 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
those Convertible CRA Shares (prior to execution of an option agreement), as the
Convertible CRA Shares have 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.
 
 - 22
-
  CENTERLINE
HOLDING COMPANY
 NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 
 The
calculation of basic and diluted net loss per share is as follows:
 
 Three
      Months Ended
                  March
      31,(in
      thousands, except per share amounts)
                
                2008
                
                2007Numerator:Net
      loss
                
                $
                (21,639
                )
                $
                (14,745
                )Preferred
      dividends for 4.4% CRA Preferred shares and 11.0% Preferred
      shares
                
                
                (4,036
                )
                
                (1,188)Dividends
      for redeemable securities
                
                
                (983
                )Undistributed
      loss
                
                
                (26,658
                )
                
                (15,933
                )Effect
      of redeemable share conversions
                
                
                (11,920
                )
                
                --Net
      loss for EPS calculations
                
                $
                (38,578
                )
                $
                (15,933
                )Denominator:Weighted
      average shares outstanding – basic and diluted (1)
                
                
                50,754
                
                
                57,957Calculation
      of EPS:Net
      loss as computed above
                
                $
                (38,578
                )
                $
                (15,933
                )Weighted
      average shares outstanding – basic and diluted (1)
                
                
                50,754
                
                
                57,957Net
      loss per share – basic and diluted
                
                $
                (0.76
                )
                $
                (0.27
                )
 
 (1)
                In
      accordance with SFAS No. 128, 1.0 million common share equivalents have
      been excluded from the Diluted EPS calculation in the 2007 period, as we
      reported a net loss after preferred dividends.  There were no
      common share equivalents in the 2008
period.
 
  - 23
-
 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)
                
                March
      31,
                  2008
                
                December
      31,
                  2007Loan
      to AMAC
                
                $
                78,831
                
                $
                77,685Interest
      receivable on AMAC loan
                
                
                392
                
                
                529Investment
      in AMAC common and preferred shares
                
                
                5,912
                
                
                6,910Co-investment
      in CUC
                
                
                4,145
                
                
                4,184Due
      from partnerships, net
                
                
                9,206
                
                
                8,300Fees
      receivable, net
                
                
                6,578
                
                
                9,567Total
                
                $
                105,064
                
                $
                107,175Note:  The
      above table 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 $19.1
      million as of March 31, 2008, and $36.1 million as December 31,
      2007.
 
 
 Income
Statement Impact
 
 Our
Condensed Consolidated Statements of Operations included the following amounts
pertaining to related party transactions:
 
 Three
      Months Ended
                  March
      31,(in
      thousands)
                
                2008
                
                2007AMAC
      asset management and incentive managements fees and expense
      reimbursements
                
                $
                548
                
                $
                1,007AMAC
      credit facility interest income
                
                $
                1,240
                
                $
                97AMAC
      servicing fee income
                
                $
                89
                
                $
                130Equity
      in loss of AMAC
                
                $
                (1,994
                )
                $
                --TRCLP
      shared service fee expense
                
                $
                --
                
                $
                (143
                )TRCLP
      property management services expense
                
                $
                (1,137
                )
                $
                (1,073
                )
 
 
 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.
 
 Our
revolving credit facility to AMAC has a maximum capacity of $80.0 million and
expires in June 2008 with a one year optional extension.  This
facility, bearing interest at LIBOR plus 3.0%, is used by AMAC to purchase new
investments and for general corporate purposes.  Income we earn from
this facility is included in “Other interest income” in the Condensed
Consolidated Statements of Operations.  In the opinion of management,
the terms of this facility were consistent with similar transactions with
independent third parties at the time of execution.  If the line is
extended, management expects that new terms will likewise be consistent with
transactions with independent third parties.
 
 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 $7.0 million to $5.9
million.  Dividends, when received, are recorded as a return of
capital.  Although AMAC has notified us that it is in default under
the covenants of the line of credit, interest payments for the line of credit
are current and we have not exercised our rights to demand repayment as we
believe the advances are recoverable.
 
 - 24
-
  CENTERLINE
HOLDING COMPANY
 NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 
 During
2006, Centerline Real Estate Special Situations Mortgage Fund, LLC (“CRESS”)
entered into a co-investment agreement with AMAC whereby both 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 three months ended March 31, 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 three months ended March 31, 2008, LIHTC Fund Partnerships that we
consolidate provided equity financing to properties developed by a subsidiary of
TRCLP.  CRESS funded an additional $2.8 million on two loans secured
by properties developed by TRCLP.
 
 In
January 2008, we issued $131.1 million of our convertible preferred shares to a
company affiliated with TRCLP (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 (see Note 20
regarding future funding commitments).
 
 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 $42.0 million at March 31, 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.
 
 In
connection with the 2002 refinancing of a property partly owned by our Chairman,
we entered into an agreement which allows a revenue bond to be put to us should
the owner of the underlying property default on the bond.  We, in
turn, entered into agreements which allow us to put the bond to the general
partners of the owner who are our affiliates controlled by our
Chairman.  This right is secured by collateral assignments of the
general partners’ partnership interests in the limited partnership which owns
the underlying property.
 
 - 25
-
 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 December 31,
2007, the most recent reliable date.  Information with respect to the
CMBS Fund and High-Yield Debt Fund Partnerships is as of March 31,
2008.
 
 Assets
and liabilities of consolidated partnerships consisted of the
following:
 
 March
      31, 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
                
                $
                --
                
                $
                877,128
                
                $
                877,128
                
                $
                --
                
                $
                1,235,059
                
                $
                1,235,059Retained
      CMBS certificates
                
                
                --
                
                
                479,461
                
                
                479,461
                
                
                --
                
                
                482,424
                
                
                482,424CDO
      equity
                
                
                --
                
                
                138,506
                
                
                138,506
                
                
                --
                
                
                65,060
                
                
                65,060--
                
                
                1,495,095
                
                
                1,495,095
                
                
                --
                
                
                1,782,543
                
                
                1,782,543Equity
      MethodEquity
      interests in LIHTC properties
                
                
                4,256,384
                
                
                --
                
                
                4,256,384
                
                
                4,178,206
                
                
                --
                
                
                4,178,206OtherMortgage
      loans held for investment
                
                
                --
                
                
                338,806
                
                
                338,806
                
                
                --
                
                
                336,322
                
                
                336,322Other
      investments
                
                
                69,515
                
                
                --
                
                
                69,515
                
                
                78,055
                
                
                --
                
                
                78,05569,515
                
                
                338,806
                
                
                408,321
                
                
                78,055
                
                
                336,322
                
                
                414,377Total
      investments held by consolidated partnerships
                
                
                4,325,899
                
                
                1,833,901
                
                
                6,159,800
                
                
                4,256,261
                
                
                2,118,865
                
                
                6,375,126Land,
      buildings and improvements, net
                
                
                704,853
                
                
                --
                
                
                704,853
                
                
                661,380
                
                
                --
                
                
                661,380Other
      assets
                
                
                281,131
                
                
                101,662
                
                
                382,793
                
                
                290,076
                
                
                81,659
                
                
                371,735Total
      assets
                
                $
                5,311,883
                
                $
                1,935,563
                
                $
                7,247,446
                
                $
                5,207,717
                
                $
                2,200,524
                
                $
                7,408,241Financing
      arrangements
                
                $
                --
                
                $
                1,123,001
                
                $
                1,123,001
                
                $
                --
                
                $
                1,122,906
                
                $
                1,122,906Notes
      payable
                
                
                409,855
                
                
                295,000
                
                
                704,855
                
                
                422,904
                
                
                35,463
                
                
                458,367Repurchase
      agreements
                
                
                --
                
                
                103,373
                
                
                103,373
                
                
                --
                
                
                416,059
                
                
                416,059Due
      to property partnerships
                
                
                957,311
                
                
                --
                
                
                957,311
                
                
                970,602
                
                
                --
                
                
                970,602Other
      liabilities
                
                
                168,805
                
                
                30,064
                
                
                198,869
                
                
                177,979
                
                
                15,041
                
                
                193,020Total
      liabilities
                
                $
                1,535,971
                
                $
                1,551,438
                
                $
                3,087,409
                
                $
                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
March 31, 2008:
  - 26
-
 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+
                
                $
                17,000
                
                $
                17,000
                
                $
                --
                
                $
                (13,480
                )
                $
                3,520
                
                0.4
                %BBB
                
                
                96,539
                
                
                83,051
                
                
                --
                
                
                (46,318
                )
                
                36,733
                
                4.2BBB-
                
                
                303,665
                
                
                296,709
                
                
                --
                
                
                (147,753
                )
                
                148,956
                
                17.0BB+
                
                
                328,213
                
                
                274,918
                
                
                --
                
                
                (147,373
                )
                
                127,545
                
                14.5BB
                
                
                280,769
                
                
                227,063
                
                
                --
                
                
                (129,457
                )
                
                97,606
                
                11.1BB-
                
                
                324,646
                
                
                231,329
                
                
                190
                
                
                (126,178
                )
                
                105,341
                
                12.0B+
                
                
                238,257
                
                
                148,562
                
                
                722
                
                
                (84,629
                )
                
                64,655
                
                7.4B
                
                
                185,569
                
                
                107,891
                
                
                1,161
                
                
                (58,852
                )
                
                50,200
                
                5.7B-
                
                
                229,746
                
                
                99,835
                
                
                --
                
                
                (45,553
                )
                
                54,282
                
                6.2Non-rated
                
                
                970,989
                
                
                295,941
                
                
                --
                
                
                (107,651
                )
                
                188,290
                
                21.5Total
                
                $
                2,975,393
                
                $
                1,782,299
                
                $
                2,073
                
                $
                (907,244
                )
                $
                877,128
                
                100.0
                %
 
 
 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
                
                TotalMarch
      31, 2008Number
                
                
                264
                
                
                63
                
                
                327Fair
      value
                
                $
                688,643
                
                $
                174,271
                
                $
                862,914Gross
      unrealized losses
                
                $
                902,505
                
                $
                4,739
                
                $
                907,244
 
 
 The
unrealized losses are due to widening interest rate spreads as a result of
market conditions and we believe are not reflective of 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 March 31, 2008:
 
  - 27
-
 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
                
                $
                144,523
                
                $
                3,120
                
                $
                (3,811
                )
                $
                143,832
                
                30.0
                %AA+
                
                
                51,100
                
                
                49,189
                
                
                784
                
                
                (1,683
                )
                
                48,290
                
                10.1AA
                
                
                15,400
                
                
                16,210
                
                
                --
                
                
                (1,525
                )
                
                14,685
                
                3.1A+
                
                
                62,600
                
                
                62,698
                
                
                --
                
                
                (5,156
                )
                
                57,542
                
                12.0A
                
                
                66,500
                
                
                71,455
                
                
                --
                
                
                (4,022
                )
                
                67,433
                
                14.1A-
                
                
                30,700
                
                
                28,603
                
                
                --
                
                
                (2,383
                )
                
                26,220
                
                5.5BBB+
                
                
                84,138
                
                
                75,312
                
                
                --
                
                
                (20,799
                )
                
                54,513
                
                11.4BBB
                
                
                28,781
                
                
                24,271
                
                
                --
                
                
                (12,759
                )
                
                11,512
                
                2.4BBB-
                
                
                40,294
                
                
                31,840
                
                
                --
                
                
                (17,737
                )
                
                14,103
                
                2.9BB+
                
                
                47,820
                
                
                23,097
                
                
                --
                
                
                (11,142
                )
                
                11,955
                
                2.5BB
                
                
                12,158
                
                
                5,231
                
                
                --
                
                
                (2,434
                )
                
                2,797
                
                0.6BB-
                
                
                12,157
                
                
                4,727
                
                
                --
                
                
                (2,296
                )
                
                2,431
                
                0.5B+
                
                
                21,073
                
                
                7,281
                
                
                --
                
                
                (3,488
                )
                
                3,793
                
                0.8B
                
                
                11,348
                
                
                2,794
                
                
                --
                
                
                (1,092
                )
                
                1,702
                
                0.4B-
                
                
                12,158
                
                
                2,244
                
                
                --
                
                
                (785
                )
                
                1,459
                
                0.3Non-rated
                
                
                183,686
                
                
                7,501
                
                
                1,323
                
                
                (262
                )
                
                8,562
                
                1.7Non-rated
      interest only
                
                
                --
                
                
                4,661
                
                
                3,971
                
                
                --
                
                
                8,632
                
                1.7Total
                
                $
                827,813
                
                $
                561,637
                
                $
                9,198
                
                $
                (91,374
                )
                $
                479,461
                
                100.0
                %
 
 
 At March
31, 2008, the non-rated interest only certificates had combined notional amounts
of $1.3 billion.
 
 Unrealized
losses presented above do not include $20.9 million of unrealized losses that a
CMBS Fund Partnership recognized as an impairment charge in 2007 or an
additional $0.7 million recognized in the first quarter of 2008.  The
CMBS Fund Partnership is scheduled to liquidate in the next two years and may
not hold the assets until recovery.
 
 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
                
                TotalMarch
      31, 2008Number
                
                
                23
                
                
                7
                
                
                30Fair
      value
                
                $
                247,319
                
                $
                216,489
                
                $
                463,808Gross
      unrealized losses
                
                $
                84,249
                
                $
                7,125
                
                $
                91,374
 
 
 The
unrealized losses are due to widening interest rate spreads as a result of
market conditions and we believe are not reflective of 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.
 
  - 28
-
 CENTERLINE
HOLDING COMPANY
 NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 C.  CDO
Equity
 
 (dollars
      in thousands)
                
                Face
                  Amount
                
                Accreted
      Cost
                
                Unrealized
                  Gain
                
                Unrealized
                  Loss
                
                Fair
                  Value
                
                Percentage
      of
                  Fair
      ValueSecurity
      rating:BBB
                
                $
                9,750
                
                $
                9,449
                
                $
                --
                
                $
                (1,933
                )
                $
                7,516
                
                5.4
                %BBB-
                
                
                28,450
                
                
                27,054
                
                
                --
                
                
                (10,211
                )
                
                16,843
                
                12.2BB+
                
                
                42,300
                
                
                40,084
                
                
                --
                
                
                (16,994
                )
                
                23,090
                
                16.7BB
                
                
                17,412
                
                
                16,362
                
                
                --
                
                
                (6,779
                )
                
                9,583
                
                6.9BB-
                
                
                11,325
                
                
                10,511
                
                
                --
                
                
                (4,481
                )
                
                6,030
                
                4.4B+
                
                
                18,575
                
                
                17,096
                
                
                --
                
                
                (7,877
                )
                
                9,219
                
                6.7B
                
                
                7,124
                
                
                6,302
                
                
                --
                
                
                (1,789
                )
                
                4,513
                
                3.3B-
                
                
                17,325
                
                
                16,486
                
                
                --
                
                
                (9,154
                )
                
                7,332
                
                5.3Non-rated
                
                
                101,619
                
                
                89,634
                
                
                --
                
                
                (35,254
                )
                
                54,380
                
                39.1Total
                
                $
                253,980
                
                $
                232,978
                
                $
                --
                
                $
                (94,472
                )
                $
                138,506
                
                100.0
                %
 
 
 During
the first quarter of 2008, the High-Yield Debt Fund Partnership purchased CDO
equity investments with a face amount of $148.1 million for a purchase price of
$129.5 million.
 
 The
unrealized losses (all of which have been in an unrealized loss position for
less than 12 months) 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 neither we nor the
LIHTC Fund Partnerships control and which, therefore, we do not
consolidate.  “Equity interests in LIHTC properties” represents the
limited partner equity investments in those property level
partnerships.  “Due to property partnerships” represents the unfunded
capital commitments of the LIHTC Fund Partnerships in those property
partnerships.  As those commitments are funded, the “Equity interests
in LIHTC properties” balance increases and the “due to property partnerships”
balance decreases.
 
 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 March 31, 2008, are presented in the table below:
 
 (dollars
      in thousands)
                
                Total
                  Commitment
                
                Carrying
                  Value
                
                Allocation
      by
                  Product
      Type
                
                Fixed
      Rate
                  Average
                  Yield
                
                Variable
      Rate Average YieldProduct
      Type:Bridge
      loans, variable rate
                
                $
                15,000
                
                $
                12,359
                
                3.8
                %
                --
                %
                5.69
                %Bridge
      loans, fixed rate
                
                
                43,426
                
                
                41,430
                
                10.9
                
                7.24
                
                --Subordinated
      notes, variable rate
                
                
                46,800
                
                
                35,052
                
                11.7
                
                --
                
                7.03Subordinated
      notes, fixed rate
                
                
                23,375
                
                
                21,314
                
                5.8
                
                8.17
                
                --Mezzanine
      loans, variable rate
                
                
                176,426
                
                
                137,670
                
                44.2
                
                --
                
                7.26Mezzanine
      loans, fixed rate
                
                
                92,917
                
                
                89,642
                
                23.3
                
                9.79
                
                --First
      mortgage, fixed rate
                
                
                1,497
                
                
                1,339
                
                0.3
                
                6.63
                
                --Total
      / Average
                
                $
                399,441
                
                $
                338,806
                
                100.0
                %
                8.85
                %
                6.66
                %
 
  - 29
-
 CENTERLINE
HOLDING COMPANY
 NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 F.  Financing
Arrangements/Notes Payable/Repurchase Agreements/Financial Risk Management and
Derivatives
 
 The Fund
Partnerships use these 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 interest in cash thus far).  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.
 
 G.  Financial
Risk Management and Derivatives
 
 In
connection with the termination of a repurchase agreement financing as discussed
above, the fund 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 is included in other
comprehensive income.  In addition, during the first quarter of 2008,
the High-Yield Debt Fund terminated all of its cash flow hedges with total
notional value of $73.2 million.  Termination costs of $5.6 million
were paid at the time of termination and remains in the fund’s other
comprehensive income.  These termination amounts included in other
comprehensive income will be amortized into interest expense by the funds over
the remaining lives of the terminated swap agreements as long as it is probable
that there will be interest payments made on variable-rate debt throughout this
term.  Management believes that future financing transactions for the
funds continue to be probable and the cash flow hedge designations associated
with the future debt transactions continue to be appropriate.
 
 H.  Revenues
and Expenses
 
 Revenues
and expenses of consolidated partnerships consisted of the
following:
 
 Three
      Months Ended March 31,2008
                
                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
                
                $
                2,984
                
                $
                67,152
                
                $
                70,136
                
                $
                3,531
                
                $
                31,369
                
                $
                34,900Rental
      income
                
                
                16,989
                
                
                --
                
                
                16,989
                
                
                12,151
                
                
                --
                
                
                12,151Other
      revenues
                
                
                1,550
                
                
                92
                
                
                1,642
                
                
                1,560
                
                
                137
                
                
                1,697Total
      revenues
                
                $
                21,523
                
                $
                67,244
                
                $
                88,767
                
                $
                17,242
                
                $
                31,506
                
                $
                48,748Interest
      expense
                
                $
                3,024
                
                $
                31,868
                
                $
                34,892
                
                $
                7,185
                
                $
                15,127
                
                $
                22,312Asset
      management fees
                
                
                8,092
                
                
                --
                
                
                8,092
                
                
                6,339
                
                
                --
                
                
                6,339Property
      operating expenses
                
                
                6,857
                
                
                --
                
                
                6,857
                
                
                5,890
                
                
                --
                
                
                5,890General
      and administrative expenses
                
                
                5,594
                
                
                415
                
                
                6,009
                
                
                5,240
                
                
                554
                
                
                5,794Depreciation
      and amortization
                
                
                7,282
                
                
                2,244
                
                
                9,526
                
                
                6,089
                
                
                597
                
                
                6,686Other
      expenses
                
                
                1,374
                
                
                --
                
                
                1,374
                
                
                742
                
                
                185
                
                
                927Subtotal
                
                
                29,199
                
                
                2,659
                
                
                31,858
                
                
                24,300
                
                
                1,336
                
                
                25,636Total
      expenses
                
                $
                32,223
                
                $
                34,527
                
                $
                66,750
                
                $
                31,485
                
                $
                16,463
                
                $
                47,948
 
 
  - 30
-
 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
March 31, 2008:
 
 (dollars
      in thousands)
                
                Level
      1
                
                Level
      2
                
                Level
      3
                
                Balance
                  as
      of
                  March
      31,
                  2008Available-for-sale
      investments:CMBS
                
                $
                --
                
                $
                --
                
                $
                877,128
                
                $
                877,128Retained
      CMBS certificates
                
                
                --
                
                
                --
                
                
                479,461
                
                
                479,461CDO
      equity
                
                
                --
                
                
                --
                
                
                138,506
                
                
                138,506Total
      available-for-sale investments
                
                $
                --
                
                $
                --
                
                $
                1,495,095
                
                $
                1,495,095LiabilitiesDerivatives
      (included in “Other liabilities of consolidated
    partnerships”)
                
                $
                --
                
                $
                17,651
                
                $
                --
                $
                17,651
 
 
 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:
 
 (dollars
      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
                
                $
                1,495,095Amount
      of total gains or losses for the period included in earnings attributable
      to the change in unrealized gains or losses relating to assets still held
      at March 31, 2008
                
                $
                --
                
                $
                (688
                )(1)
                $
                --
                
                $
                --
 
 (1)
                Included
      in “Other Income (Loss) – Investments Held by Consolidated Partnerships”
      in the Condensed Consolidated Statement of
  Operations.
 
 
 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 unobservable long–dated volatilities)
inputs.
 
  - 31
-
 CENTERLINE
HOLDING COMPANY
 NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 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 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.
 
  - 32
-
 CENTERLINE
HOLDING COMPANY
 NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 
 
 Three
      Months Ended March 31,(in
      thousands)
                    
                    2008
                    
                    2007RevenueAffordable
      Housing
                    
                    $
                    43,448
                    
                    $
                    62,580Commercial
      Real Estate
                    
                    
                    14,344
                    
                    
                    15,002Portfolio
      Management
                    
                    
                    11,384
                    
                    
                    13,983Credit
      Risk Products
                    
                    
                    2,303
                    
                    
                    3,392Corporate
                    
                    
                    6,331
                    
                    
                    6,621Consolidated
      Partnerships
                    
                    
                    88,767
                    
                    
                    48,748Elimination
      of intersegment transactions
                    
                    
                    (32,390
                    )
                    
                    (33,161
                    )Consolidated
      Revenues
                    
                    $
                    134,187
                    
                    $
                    117,165Depreciation
      and AmortizationAffordable
      Housing
                    
                    $
                    498
                    
                    $
                    255Commercial
      Real Estate
                    
                    
                    3,088
                    
                    
                    4,561Portfolio
      Management
                    
                    
                    1,273
                    
                    
                    1,544Credit
      Risk Products
                    
                    
                    36
                    
                    
                    17Corporate
                    
                    
                    7,006
                    
                    
                    4,721Consolidated
      Depreciation and Amortization
                    
                    $
                    11,901
                    
                    $
                    11,098Depreciation
      and Amortization of Consolidated Partnerships
                    
                    $
                    9,526
                    
                    $
                    6,686Adjusted
      Net Income (Loss)Affordable
      Housing
                    
                    $
                    1,991
                    
                    $
                    (7,192
                    )Commercial
      Real Estate
                    
                    
                    (5,253
                    )
                    
                    (1,521
                    )Portfolio
      Management
                    
                    
                    3,620
                    
                    
                    5,946Credit
      Risk Products
                    
                    
                    (3,143
                    )
                    
                    6Corporate
                    
                    
                    (14,863
                    )
                    
                    (4,815
                    )Consolidated
      Partnerships
                    
                    
                    7,364
                    
                    
                    7,068Eliminations
                    
                    
                    (7,478
                    )
                    
                    (8,214
                    )Total
      Adjusted Net Loss
                    
                    
                    (17,762
                    )
                    
                    (8,722
                    )Amortization
      of acquired intangible assets, net of minority interests
                    
                    
                    (2,476
                    )
                    
                    (2,677
                    )Amortization
      of acquisition-related share-based compensation, net of minority
      interests
                    
                    
                    (1,401
                    )
                    
                    (3,346
                    )Net
      loss
                    
                    $
                    (21,639
                    )
                    $
                    (14,745
                    )
 
 NOTE
20– Commitments and Contingencies
 
 PRS/CRG/ERC
 
 PRS/CRG
 
 PRS
Companies (“PRS”) and Capital Realty Group (“CRG”) were sponsors of certain
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.
 
 - 33
-
 CENTERLINE
HOLDING COMPANY
 NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 The PRS
Partnerships, GCG Partnerships, and CRG Partnerships are set out in the table
below.
 
 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 second 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.
 
 Summary of
Impact
 
 The
partnerships are summarized as follows:
 
  - 34
-
 CENTERLINE
HOLDING COMPANY
 NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 
 Number
                
                Centerline
      Capital Sponsored Fund is Equity Partner
                
                Included
      in Credit Intermediated Funds
                
                Centerline
      Holds GP Interest
                
                Third
      Parties Provided EquityPRS
      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 March 31, 2008,
      advances outstanding totaled $39.7 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.
 
 There can
be no assurance that a bankruptcy by or against PRS or its affiliates or against
ERC may not give rise to additional claims concerning these
partnerships.
 
 - 35
-
 CENTERLINE
HOLDING COMPANY
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 Forward
Transactions
 
 At March
31, 2008, our Commercial Real Estate subsidiaries had forward commitments under
Fannie Mae and Freddie Mac programs of $251.4 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 had been forward commitments as noted above) or have
been committed and/or” rate locked”.  Those that have been funded as
of March 31, 2008, totaled $203.4 million and are included in “Investments –
Other” as “Mortgage loans held for sale” on the Condensed Consolidated Balance
Sheet.  We expect to fund the $69.0 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 March 31, 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 March 31, 2008, pursuant to these agreements, was $846.1
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 March 31,
2008, that reserve was $13.1 million which represents our estimate of potential
losses as of that date.  The reserve is recorded as a reduction of
mortgage servicing rights (see Note 5).
 
 As of
March 31, 2008, we maintained collateral consisting of commercial paper and
Fannie Mae and Freddie Mac securities of $11.2 million and a money market
account of $25,000, which is included in restricted cash in the Condensed
Consolidated Balance Sheet, to satisfy the Fannie Mae collateral requirements of
$10.9 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. 
At March 31, 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 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:
 
 ·
                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
   - 36
-
 CENTERLINE
HOLDING COMPANY
 NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 ·
                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
$35.1 million as of March 31, 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.
 
 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 March
31, 2008.  The fair value of these obligations, representing the
deferral of the fee income over the obligation periods, was $0.7 million as of
March 31, 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.
 
 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 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 March 31, 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
May 9, 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.
  - 37
-
  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 asserts that we and other
defendants allegedly violated federal securities law by failing to disclose in a
timely fashion our recently announced transaction with Freddie
Mac.  Each complaint seeks an unspecified amount of compensatory
damages and other relief.  The court is currently considering motions
by the different plaintiffs to designate a lead plaintiff for these cases, and
five of the six lawsuits have been consolidated into a single action, with a
motion to consolidate the sixth case as well pending before the
court.  We intend to defend vigorously the claims that have been
asserted against us and our officers and trustees.  The federal
lawsuits are:
 
 ·
                On
      January 18, 2008, Goldstein v. Centerline Holding Company, et al., No. 08
      CV 00505, was filed against us and against certain of our officers and
      trustees in the United States District Court for the Southern District of
      New York;
 ·
                On
      January 31, 2008, Frank v. Centerline Holding Company, et al., No. 08 CV
      01026, 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
      February 4, 2008, Weinrib v. Centerline Holding Company, et al., No. 08 CV
      01158, 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
      February 11, 2008, Lyons v. Centerline Holding Company, et al., No. 08 CV
      01458, 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
      February 15, 2008, Dechter v. Centerline Holding Company, et al., No. 08
      CV 01593, was filed against us and certain of our officers and trustees in
      the United States District Court for the Southern District of New York;
      and
 ·
                On
      February 26, 2008, Quill v. Centerline Holding Co., Inc, et al., No. 08 CV
      01902, was filed against us and certain of our officers and trustees in
      the United States District Court for the Southern District of New
      York.
 
 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.
 
 - 38
-
 CENTERLINE
HOLDING COMPANY
 NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 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.  Silverwoodinvolves a
counterclaim 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 - 15 million against our subsidiaries.  Silverwood is currently
scheduled for trial in June 2008.  Viewcrest does not currently
have a scheduled trial date.  The parties have engaged in discovery
and have entered into settlement discussions seeking a global resolution of all
of these disputes.  If such a settlement cannot be achieved, we intend
to defend vigorously against the claims.  We are unable at the present
time to estimate what potential losses, if any, may arise in connection with
this litigation.
 
 Funding
Commitments
 
 Our
membership interest in CUC (see Note 17) includes a co-investment obligation
amounting to 2.5% of capital invested.  As of March 31, 2008, our
remaining unfunded capital commitments were $0.3 million.
 
 We also
participate as co-investor in the CMBS and High-Yield Debt Fund Partnerships we
sponsor (see Note 18).  As of March 31, 2008, our remaining unfunded
capital commitments were $1.2 million.
 
 
 NOTE
21 –Subsequent Events
 
 In April
2008, management approved a plan to reduce our workforce by 8%. The
restructuring will result in a charge of $0.8 million, all to be paid in cash,
in the second quarter of 2008.  The restructuring charge will affect
our Affordable Housing, Commercial Real Estate, Portfolio Management and
Corporate Groups.
 
 In April
2008, Fitch downgraded the retained certificates of certain trusts in which we
hold investments.. The downgrade reduced the fair value of the investments by
$10.5 million and led to a margin call of $7.1 million on a repurchase facility,
which was paid from available cash (see Notes 2 and 7).
 
 In April
2008, we repaid the outstanding balance of our P-FLOATS/RITES in connection with
the redemption of the underlying mortgage revenue bond (see Notes 2 and
8).
 
 In March
2008, we commenced a rights offering that entitled shareholders to purchase the
11.0% Preferred Shares (see Note 13)  The rights offering concluded in
April 2008 and shareholders purchased 0.4 million shares for $4.4 million, and
we redeemed the same number of shares from the TRCLP affiliate.
 
  - 39
-
  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 62 for more
information.
 
 OVERVIEW
 
 We are an
alternative asset manager with a core focus on real estate funds and financing
with more than $12.0 billion of assets under management as of March 31,
2008.  Our 2008 results reflect our transformation from direct
investing towards fund and asset management.  In addition, we continue
to be hampered by general economic conditions affecting credit markets,
particularly with respect to real estate finance.  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 segments and two segments not involved in
direct operations, see Note 19 to the condensed consolidated financial
statements.
 
 Significant
changes between 2008 and 2007 include:
 
 Market
Conditions
 
 ·
                Disruption
      in credit markets, specifically with respect to CDO financing, repurchase
      financing for investments such as CMBS and commercial real estate lending,
      impacted our Commercial Real Estate
Group;
 
 ·
                Such
      disruption made credit generally less available and more costly across all
      of our business lines.  This impacted the spread we earned in
      the Affordable Housing bond investing business and increased our general
      cost of doing business; and
 
 ·
                Changes
      in interest rates led to significant declines in the fair value of our
      interest rate swaps and widening credit spreads led to significant
      declines in the values of CMBS investments we hold or that the funds we
      manage hold.
 
 Affordable
Housing
 
 ·
                The
      significant reduction in our Affordable Housing bond portfolio due to the
      re-securitization with Freddie Mac in December 2007 as more fully
      discussed in our 2007 Form 10-K;
 
 ·
                We
      originated no new mortgage revenue bonds in the 2008 period compared to
      $28.4 million of originations in the first quarter of 2007;
      and
 
 ·
                We
      raised gross equity of $1.3 billion in more than eight LIHTC funds since
      the end of the first quarter of
2007.
 
 Commercial Real
Estate
 
 ·
                The
      launch of our third high-yield CMBS Fund in August 2007 with committed
      capital of $585.3 million as of March 31,
2008;
 
 ·
                Increased
      capital commitments of $178.6 million in December 2007 in our High-Yield
      Debt Fund Partnership; and
 
 ·
                The
      origination of no commercial mortgage loans for AMAC or CRESS in the
      current year and a decline in originations for
  conduits.
 
 Portfolio
Management
 
 ·
                An
      increase in our primary loan servicing portfolio to $27.6 billion,
      compared to $22.9 billion at March 31,
2007.
 
 Credit Risk
Products
 
 ·
                The
      expansion of our Credit Risk Products Group, in which our Centerline
      Financial subsidiary received a AAA counterparty rating in December 2007
      from S&P.
   - 40
-
  Management’s
Discussion and Analysis of
 Financial
Condition and Results of Operations
 (continued)
 For the
first quarter 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
 
 THREE MONTHS ENDED MARCH 31,
2008 AND 2007
 
 Profitability
 
 Beginning
in the first quarter of 2008, we have utilized 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 March 31,(in
      thousands, except per share amounts)
                
                2008
                
                2007Net
      loss
                
                $
                (21,639
                )
                $
                (14,745
                )Amortization
      of acquired intangible assets, net of minority interests
                
                
                2,476
                
                
                2,677Amortization
      of acquisition related
                  share-based
      compensation, net of minority interests
                
                
                1,401
                
                
                3,346Adjusted
      Net Loss
                
                $
                (17,762
                )
                $
                (8,722
                )Adjusted
      EPS (1)
                
                $
                (0.68
                )
                $
                (0.17
                )(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:
 
 ·
                The
      December 2007 re-securitization of our mortgage revenue bonds, as more
      fully discussed in our 2007 Form 10-K, which substantially reduced our
      mortgage revenue bond interest income when compared against the quarter
      ended March 31, 2007.  For the 2007 quarter, we recognized $32.0
      million as mortgage revenue bond interest for bonds that we accounted for
      as sold in the re-securitization.  This reduction in mortgage
      revenue bond interest income was partially offset by interest earned on
      Freddie Mac Certificates of $9.2 million, $1.7 million of interest income
      from a stabilization escrow account established at the time of the
      transaction  and lower levels of interest
    expense;
  ·
                The
      issuance, in January 2008, of 11.0% Preferred Shares in a private
      placement resulting in net proceeds of $131.3 million;
  and
  ·
                The
      adoption of SFAS 157 which resulted in a decrease in the fair value of our
      liabilities, $4.2 million of which we reflected as reduction in interest
      expense in the Condensed Consolidated Statement of
    Operations.
 
 We
recorded a net loss for the 2008 and 2007 periods, which principally reflect the
following items:
 
 ·
                Non-cash
      expenses of $8.7 million (included in interest expense and net of the $4.2
      million reduction due to the adoption of SFAS 157 described above)
      recorded for the decline in the fair value of interest rate derivatives
      for the quarter ended March 31, 2008, compared to $0.7 million in the 2007
      period;
   - 41
-
 Management’s
Discussion and Analysis of
 Financial
Condition and Results of Operations
 (continued)
 ·
                Impairment
      charges on mortgage revenue bonds of $6.8 million in 2008 and $16.4
      million in 2007 and a $5.8 million charge to reserve against associated
      receivables in the 2007 period;
  ·
                Impairment
      charges of $1.2 million in 2008 related to syndicated corporate debt for
      which there was no comparable amount in
2007;
  ·
                Losses
      of $7.3 million in 2008 associated with the sale of investments (see Other Items later in
      this section); and
 
 ·
                General
      economic conditions which resulted in decreased mortgage origination
      volume ($243.6 million in 2008 and $456.5 million in 2007), and overall
      reduced margins due to spread compression in the markets related to LIHTC
      fund origination fees and mortgage banking
fees.
 
 Consolidated
Results
 
 Our
summary consolidated results of operations are presented below for the three
months ended March 31, 2008 and 2007:
 
 (dollars
      in thousands)
                
                2008
                
                %
      of Revenues
                
                2007
                
                %
      of Revenues
                
                %
      ChangeRevenues
                
                $
                134,187
                
                100.0
                %
                $
                117,165
                
                100.0
                %
                14.5
                %Expenses
                
                
                162,449
                
                121.1
                
                
                165,242
                
                141.0
                
                (1.7
                )Other
      items
                
                
                7,672
                
                5.7
                
                
                30,386
                
                25.9
                
                (74.8
                )(Loss)
      income before income taxes:Loss
      subject to tax
                
                
                (26,509
                )
                (19.8
                )
                
                (36,208
                )
                (30.9
                )
                (26.8
                )Income
      not subject to tax
                
                
                5,919
                
                4.4
                
                
                18,517
                
                15.8
                
                (68.0
                )Income
      tax (provision) benefit
                
                
                (1,049
                )
                (0.8
                )
                
                2,946
                
                2.5
                
                (135.6
                )Net
      loss
                
                $
                (21,639
                )
                (16.2
                )%
                $
                (14,745
                )
                (12.6
                )%
                (46.8
                )%
 
 
 Revenues
 
 The
following table presents our revenues for the three months ended March 31, 2008
and 2007:
 
 Three
      Months Ended March 31,(dollars
      in thousands)
                
                2008
                
                2007
                
                %
      ChangeInterest
      income
                
                $
                26,116
                
                $
                49,620
                
                (47.4
                )%Fee
      income
                
                
                17,160
                
                
                16,384
                
                4.7Other
      revenues
                
                
                2,144
                
                
                2,413
                
                (11.2
                )Subtotal
                
                
                45,420
                
                
                68,417
                
                (33.6
                )Revenues
      of LIHTC Fund and Property Partnerships
                
                
                21,523
                
                
                17,242
                
                24.8Revenues
      of CMBS and High-Yield Debt Fund Partnerships
                
                
                67,244
                
                
                31,506
                
                113.4Subtotal
                
                
                88,767
                
                
                48,748
                
                82.1Total
      revenues
                
                $
                134,187
                
                $
                117,165
                
                14.5
                %
 
 
 The
growth in revenues in 2008 is primarily attributable to the growth in revenues
of consolidated partnerships of $40.0 million, 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 $23.2 million of revenue in the quarter ended March 31, 2008.
Partially offsetting this increase was a reduction of interest income, reflected
in the $32.0 million decrease in mortgage revenue bond interest income following
the December 2007 re-securitization transaction.  This reduction was
mitigated by the $9.2 million earned on the Freddie Mac certificates retained in
the transaction and $1.7 million earned on the associated stabilization
escrow.
 
 - 42
-
 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 three months ended March 31,
2008 and 2007:
 
 (in
      thousands)
                
                2008
                
                2007
                
                %
      ChangeInterest
      expense
                
                $
                27,149
                
                $
                28,502
                
                (4.7
                )%Interest
      expense – preferred shares of subsidiary
                
                
                4,724
                
                
                4,724
                
                --Salaries
      and benefits
                
                
                26,731
                
                
                36,860
                
                (27.5
                )Other
      general and administrative
                
                
                17,171
                
                
                19,663
                
                (12.6
                )Subtotal
      general and administrative
                
                
                43,902
                
                
                56,523
                
                (22.3
                )Depreciation
      and amortization
                
                
                11,901
                
                
                11,098
                
                7.2Loss
      on impairment of assets
                
                
                8,023
                
                
                16,447
                
                (51.2
                )Subtotal
      before consolidated partnerships
                
                
                95,699
                
                
                117,294
                
                (18.4
                )Interest
      expense of consolidated LIHTC Fund andProperty
      Partnerships
                
                
                3,024
                
                
                7,185
                
                (57.9
                )Interest
      expense of consolidated CMBS Fund andHigh-Yield
      Debt Partnerships
                
                
                31,868
                
                
                15,127
                
                110.734,892
                
                
                22,312
                
                56.4Other
      expenses of consolidated LIHTC Fund andProperty
      Partnerships
                
                
                29,199
                
                
                24,300
                
                20.2Other
      expense of consolidated CMBS Fund andHigh-Yield
      Debt Partnerships
                
                
                2,659
                
                
                1,336
                
                99.031,858
                
                
                25,636
                
                24.3Subtotal
      expense of consolidated partnerships
                
                
                66,750
                
                
                47,948
                
                39.2Total
      expenses
                
                $
                162,449
                
                $
                165,242
                
                (1.7
                )%
 
 
 ·
                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 mortgage revenue bond re-securitization.  Offsetting this
      net decrease was an increase related to new credit facilities established
      in December 2007 as well as non-cash expense of $8.7 million relating to
      free-standing derivatives in the first quarter of 2008.  In
      addition, our average borrowing rate increased to 5.91% for the three
      months ended March 31, 2008 as compared to 4.72% for the 2007
      period.
 
 Currently,
our borrowings are typically based on LIBOR while many of the free-standing
derivatives are based on the Securities Industry and Financial Markets
Association Municipal Swap Index (“SIFMA”).  Prior to the
re-securitization of our mortgage revenue bonds, a large portion of our
borrowings were based on SIFMA.
 
 Interest
expense also includes amounts paid and received pursuant to swap agreements as
part of our risk management strategy.
  - 43
-
 Management’s
Discussion and Analysis of
 Financial
Condition and Results of Operations
 (continued)
 Three
      Months Ended March 31.(dollars
      in thousands)
                
                2008
                
                2007
                
                %
      ChangeAverage
      borrowing rate
                
                
                5.91
                %
                
                4.72
                %Average
      borrowings
                
                $
                1,043,725
                
                $
                2,345,556
                
                
                (55.5
                )%Average
      LIBOR rate
                
                
                3.28
                %
                
                5.32
                %Average
      SIFMA rate
                
                
                2.53
                %
                
                3.59
                %Swap
      agreements – notional amount at March 31
                
                $
                387,310
                
                $
                725,000
                
                
                (62.1
                )
 
 
 ·
                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 Freddie Mac Series A-1 retained securitization certificate investments
      with terms that match the preferred
shares.
 
 ·
                Salaries and benefits–
      The decrease in salaries and benefits expense is primarily attributable
      to
 
  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 $4.6 million relating to amortization of these shares compared to
      amortization of $1.9 million in the 2008
  period);
 o
                a
      reduction of $3.6 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
                $2.2
      million of severance charges in 2007 for which there was no comparable
      amount in 2008.
 
 While we
recorded no severance in the first quarter of 2008, we announced a reduction in
our workforce in April of 2008 and will record a severance-related restructuring
charge of $0.8 million in the second quarter of 2008.  As a result of
the reduction in our workforce, we expect to reduce salary and benefits expense
by $3.5 million annually.
 
 ·
                Other general and
      administrative– Other general and administrative expenses
      decreased $2.5 million which primarily relates to $5.5 million of reserves
      recorded in the 2007 period against advances made to our sponsored
      funds.  This decrease was partially offset by increased fund
      origination expenses resulting from increased fund origination activity
      period over period (see Affordable Housing
      segment discussion later in this section) and increased professional
      fees.
 
 ·
                Loss on impairment–
      Loss on impairment of assets in 2008 related to two mortgage revenue bonds
      that we plan to sell and another property experiencing substandard
      performance.  The 2008 period also includes $1.2 million
      relating to other-than-temporary impairments on syndicated corporate debt
      investments (see Note 2 of the condensed consolidated financial
      statements).  Impairments in the 2007 period related to mortgage
      revenue bonds associated with six properties experiencing substandard
      performance.
 
 ·
                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 of consolidated CMBS Fund and High-Yield Debt Partnerships is
      primarily attributable to Fund III which commenced in August 2007 and $5.5
      million of unrealized losses on
derivatives.
 
  - 44
-
 Management’s
Discussion and Analysis of
 Financial
Condition and Results of Operations
 (continued)
 Other
Items
 
 Three
      Months Ended March 31,(dollars
      in thousands)
                
                2008
                
                2007
                
                %
      ChangeEquity
      and other income (loss)
                
                $
                (1,895
                )
                $
                (250
                )
                (658.0
                )%Other
      income (loss):(Loss)
      gain on repayment or sale of mortgage revenue bonds and other
      investments
                
                $
                (7,528
                )
                $
                755
                
                N/MGain
      on sale or repayment of mortgage loans
                
                
                2,358
                
                
                1,624
                
                45.2(Loss)
      gain on repayment or sale of investments
                
                $
                (5,170
                )
                $
                2,379
                
                (317.3
                )%(Income)/loss
      allocations:Preferred
      shares of subsidiary
                
                $
                (1,556
                )
                $
                (1,556
                )
                --
                %SCUs
                
                $
                9,933
                
                $
                5,956
                
                66.7
                %SCIs
                
                
                134
                
                
                76
                
                76.3SMUs
                
                
                --
                
                
                79
                
                (100.0
                )Other
      minority interests
                
                
                90
                
                
                6
                
                N/MMinority
      interests in subsidiaries, net
                
                $
                10,157
                
                $
                6,117
                
                66.0
                %Partners
      of consolidated partnerships
                
                $
                100,937
                
                $
                81,111
                
                24.4
                %N/M
      – Not meaningful.
 
 
 Equity
and other income (loss)
 
 Equity
and other income (loss)includes 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 amount of losses in 2008 is primarily due to our
$2.0 million portion of AMAC’s net loss for which there was no comparable amount
in the 2007 period.
 
 We
co-invest in CMBS and High-Yield Debt Fund Partnerships and earn equity income
from those investments, positively affecting our net loss by $7.4 million in
2008 compared to $7.1 million in 2007, (see further discussion in Commercial Real Estate and
Consolidated Partnershipsegment discussions below).  Since we consolidate these
partnerships and eliminate this income in consolidation, these amounts are not
displayed in the amounts presented above.
 
 Other
Income (Loss)
 
 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).
  We also
recognized incremental losses in 2008 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
the gain on sale of one mortgage revenue bond 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 asset thereby allowing
recognition of the asset as sold.  We expect further gains of this
type during the remainder of 2008 as other bonds included in the
re-securitization transaction are accorded sale treatment.
 
 - 45
-
  Management’s
Discussion and Analysis of
 Financial
Condition and Results of Operations
 (continued)
 
 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 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%.
 
 INCOME
TAXES
 
 Some of
our pre-tax income is derived from our tax-exempt mortgage revenue bond
investments included in our Affordable Housing segment, which is held within
flow-through entities. Likewise, the CMBS and High-Yield Debt Funds which are
included in our Commercial Real Estate segment 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.  Our corporate entities generally
have loses 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.
 
 We
recognized an income tax provision in the three months ended March 31, 2008,
principally due to state and local income taxes.  The effective tax
rate on a consolidated basis for the three months ended March 31, 2008 and 2007,
was (5.1)% and 16.7%, respectively.  The effective rate for our
corporate subsidiaries that were subject to taxes was 6.3% and (16.0)% for the
three months ended March 31, 2008 and 2007.
 
 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
quarters ended March 31, 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).
 
 - 46
-
 Management’s
Discussion and Analysis of
 Financial
Condition and Results of Operations
 (continued)
 Three
      Months Ended March 31,(dollars
      in thousands)
                    
                    2008
                    
                    2007
                    
                    %
      ChangeRevenues:Affordable
      Housing
                    
                    $
                    43,448
                    
                    $
                    62,580
                    
                    (30.6
                    )%Commercial
      Real Estate
                    
                    
                    14,344
                    
                    
                    15,002
                    
                    (4.4
                    )Portfolio
      Management
                    
                    
                    11,384
                    
                    
                    13,983
                    
                    (18.6
                    )Credit
      Risk Products
                    
                    
                    2,303
                    
                    
                    3,392
                    
                    (32.1
                    )Corporate
                    
                    
                    6,331
                    
                    
                    6,621
                    
                    (4.4
                    )Consolidated
      Partnerships
                    
                    
                    88,767
                    
                    
                    48,748
                    
                    82.1Eliminations
                    
                    
                    (32.390
                    )
                    
                    (33,161
                    )
                    2.3Total
      revenues
                    
                    $
                    134,187
                    
                    $
                    117,165
                    
                    14.5
                    %Expenses:Affordable
      Housing
                    
                    $
                    32,807
                    
                    $
                    69,079
                    
                    (52.5
                    )%Commercial
      Real Estate
                    
                    
                    28,093
                    
                    
                    28,073
                    
                    0.1Portfolio
      Management
                    
                    
                    8,364
                    
                    
                    9,566
                    
                    (12.6
                    )Credit
      Risk Products
                    
                    
                    4,921
                    
                    
                    3,386
                    
                    45.3Corporate
                    
                    
                    32,811
                    
                    
                    30,462
                    
                    7.7Consolidated
      Partnerships
                    
                    
                    87,539
                    
                    
                    65,376
                    
                    33.9Eliminations
                    
                    
                    (32,086
                    )
                    
                    (40,700
                    )
                    21.2Total
      expenses
                    
                    $
                    162,449
                    
                    $
                    165,242
                    
                    (1.7
                    )%Other
      income (loss):Affordable
      Housing
                    
                    $
                    (6,869
                    )
                    $
                    403
                    
                    N/MCommercial
      Real Estate (1)
                    
                    
                    7,541
                    
                    
                    8,466
                    
                    (10.9
                    )Credit
      Risk Products
                    
                    
                    (525
                    )
                    
                    --
                    
                    (100.0
                    )Corporate
                    
                    
                    (5
                    )
                    
                    --
                    
                    (100.0
                    )Consolidated
      Partnerships (2)
                    
                    
                    6,136
                    
                    
                    23,696
                    
                    (74.1
                    )Eliminations
                    
                    
                    (7,207
                    )
                    
                    (6,740
                    )
                    (20.6
                    )Total
      other income (loss)
                    
                    $
                    (929
                    )
                    $
                    25,825
                    
                    (103.6
                    )%Income
      (loss) before other allocations:Affordable
      Housing
                    
                    $
                    3,772
                    
                    $
                    (6,096
                    )
                    161.9
                    %Commercial
      Real Estate
                    
                    
                    (6,208
                    )
                    
                    (4,605
                    )
                    (34.8
                    )Portfolio
      Management
                    
                    
                    3,020
                    
                    
                    4,417
                    
                    (31.6
                    )Credit
      Risk Products
                    
                    
                    (3,143
                    )
                    
                    6
                    
                    N/MCorporate
                    
                    
                    (26,485
                    )
                    
                    (23,841
                    )
                    (11.1
                    )Consolidated
      Partnerships
                    
                    
                    7,364
                    
                    
                    7,068
                    
                    4.2Eliminations
                    
                    
                    (7,511
                    )
                    
                    799
                    
                    N/MTotal
      loss before other allocations
                    
                    $
                    (27,334
                    )
                    $
                    (22,252
                    )
                    (31.2
                    )%Adjusted
      Net Income (Loss):Affordable
      Housing
                    
                    $
                    1,991
                    
                    $
                    (7,192
                    )
                    127.7
                    %Commercial
      Real Estate
                    
                    
                    (5,253
                    )
                    
                    (1,521
                    )
                    (245.4
                    )Portfolio
      Management
                    
                    
                    3,620
                    
                    
                    5,946
                    
                    (39.1
                    )Credit
      Risk Products
                    
                    
                    (3,143
                    )
                    
                    6
                    
                    N/MCorporate
                    
                    
                    (14,863
                    )
                    
                    (4,815
                    )
                    (208.7
                    )Consolidated
      Partnerships
                    
                    
                    7,364
                    
                    
                    7,068
                    
                    4.1Eliminations
                    
                    
                    (7,478
                    )
                    
                    (8,214
                    )
                    9.0$
                    (17,762
                    )
                    $
                    (8,722
                    )
                    (103.6
                    )%(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.
 
 - 47
-
  Management’s
Discussion and Analysis of
 Financial
Condition and Results of Operations
 (continued)
 Affordable
Housing
 
 Revenues
 
 Three
      Months Ended March 31,(dollars
      in thousands)
                    
                    2008
                    
                    2007
                    
                    %
      ChangeMortgage
      revenue bond interest income
                    
                    $
                    12,262
                    
                    $
                    43,600
                    
                    (71.9
                    )%Other
      interest income
                    
                    
                    11,158
                    
                    
                    638
                    
                    N/MFee
      income from fund sponsorship
                    
                    
                    18,718
                    
                    
                    16,125
                    
                    16.1Expense
      reimbursements
                    
                    
                    980
                    
                    
                    1,776
                    
                    (44.8
                    )Other
      revenues
                    
                    
                    330
                    
                    
                    441
                    
                    (25.2
                    )Total
      revenues
                    
                    $
                    43,448
                    
                    $
                    62,580
                    
                    (30.6
                    )%N/M
      – Not meaningful.
 
 
 A
discussion 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 March 31,(dollars
      in thousands)
                    
                    2008
                    
                    2007
                    
                    %
      ChangeTotal
      acquisition and funding activity
                    
                    $
                    --
                    
                    $
                    28,393
                    
                    100.0
                    %Mortgage
      revenue bonds repaid
                    
                    
                    15,173
                    
                    
                    2,622
                    
                    478.7
                    %Average
      portfolio balance (fair value)
                    
                    
                    770,881
                    
                    
                    2,837,703
                    
                    (72.8
                    )%Weighted
      average permanent interest rate ofbonds
      acquired
                    
                    
                    --
                    %
                    
                    5.88
                    %Weighted
      average yield of portfolio
                    
                    
                    6.27
                    %
                    
                    6.35
                    %
 
 
 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. As discussed in the Consolidated Results section
earlier, mortgage revenue bond interest income of $32.0 million earned in the
first quarter of 2007 related to mortgage revenue bonds included in that
transaction.  Furthermore, we originated no new mortgage revenue bonds
in the 2008 period.
 
 Other
interest income in 2008 includes $9.2 million related to interest earned on our
retained interests in the re-securitized bonds and $1.7 million of interest on
the stabilization escrow account established at the time of the
re-securitization.  There were no comparable investments in the 2007
period.
 
 
 - 48
-
 Management’s
Discussion and Analysis of
 Financial
Condition and Results of Operations
 (continued)
 LIHTC
FUND SPONSORSHIP STATISTICS
 
 Three
      Months Ended March 31,(dollars
      in thousands)
                    
                    2008
                    
                    2007
                    
                    %
      ChangeFees based on equity
      raisedPartnership
      management fees
                    
                    $
                    2,759
                    
                    $
                    2,214
                    
                    24.6
                    %Fees based on equity
      investedProperty
      acquisition fees
                    
                    
                    6,454
                    
                    
                    2,636
                    
                    144.8Organization,
      offering and acquisition
                      allowance
      fees
                    
                    
                    3,101
                    
                    
                    1,533
                    
                    102.3Fees
      based on management of other entitiesAsset
      management fees
                    
                    
                    5,750
                    
                    
                    5,859
                    
                    (1.9
                    )Other
      fee income
                    
                    
                    654
                    
                    
                    3,883
                    
                    (83.2
                    )$
                    18,718
                    
                    $
                    16,125
                    
                    16.1
                    %Assets
      under management – LIHTC Funds
                    
                    $
                    9,795,332
                    
                    $
                    8,532,347
                    
                    14.8
                    %Equity
      raised by LIHTC funds
                    
                    $
                    100,902
                    
                    $
                    6,444
                    
                    N/MEquity
      invested by LIHTC funds (1)
                    
                    $
                    252,223
                    
                    $
                    113,979
                    
                    121.3
                    %(1)  
      Excludes warehoused properties that have not yet closed into an investment
      fund.
                      N/M
      – Not meaningful.
 
 
 Fees
Based on Equity Raised
 
 The
increase in partnership management fees over the period is primarily the result
of additional (and larger) funds closed.  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.
 
 Fees
Based on Equity Invested
 
 Property
acquisition fees increased compared to the 2007 period due to an increase in
both the equity invested as well as improvement to the fee rate
realized.
 
 Organization,
offering and acquisition allowance fees are recorded on a prorated basis similar
to the property acquisition fees.  Thus, the increase is similar to
the increase in property acquisition fees, partially offset by a decrease in the
fee rate realized stemming from heightened competition relating to certain types
of funds.
 
 Fees
Based on Management of Other Entities
 
 Asset
management fees decreased slightly primarily due to a lower fee earned related
to our public funds as a result of dispositions that occurred during
2007.
 
 Other
Revenues
 
 Other
revenues include 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.  Also, as we acquired no
mortgage revenue bonds during the 2008 period, we recognized no associated
income as compared to $175,000 in the 2007 period.
 
 - 49
-
  Management’s
Discussion and Analysis of
 Financial
Condition and Results of Operations
 (continued)
 
 Expenses and Other Income
(Loss)
 
 Three
      Months Ended March 31,(dollars
      in thousands)
                    
                    2008
                    
                    2007
                    
                    %
      ChangeInterest
                    
                    $
                    11,150
                    
                    $
                    30,668
                    
                    (63.6
                    )%Interest
      - preferred shares of subsidiary
                    
                    
                    4,724
                    
                    
                    4,724
                    
                    --General
      and administrative
                    
                    
                    9,631
                    
                    
                    16,985
                    
                    (43.3
                    )Depreciation
      and amortization
                    
                    
                    470
                    
                    
                    255
                    
                    84.3Impairment
      of assets
                    
                    
                    6,832
                    
                    
                    16,447
                    
                    (58.5
                    )Total
      expenses
                    
                    $
                    32,807
                    
                    $
                    69,079
                    
                    (52.5
                    )%Equity
      and other income (loss)
                    
                    $
                    152
                    
                    $
                    (250
                    )
                    160.8
                    %Repayment
      or sale of investments
                    
                    
                    (7,021
                    )
                    
                    653
                    
                    N/MTotal
      other loss
                    
                    $
                    (6,869
                    )
                    $
                    403
                    
                    N/MAverage
      borrowing rate (1)
                    
                    
                    5.89
                    %
                    
                    4.76
                    %Average
      SIFMA rate
                    
                    
                    2.53
                    %
                    
                    3.59
                    %(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 over the period.
 
 The
decrease in general and administrative expenses is primarily due to $5.5 million
of reserves recorded in 2007 against advances made to our sponsored
funds.  There were no comparable amounts in 2008.
 
 During
2008, we recognized $6.8 million of mortgage revenue bond impairment
charges.  In March 2008, we reached an agreement to sell two mortgage
revenue bonds in the second quarter of 2008, resulting in impairment charges of
$6.3 million, representing the difference between the sale price and the
carrying value for the two bonds.  As the terms of the sale agreement
indicated a permanent decline in the value of the investments, we recorded the
loss as an impairment in the first quarter.  The remaining $0.5
million relates to one bond which resulted from substandard performance at the
underlying property.
 
 Profitability
 
 Three
      Months Ended March 31,(dollars
      in thousands)
                    
                    2008
                    
                    2007
                    
                    %
      ChangeIncome
      (loss) before other allocations
                    
                    $
                    3,772
                    
                    $
                    (6,096
                    )
                    161.9
                    %Adjusted
      Net Income (Loss)
                    
                    
                    1,991
                    
                    
                    (7,192
                    )
                    127.7
 
 
 The
change in income (loss) before other allocations reflects the economic and
business changes discussed earlier.  Another principal driver is the
recording of $6.8 million in impairment in the current quarter as compared to
$16.5 million in the comparable 2007 period.  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.
 
 - 50
-
  Management’s
Discussion and Analysis of
 Financial
Condition and Results of Operations
 (continued)
 
 Commercial
Real Estate
 
 Assets under
Management
 
 Assets
under management in our Commercial Real Estate Group are broken down as follows
at March 31:
 
 (dollars
      in thousands)
                    
                    2008
                    
                    2007
                    
                    %
      ChangeCMBS
      funds
                    
                    $
                    1,475,397
                    
                    $
                    890,134
                    
                    65.7
                    %High-yield
      debt investment entities
                    
                    
                    535,665
                    
                    
                    443,822
                    
                    20.7Joint
      venture equity funds
                    
                    
                    221,641
                    
                    
                    164,483
                    
                    34.8$
                    2,232,703
                    
                    $
                    1,498,439
                    
                    49.0
                    %
 
 
 Revenues
 
 Revenues
for the period are broken down as follows:
 
 Three
      Months Ended March 31,(dollars
      in thousands)
                    
                    2008
                    
                    2007
                    
                    %
      ChangeMortgage
      origination fees
                    
                    $
                    1,439
                    
                    $
                    2,382
                    
                    (39.6
                    )%Mortgage
      servicing fees
                    
                    
                    5,023
                    
                    
                    4,653
                    
                    8.0Other
      fee income
                    
                    
                    1,008
                    
                    
                    685
                    
                    47.2Interest
      income
                    
                    
                    5,742
                    
                    
                    4,933
                    
                    16.4Prepayment
      penalties
                    
                    
                    419
                    
                    
                    653
                    
                    (35.8
                    )Other
      revenues
                    
                    
                    713
                    
                    
                    1,696
                    
                    (58.0
                    )Total
      revenues
                    
                    $
                    14,344
                    
                    $
                    15,002
                    
                    (4.4
                    )%
 
 
 Originations
 
 Mortgage
originations for the three months ended March 31, are broken down as
follows:
 
 2008
                    
                    2007(dollars
      in thousands)
                    
                    
                    
                    
                    %
      of Total
                    
                    
                    
                    
                    %
      of Total
                    
                    %
      ChangeFannie
      Mae
                    
                    
                    117,342
                    
                    48.2
                    %
                    
                    69,181
                    
                    15.2
                    %
                    69.6
                    %Freddie
      Mac
                    
                    
                    115,257
                    
                    47.3
                    
                    
                    144,720
                    
                    31.7
                    
                    (20.4
                    )Centerline
      Direct
                    
                    
                    --
                    
                    --
                    
                    
                    203,685
                    
                    44.6
                    
                    (100.0
                    )Conduit
      and other
                    
                    
                    11,000
                    
                    4.5
                    
                    
                    38,930
                    
                    8.5
                    
                    (71.7
                    )Total
                    
                    $
                    243,599
                    
                    100.0
                    %
                    $
                    456,516
                    
                    100.0
                    %
                    (46.6
                    )%
 
 
 Origination
fees decreased in 2008 due to a decrease in the 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.
 
 - 51
-
 Management’s
Discussion and Analysis of
 Financial
Condition and Results of Operations
 (continued)
 Servicing
 
 As
      of March 31,(dollars
      in thousands)
                    
                    2008
                    
                    2007
                    
                    %
      ChangePrimary
      servicing mortgage portfolio
                    
                    $
                    8,798,781
                    
                    $
                    8,535,220
                    
                    3.1
                    %Carrying
      value of MSRs
                    
                    $
                    51,651
                    
                    $
                    53,473
                    
                    (3.4
                    )%
 
 
 The
increase in servicing fees is primarily due to the growth in the servicing
portfolio and from fees earned from Freddie Mac on the mortgage revenue bonds
re-securitized in December 2007.
 
 Investments
 
 The
increase in interest income is due to an investment in CMBS securities for our
own account in the 2008 quarter while we had none in the comparable 2007 period,
as well as interest on a higher level of mortgage loans held for sale in the
current period.
 
 Other
Revenues
 
 Other
revenues decreased principally due to 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.
 
 Expenses and Other
Income
 
 Three
      Months Ended March 31,(dollars
      in thousands)
                    
                    2008
                    
                    2007
                    
                    %
      ChangeInterest
      expense
                    
                    $
                    11,239
                    
                    $
                    2,530
                    
                    344.2
                    %General
      and administrative expenses
                    
                    
                    13,766
                    
                    
                    20,982
                    
                    (34.4
                    )Depreciation
      and amortization
                    
                    
                    3,088
                    
                    
                    4,561
                    
                    (32.3
                    )Total
      expenses
                    
                    $
                    28,093
                    
                    $
                    28,073
                    
                    0.1
                    %Equity
      income
                    
                    $
                    5,183
                    
                    $
                    6,740
                    
                    (23.1
                    )%Gain
      on sale or repayment of loans
                    
                    
                    2,358
                    
                    
                    1,726
                    
                    36.6Total
      other income
                    
                    $
                    7,541
                    
                    $
                    8,466
                    
                    (10.9
                    )%
 
 
 Interest
expense increased primarily as a result of the $8.0 million decline in the fair
value of interest rate derivatives while there was no corresponding cost in the
2007 period.  Additionally, 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.
 
 The 2008
period includes a $2.0 million equity loss related to our investments in AMAC
(in which we co-invested beginning in May 2007 and thus for which there is no
comparable 2007 amount).  This loss offset the incremental equity
income from the third CMBS fund closed in August 2007 and from the increase in
funded equity for the High-Yield Debt Fund.
 
 - 52
-
 Management’s
Discussion and Analysis of
 Financial
Condition and Results of Operations
 (continued)
 Profitability
 
 Three
      Months Ended March 31,(dollars
      in thousands)
                    
                    2008
                    
                    2007
                    
                    %
      ChangeIncome
      (loss) before other allocations
                    
                    $
                    (6,208
                    )
                    $
                    (4,605
                    )
                    34.8
                    %Adjusted
      Net Loss
                    
                    
                    (5,253
                    )
                    
                    (1,521
                    )
                    (245.4
                    )N/M
      – Not meaningful.
 
 
 The
decrease in income (loss) before other allocations in 2008 as compared to 2007
reflects the lower operating revenues, and the reduction in equity income
(particularly the equity losses associated with AMAC).
 
 Adjusted
Net Loss for the first quarter 2008 is consistent with the loss before
allocation and 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 description of Adjusted Net Income and a reconciliation to GAAP
net income.
 
 Portfolio
Management
 
 Revenues
 
 Three
      Months Ended March 31,(dollars
      in thousands)
                    
                    2008
                    
                    2007
                    
                    %
      ChangeInterest
      income
                    
                    $
                    2,491
                    
                    $
                    5,266
                    
                    (52.7
                    )%Asset
      management and servicing fees
                    
                    
                    6,739
                    
                    
                    6,311
                    
                    6.8Other
      fees
                    
                    
                    1,937
                    
                    
                    2,092
                    
                    (7.4
                    )Total
      fee income
                    
                    
                    8,676
                    
                    
                    8,403
                    
                    3.2Other
      revenues
                    
                    
                    217
                    
                    
                    314
                    
                    (30.9
                    )Total
      revenues
                    
                    $
                    11,384
                    
                    $
                    13,983
                    
                    (18.6
                    )%Servicing
      portfolio at March 31:Primary
      servicing (1)
                    
                    $
                    27,494,083
                    
                    $
                    22,870,536
                    
                    20.2
                    %Special
      servicing
                    
                    
                    1,181,814
                    
                    
                    164,927
                    
                    616.6Carrying
      value of MSRs at March 31:
                    
                    
                    4,931
                    
                    
                    10,705
                    
                    (53.9
                    )(1)  
      Includes sub-servicing of the Commercial Real Estate servicing
      portfolio.
 
 
 Interest
Income
 
 Despite
the growth in the servicing portfolio, interest income decreased due to lower
rates earned on the servicing escrow float resulting from general declines
period over period.  This decline was partially offset by higher asset
management fee income recognized as assets under management have increased
throughout the Company.
 
 - 53
-
 Management’s
Discussion and Analysis of
 Financial
Condition and Results of Operations
 (continued)
 Expenses
 
 Three
      Months Ended March 31,(dollars
      in thousands)
                    
                    2008
                    
                    2007
                    
                    %
      ChangeInterest
      expense
                    
                    $
                    2
                    
                    $
                    --
                    
                    100.0
                    %General
      and administrative expenses
                    
                    
                    7,089
                    
                    
                    8,022
                    
                    (11.6
                    )Depreciation
      and amortization
                    
                    
                    1,273
                    
                    
                    1,544
                    
                    (17.6
                    )Total
      expenses
                    
                    $
                    8,364
                    
                    $
                    9,566
                    
                    (12.6
                    )%
 
 
 General
and administrative expenses declined in 2008 as compared to 2007 due to lower
compensation costs, principally driven by reduced share-based compensation and
other miscellaneous employee costs (e.g., travel, temporary
personnel).  Depreciation and amortization expenses decreased as a
result of lower amortization of mortgage servicing rights.
 
 Profitability
 
 Three
      Months Ended March 31,(dollars
      in thousands)
                    
                    2008
                    
                    2007
                    
                    %
      ChangeIncome
      before other allocations
                    
                    $
                    3,020
                    
                    $
                    4,417
                    
                    (31.6
                    )%Adjusted
      Net Income
                    
                    
                    3,620
                    
                    
                    5,946
                    
                    (39.1
                    )
 
 
 Income
before other allocations decreased principally due to reduction in interest
income which more than offset the lower expense levels.
 
 Adjusted
Net Income for the first quarter 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 related
compensation.  See Note 19 to the condensed consolidated financial
statements for a description of Adjusted Net Income and a reconciliation to GAAP
net income.
 
 Credit
Risk Products
 
 Revenues
 
 Three
      Months Ended March 31,(dollars
      in thousands)
                    
                    2008
                    
                    2007
                    
                    %
      ChangeCredit
      intermediation fees
                    
                    $
                    1,193
                    
                    $
                    2,470
                    
                    (51.7
                    )%Interest
      income
                    
                    
                    1,018
                    
                    
                    922
                    
                    10.4Other
      revenues
                    
                    
                    92
                    
                    
                    --
                    
                    100.0Total
      revenues
                    
                    $
                    2,303
                    
                    $
                    3,392
                    
                    (32.1
                    )%
 
 
 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 increased due to investments in syndicated
corporate debt, which offset declines from interest earned on collateral
balances at Centerline Financial.
 
 
 - 54
-
 Management’s
Discussion and Analysis of
 Financial
Condition and Results of Operations
 (continued)
 Expenses
 
 Three
      Months Ended March 31,(dollars
      in thousands)
                    
                    2008
                    
                    2007
                    
                    %
      ChangeInterest
      expense
                    
                    $
                    246
                    
                    $
                    30
                    
                    720.0
                    %Change
      in fair value of derivatives
                    
                    
                    --
                    
                    
                    1,206
                    
                    (100.0
                    )General
      and administrative expenses
                    
                    
                    3,448
                    
                    
                    2,133
                    
                    61.7Depreciation
      and amortization
                    
                    
                    36
                    
                    
                    17
                    
                    111.8Impairment
      of assets
                    
                    
                    1,191
                    
                    
                    --
                    
                    100.0Total
      expenses
                    
                    $
                    4,921
                    
                    $
                    3,386
                    
                    45.3
                    %Loss
      on sale of assets
                    
                    $
                    525
                    
                    $
                    --
                    
                    100.0
                    %Total
      other loss
                    
                    $
                    525
                    
                    $
                    --
                    
                    100.0
                    %
 
 
 The
decrease in the change in fair value of derivatives is attributable principally
to the absence of credit default swaps terminated as part of the December 2007
re-securitization.  This change was more than offset by increases in
compensation costs and other general and administrative costs 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,
$0.1 million of which we recognized as an impairment charge in
2007.  In addition, we recognized impairment charges of $1.2 million
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 may
not hold the investments until maturity or until the investments recover their
value.
 
 Profitability
 
 Three
      Months Ended March 31,(dollars
      in thousands)
                    
                    2008
                    
                    2007
                    
                    %
      Change(Loss)
      income before other allocations
                    
                    $
                    (3,143
                    )
                    $
                    6
                    
                    N/MAdjusted
      Net (Loss) Income
                    
                    
                    (3,143
                    )
                    
                    6
                    
                    N/MN/M
      – Not meaningful.
 
 
 Adjusted
Net (Loss) Income for the first quarter 2008 principally reflects the impact of
the December 2007 re-securitization as well as incremental costs associated with
growing the Credit Risk Product Group.  See Note 19 to the condensed
consolidated financial statements for a description of Adjusted Net Income and a
reconciliation to GAAP net income.
 
 Consolidated
Partnerships
 
 The
results of Consolidated Partnerships reflected 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 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 up to 25.0% and also receive additional equity income
allocations as manager.
 
 A summary
of the impact the Consolidated Partnerships have on our Condensed Consolidated
Statements of Operations is as follows:
 
 
 - 55
-
  Management’s
Discussion and Analysis of
 Financial
Condition and Results of Operations
 (continued)
 
 Three
      Months Ended March 31,2008
                    
                    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
                    
                    $
                    21,523
                    
                    $
                    67,244
                    
                    $
                    88,767
                    
                    $
                    17,242
                    
                    $
                    31,506
                    
                    $
                    48,748Interest
      expense
                    
                    
                    (3,024
                    )
                    
                    (31,868
                    )
                    
                    (34,892
                    )
                    
                    (7,185
                    )
                    
                    (15,127
                    )
                    
                    (22,312
                    )Other
      expenses
                    
                    
                    (29,199
                    )
                    
                    (2,659
                    )
                    
                    (31,858
                    )
                    
                    (24,300
                    )
                    
                    (1,336
                    )
                    
                    (25,636
                    )Partnership
      expenses eliminated in consolidation
                    
                    
                    (20,724
                    )
                    
                    (65
                    )
                    
                    (20,789
                    )
                    
                    (17,428
                    )
                    
                    --
                    
                    
                    (17,428
                    )Loss
      on investments
                    
                    
                    (94,113
                    )
                    
                    (688
                    )
                    
                    (94,801
                    )
                    
                    (57,415
                    )
                    
                    --
                    
                    
                    (57,415
                    )Allocations
      to limited partners
                    
                    
                    125,665
                    
                    
                    (24,728
                    )
                    
                    100,937
                    
                    
                    89,413
                    
                    
                    (8,302
                    )
                    
                    81,111Net
      impact
                    
                    $
                    128
                    
                    $
                    7,236
                    
                    $
                    7,364
                    
                    $
                    327
                    
                    $
                    6,741
                    
                    $
                    7,068
 
 
 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:
 
 March
      31,2008
                    
                    2007LIHTC
      Fund Partnerships
                    
                    
                    132
                    
                    
                    115LIHTC
      Property Partnerships
                    
                    
                    55
                    
                    
                    52CMBS
      Fund Partnerships
                    
                    
                    3
                    
                    
                    2High-Yield
      Debt Fund Partnership
                    
                    
                    1
                    
                    
                    1
 
 
 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 March 31, 2008 as compared to
the prior period.
 
 As third
party investors hold virtually all of the equity interests in these entities, we
allocate results of operations of these partnerships to such third party
investors except for a de minimis amount which represents our nominal
ownership.
 
 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.
 
 
 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.
 
 
 - 56
-
  Management’s
Discussion and Analysis of
 Financial
Condition and Results of Operations
 (continued)
 Turbulence
in 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 were 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, compounding the effect on borrowing as market
      values of the collateral assets have declined.  Additionally,
      the market for issuing CDO financing has deteriorated, impeding our
      ability to replace the repurchase financing with more cost effective
      permanent financing; and
 
 ·
                lenders
      for our mortgage loan warehouse line (some of which have also experienced
      recent credit restrictions) have sought to lower their exposure to
      specific borrowers or collateral types, resulting in lower borrowing
      capacity for us.  We expect to enter into a new mortgage
      warehouse facility prior to the maturity of our existing
      facility.  The terms of the new facility are currently expected
      to be similar to those of the existing
facility.
 
 We
believe that our existing financing capacity and cash flow from current
operations are adequate to meet our immediate and long-term liquidity
requirements with respect to our operations.  Nonetheless, as business
needs warrant, we may issue other types of debt or equity in the future,
although current market conditions could make such forms of financing very
costly.
 
 Our
access to capital markets can be affected by factors outside our control, as
discussed above.  In addition, with respect to both short and
long-term business needs, access to capital markets is impacted by market
conditions, and the short- and long-term debt ratings assigned by independent
rating agencies.  There have been no changes to our various credit
ratings since December 31, 2007 (refer to our 2007 Form 10-K for the ratings by
entity).  We believe that our credit ratings provide us adequate
access to the capital markets given our current expected cash
needs.
 
 Cash
Flows
 
 Three
      Months Ended March 31,(in
      thousands)
                
                2008
                
                2007Cash
      flow from operating activities
                
                $
                (152,382
                )
                $
                116,133Cash
      flow from investing activities
                
                
                (85,936
                )
                
                (82,549
                )Cash
      flow from financing  activities
                
                
                210,769
                
                
                (113,194
                )Net
      change in cash
                
                
                (27,549
                )
                
                (79,610
                )
 
 
 Operating
Activities
 
 Our
operating cash flows principally decreased due to the timing of our purchase of
mortgage loans held for sale compared against when they ultimately are sold,
which typically is less than three months.  We originated a
significant amount of mortgages near quarter end, all of which have existing
sale commitments.  In addition, working capital requirements increased
as compared to the prior year quarter principally as a result of a significant
amount of property and fund advances repaid in first quarter of 2007 and the
timing of payment for salaries, distributions and investment settlements in the
2008 period.
 
 Investing
Activities
 
 Due to
current market conditions, we acquired fewer investment securities including
mortgage revenue bonds, CMBS and other available-for-sale
securities.  Partially offsetting this decrease in investment
activities was an additional funding of $30.0 million to the stabilization
escrow established in connection with the re-securitization transaction in
December 2007.
 
 Financing
Activities
 
 The
positive financing cash flow principally reflects the net proceeds of $130.6
million from the 11.0% Preferred Shares as more fully described in Note 13 to
the condensed consolidated financial statements.  In addition,
distributions to shareholders reflect the reduced common dividend rate of $0.15
per share in 2008 as compared to $0.42 per share in the first quarter of
2007.  The net repayment of financing arrangements and notes payable
decreased in 2008 as compared to 2007 as a result of the December 2007
re-securitization at which time we repaid most of our previous financing
securitization debt and lowered the level of our credit facility.
 
 - 57
-
 Management’s
Discussion and Analysis of
 Financial
Condition and Results of Operations
 (continued)
 Liquidity
Requirements after March 31, 2008
 
 Equity
distributions will be paid through May 2008 as follows:
 
 (in
      thousands)Common/non-redeemable
      CRA shares
                
                $
                8,237SCUs/SCIs
                
                
                2,9894.4
      % CRA Preferred shares
                
                
                1,389Equity
      Issuer Preferred shares
                
                
                8,375Redeemable
      CRA shares
                
                
                82211.0%
      Preferred shares
                
                
                2,647Total
                
                $
                24,459
 
 
 In April
2008, Fitch downgraded the certificates of certain trusts in which we hold
investments.  The downgrade reduced the fair value of the investments
by $10.5 million and led to a $7.1 million margin call on a repurchase facility
(see Notes 2 and 7 to the condensed consolidated financial
statements).
 
 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.
 
 Similar
to other market participants, we are confronted by valuation related issues,
particularly since the second half of 2007.  These include 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.  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.
 
 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.
  - 58
-
 Management’s
Discussion and Analysis of
 Financial
Condition and Results of Operations
 (continued)
 (in
      thousands)
                
                March
      31,
                  2008
                
                December
      31,
                  2007Level
      3 assets held for our own account (note 10):Series B Freddie Mac
      Certificates
                
                $
                150,761
                
                $
                153,468Mortgage revenue
      bonds
                
                
                352,914
                
                
                376,432Retained CMBS
      certificates
                
                
                73,672
                
                
                75,328CMBS
                
                
                11,413
                
                
                13,361Mortgage
      servicing rights (1)
                
                
                56,583
                
                
                58,529Level
      3 assets held by Consolidated Partnerships (note 18):CMBS
                
                
                877,128
                
                
                1,235,059Retained CMBS
      certificates
                
                
                479,461
                
                
                482,424CDO equity
                
                
                138,506
                
                
                65,060Total
      Level 3 assets
                
                $
                2,140,438
                
                $
                2,459,661Level
      3 assets as a percentage of total fair value assets
                
                
                80.7
                %
                
                85.6
                %(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.  These 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).
 
 
 In most
cases, we have the intent and ability to hold the above investments until
maturity or recovery, and as such the fair value presented today, considering
current market conditions, may diverge materially from the amounts that we will
ultimately realize on settlement or maturity.  For the quarter ended
March 31, 2008, we recorded impairments of $6.8 million related to mortgage
revenue bonds as more fully discussed in Note 2 of the condensed consolidated
financial statements.  In addition, we recorded impairment of $0.7
million related to retained CMBS certificates held by our Consolidated
Partnerships as more fully discussed in Note 18 to the condensed consolidated
financial statements.
 
 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.
 
  - 59
-
 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:
 
 March
      31, 2008(in
      thousands)
                
                March
      31,
                  2008
                
                December
      31,
                  2007
                
                Available
      to
                  Borrow
                
                Maximum
                  CommitmentCredit
      Facilities:Term
      loan
                
                $
                135,000
                
                $
                140,000
                
                $
                --
                
                $
                135,000Revolving
      credit facility
                
                
                205,000
                
                
                210,000
                
                
                40,000
                
                
                245,000Other
      Notes Payable:CMC
      warehouse line
                
                
                66,450
                
                
                32,302
                
                
                83,550
                (1)
                
                150,000Multifamily
      ASAP plus facility
                
                
                136,632
                
                
                58,413
                
                
                N/A
                (1)
                
                N/ACommercial
      Real Estate repurchase lines
                
                
                38,855
                
                
                56,912
                
                
                166,145
                (1)
                
                205,000Centerline
      Financial facilities
                
                
                --
                
                
                --
                
                
                155,000
                
                
                155,000Syndicated
      corporate debt warehouse line
                
                
                17,604
                
                
                5,423
                
                
                82,396
                (1)
                
                100,000Other
                
                
                2,711
                
                
                2,838
                
                
                N/A
                
                
                N/AFinancing
      Arrangements:P-FLOATs/RITES
                
                
                14,275
                
                
                14,275
                
                
                N/A
                (1)
                
                N/ASubtotal
                
                
                616,527
                
                
                520,163
                
                
                527,091
                
                
                990,000Secured
      Financing
                
                
                556,405
                
                
                548,227
                
                
                N/A
                (2)
                
                N/ACapital
      Structure (excluding Consolidated Partnerships)
                
                
                1,172,932
                
                
                1,068,390
                
                
                527,091
                
                
                990,000Consolidated
      Partnerships
                
                
                1,931,229
                
                
                1,997,332
                
                
                N/A
                
                
                N/ATotal
                
                $
                3,104,161
                
                $
                3,065,722
                
                $
                527,091
                
                $
                990,000(1)  
      Borrowings under these facilities are limited to available assets to serve
      as collateral.
                  (2)  
      As more fully discussed in our 2007 Form 10-K, 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;
 
 ·
                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
 
 ·
                certain
      limitations on distributions (including distributions to minority interest
      holders).
 
 As of
March 31, 2008, we believe we were in compliance with all of these
covenants.
  - 60
-
 Management’s
Discussion and Analysis of
 Financial
Condition and Results of Operations
 (continued)
 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; and
  ·
                bridge
      loans extended to a CMBS Fund Partnership by its investors (including
      us).
 
 During
the three months ended March 31, 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.  With the securing of this bridge
financing, and the termination of a subscription line in one of our CMBS Funds,
our Consolidated Partnerships are no longer subject to such margin
calls.
 
 Equity
 
 Other
than our common shares, we have several classes of equity outstanding, provided
in the table below, with varying claims upon our income and cash
flows:
 
 (in
      thousands)
                
                March
      31,
                  2008
                
                December
      31,
                  2007Mezzanine
      equity:Minority
      interests in subsidiaries
                
                $
                164,118
                
                $
                176,616Preferred
      shares of subsidiary (not subject to mandatory repurchase)
                
                
                104,000
                
                
                104,000Redeemable
      CRA shares
                
                
                189,191
                
                
                69,88811.0%
      Preferred shares
                
                
                130,585
                
                
                --Shareholders’
      equity:CRA
      shares
                
                
                10,256
                
                
                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
$130.6 million, net of $0.6 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.
  - 61
-
 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
March 31, 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
                
                $
                35,075Mortgage
      banking loss sharing agreements (2)
                
                
                846,111
                
                
                13,116Credit
      support to developers (3)
                
                
                199,231
                
                
                679Centerline
      Financial credit default swaps (4)
                
                
                44,015
                
                
                1,205$
                2,677,042
                
                $
                50,075(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.
                  
                  (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;
  - 62
-
 Management’s
Discussion and Analysis of
 Financial
Condition and Results of Operations
 (continued)
 ·
                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;
 ·
                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 commercial mortgage-backed
      securities (“CMBS”) and collateralized debt obligations
      (“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.
 
 
 
 
 
  - 63
-
  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
involving 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
March 31, 2008, total amount of our liabilities labeled on our Condensed
Consolidated Balance Sheet as “Financing Arrangements and Secured Financing” and
“Notes Payable”, $341.5 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 $0.7
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 March
31, 2008, a 1.0% movement in credit spreads would impact the book value of the
applicable assets by approximately 5%.  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.
  - 64
-
  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 March 31, 2008, that have materially affected, or are reasonably
likely to materially affect, our internal control over financial
reporting.
 
  - 65
-
  
 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
May 9, 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 asserts that we and other
defendants allegedly violated federal securities law by failing to disclose in a
timely fashion our recently announced transaction with Freddie
Mac.  Each complaint seeks an unspecified amount of compensatory
damages and other relief.  The court is currently considering motions
by the different plaintiffs to designate a lead plaintiff for these cases, and
five of the six lawsuits have been consolidated into a single action, with a
motion to consolidate the sixth case as well pending before the
court.  We intend to defend vigorously the claims that have been
asserted against us and our officers and trustees.  The federal
lawsuits are:
 
 ·
                On
      January 18, 2008, Goldstein v. Centerline Holding Company, et al., No. 08
      CV 00505, was filed against us and against certain of our officers and
      trustees in the United States District Court for the Southern District of
      New York;
 ·
                On
      January 31, 2008, Frank v. Centerline Holding Company, et al., No. 08 CV
      01026, 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
      February 4, 2008, Weinrib v. Centerline Holding Company, et al., No. 08 CV
      01158, 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
      February 11, 2008, Lyons v. Centerline Holding Company, et al., No. 08 CV
      01458, 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
      February 15, 2008, Dechter v. Centerline Holding Company, et al., No. 08
      CV 01593, was filed against us and certain of our officers and trustees in
      the United States District Court for the Southern District of New York;
      and
 ·
                On
      February 26, 2008, Quill v. Centerline Holding Co., Inc, et al., No. 08 CV
      01902, was filed against us and certain of our officers and trustees in
      the United States District Court for the Southern District of New
      York.
 
 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.;
   
 - 66
-
   ·
                  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 Share 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 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.
 
 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.  Silverwoodinvolves a
counterclaim 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 - 15 million against our subsidiaries.  Silverwood is currently
scheduled for trial in June 2008.  Viewcrest does not currently
have a scheduled trial date.  The parties have engaged in discovery
and have entered into settlement discussions seeking a global resolution of all
of these disputes.  If such a settlement cannot be achieved, we intend
to defend vigorously against the claims.  We are unable at the present
time to estimate what potential losses, if any, may arise in connection with
this litigation.
 
 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.
 
  - 67
-
  
 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 dueling the first quarter of 2008 and other information related to
our repurchase program:
 
 Period
                
                Total
                  number
      of
                  shares
                  purchased
      (1)
                
                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 programsJanuary
      1-31, 2008
                
                10,020
                
                $
                7.02
                
                --February
      1-29, 2008
                
                17,037
                
                
                6.27
                
                --March
      1-31, 2008
                
                99,820
                
                
                4.60
                
                --Total
                
                126,884
                
                $
                5.02
                
                --
                
                303,854(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.
 
 
 Item
      3.
                
                Defaults upon Senior
      Securities.None.Item
      4.
                
                Submission of Matters to a Vote
      of Security Holders.None.Item
      5.
                
                Other
      Information.None.Item
      6.
                
                Exhibits.10.1
                
                Amendment
      to the Executive Employment Agreement, by and between Centerline Capital
      Group, Inc. and Donald J. Meyer, dated April 28, 2008.*10.2
                
                Amendment
      to the Executive Employment Agreement, by and between Centerline Capital
      Group, Inc. and Nicholas A. C. Mumford, dated as of April 15,
      2008.*10.3
                
                Amendment
      to the Executive Employment Agreement, by and between Centerline Capital
      Group, Inc. and Paul G. Smyth, dated as of April 15,
  2008.*10.4
                
                Amendment
      to the Executive Employment Agreement, by and between Centerline Capital
      Group, Inc. and Andrew J. Weil, dated as of April 15,
    2008.*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.
 
  - 68
-
  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:
      May 12, 2008
                By:
                /s/
      Marc D. SchnitzerMarc
      D. Schnitzer
                  Managing
      Trustee, Chief Executive Officer and President
                  (Principal
      Executive Officer)Date:
      May 12, 2008
                By:
                /s/
      Robert L. LevyRobert
      L. Levy
                  Chief
      Financial Officer
                  (Principal
      Financial Officer and Principal Accounting
  Officer)
 
 - 69
-