Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549



FORM 10-Q



ý

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended September 30, 2009o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period
from                             to           
                  .


Commission File Number: 001-32248



GRAMERCY CAPITAL CORP.(Exact name of registrant as specified in its charter)



Maryland(State or other jurisdiction of
incorporation or organization)

06-1722127(I.R.S. Employer Identification No.)420 Lexington Avenue, New York, New York 10170(Address of principal executive offices) (Zip Code)(212) 297-1000(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 ý    NO o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to
be submitted and posted pursuant to Rule 405 of Regulations S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files.) YES o    NO o

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

Large accelerated filer o

Accelerated filer ý

Non-accelerated filer o (Do not check if a smaller
reporting company)

Smaller reporting company o


Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). YES o    NO ý

The number of shares outstanding of the registrant's common stock, $0.001 par value, was 49,884,500 as of November 9, 2009.



---





Table of Contents



GRAMERCY CAPITAL CORP.    INDEX



PART I.

FINANCIAL INFORMATIONITEM 1.

FINANCIAL STATEMENTSPAGECondensed Consolidated Balance Sheets as of September 30, 2009 (unaudited) and December 31,
2008

1Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2009
and 2008 (unaudited)

2Condensed Consolidated Statement of Stockholders' Equity and Comprehensive Income (loss) for the nine months
ended September 30, 2009 (unaudited)

3Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2009 and 2008
(unaudited)

4Notes to Condensed Consolidated Financial Statements (unaudited)

6ITEM 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

66ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

108ITEM 4.

CONTROLS AND PROCEDURES

109PART II.

OTHER INFORMATION

110ITEM 1.

LEGAL PROCEEDINGS

110ITEM 1A.

RISK FACTORS

110ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

110ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

110ITEM 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

110ITEM 5.

OTHER INFORMATION

110ITEM 6.

EXHIBITS

111SIGNATURES

112


---





Table of Contents

PART 1. FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS



Gramercy Capital Corp.        Condensed Consolidated Balance Sheets        (Unaudited, amounts in thousands, except share and per share data)

September 30,
2009

December 31,
2008Assets:Real estate investments, at cost:Land

$
904,296

$
891,500Building and improvements


2,419,471


2,441,839Less: accumulated depreciation


(91,881
)

(47,071
)Total real estate investments, net


3,231,886


3,286,268Cash and cash equivalents


96,745


136,828Restricted cash


254,128


234,781Pledged government securities, net


98,337


101,576Loans and other lending investments, net


1,451,703


2,213,473Commercial mortgage-backed securities


983,367


869,973Investments in joint ventures


106,803


93,919Assets held for sale, net


146,896


192,780Tenant and other receivables, net


27,944


28,129Accrued interest


32,813


25,447Acquired lease assets, net of accumulated amortization of $78,438 and $30,760


465,502


536,212Deferred costs, net of accumulated amortization of $39,517 and $26,451


38,615


53,248Other assets


50,694


48,322Total assets

$
6,985,433

$
7,820,956Liabilities and Stockholders' Equity:Mortgage notes payable

$
1,754,946

$
1,833,005Mezzanine loans payable


566,442


580,462Unsecured credit facility





172,301Term loan, credit facility and repurchase facility


48,881


95,897Collateralized debt obligations


2,608,230


2,608,065Junior subordinated notes


150,000


Total secured and other debt


5,128,499


5,289,730Accounts payable and accrued expenses


83,862


88,437Management and incentive fees payable





979Dividends payable


9,317


2,325Accrued interest payable


8,896


8,167Deferred revenue


92,352


98,693Below market lease liabilities, net of accumulated amortization of $121,933 and $53,369


795,833


846,351Leasehold interests, net of accumulated amortization of $4,353 and $2,182


18,939


21,051Liabilities related to assets held for sale


61,001


110,543Derivative instruments, at fair value


139,421


157,776Other liabilities


23,993


14,471Deferrable interest debentures held by trusts that issued trust preferred securities





150,000Total liabilities


6,362,113


6,788,523Stockholders' Equity:Common stock, par value $0.001, 100,000,000 shares authorized, 49,859,322 and 49,852,243 shares issued and outstanding at September 30, 2009 and
December 31, 2008, respectively.


50


50Series A cumulative redeemable preferred stock, par value $0.001, liquidation preference $115,000, 4,600,000 shares authorized, 4,600,000 shares issued
and outstanding at September 30, 2009 and December 31, 2008, respectively.


111,205


111,205Additional paid-in-capital


1,078,828


1,077,983Accumulated other comprehensive loss


(142,260
)

(160,739
)(Accumulated deficit) retained earnings


(427,327
)

1,222Total Gramercy Capital Corp. stockholders' equity


620,496


1,029,721Non-controlling interests


2,824


2,712Total equity


623,320


1,032,433Total liabilities and stockholders' equity

$
6,985,433

$
7,820,956


The accompanying notes are an integral part of these financial statements.

1

---





Table of Contents



Gramercy Capital Corp.        Condensed Consolidated Statements of Operations        (Unaudited, amounts in thousands, except per share data)

Three Months Ended
September 30,

Nine Months Ended
September 30,2009

2008

2009

2008RevenuesRental revenue

$
79,831

$
75,437

$
242,943

$
151,663Investment income


42,222


60,552


140,014


197,882Operating expense reimbursements


30,315


31,760


89,682


61,512Gain on sales and other income


1,262


5,432


3,778


14,420Total revenues


153,630


173,181


476,417


425,477Operating ExpensesUtilities


11,165


11,677


30,143


21,147Real estate taxes


9,955


9,192


28,939


18,459Ground rent and leasehold obligations


4,701


4,836


13,204


8,898Direct billable expenses


2,453


2,869


6,699


4,226Other property operating expenses


18,105


19,105


57,289


38,699Total property operating expenses


46,379


47,679


136,274


91,429Net operating income


107,251


125,502


340,143


334,048Other expenses:Interest expense


55,933


76,592


179,511


192,434Depreciation and amortization


27,393


20,752


84,825


42,764Marketing, general and administrative


8,478


6,201


26,812


13,087Management fees





8,025


7,787


24,275Incentive fee











5,100Impairment on loans held for sale and commercial mortgage backed securities


13,551





139,930


Provision for loan loss


205,508


18,875


425,692


50,089Total other expenses


310,863


130,445


864,557


327,749Income (loss) from continuing operations before equity in net income from unconsolidated joint ventures, provisions for taxes and non-controlling
interests


(203,612
)

(4,943
)

(524,414
)

6,299Equity in net income of unconsolidated joint ventures


2,397


1,752


6,584


7,154Income (loss) from continuing operations before provision for taxes, gain on extinguishment of debt, and discontinued operations


(201,215
)

(3,191
)

(517,830
)

13,453Gain on extinguishment of debt





11,681


107,229


33,378Provision for taxes


(88
)

(36
)

(2,489
)

(47
)Net income (loss) from continuing operations


(201,303
)

8,454


(413,090
)

46,784Net loss from discontinued operations


(2,438
)

1,174


(20,900
)

961Net gains from disposals


3,021





11,505


Net income (loss) from discontinued operations


583


1,174


(9,395
)

961Net income (loss)


(200,720
)

9,628


(422,485
)

47,745Net (income) loss attributable to non-controlling interests


(60
)

31


944


(219
)Net income (loss) attributable to Gramercy Capital Corp.


(200,780
)

9,659


(421,541
)

47,526Accrued preferred stock dividends


(2,336
)

(2,336
)

(7,008
)

(7,008
)Net income (loss) available to common stockholders

$
(203,116
)
$
7,323

$
(428,549
)
$
40,518Basic earnings per share:Net income (loss) from continuing operations, net of non-controlling interest and after preferred dividends

$
(4.08
)
$
0.12

$
(8.43
)
$
0.87Net Income (loss) from discontinued operations


0.01


0.02


(0.17
)

0.02Net income (loss) available to common stockholders

$
(4.07
)
$
0.14

$
(8.60
)
$
0.89Diluted earnings per share:Net income (loss) from continuing operations, net of non-controlling interest and after preferred dividends

$
(4.08
)
$
0.12

$
(8.43
)
$
0.86Net income (loss) from discontinued operations


0.01


0.02


(0.17
)

0.02Net income (loss) available to common stockholders

$
(4.07
)
$
0.14

$
(8.60
)
$
0.88Dividends per common share

$


$
0.63

$


$
1.26Basic weighted average common shares outstanding


49,857


51,307


49,844


45,736Diluted weighted average common shares and common share equivalents outstanding


49,857


51,356


49,844


45,814


The accompanying notes are an integral part of these financial statements.

2

---





Table of Contents

Gramercy Capital Corp.    Condensed Consolidated Statement of Stockholder's Equity    (Unaudited, amounts in thousands)

Common Stock









Total
Gramercy
Capital
CorpSeries A
Preferred
Stock

Additional Paid-
In-Capital

Accumulated Other
Comprehensive
Income (Loss)

Retained Earnings /
(Accumulated
Deficit)

Non-controlling
interest



Comprehensive
Income (loss)Shares

Par Value

TotalBalance at December 31, 2008


49,852

$
50

$
111,205

$
1,077,983

$
(160,739
)
$
1,222

$
1,029,721

$
2,712

$
1,032,433Net loss

















(421,541
)

(421,541
)

(944
)

(422,485
)

(421,541
)Change in net unrealized loss on derivative instruments














17,852





17,852





17,852


17,852Net unrealized loss on securities previously available for sale














627





627





627


627Issuance of stockstock purchase plan


39








16








16





16Stock based compensationfair value


(32
)







829








829





829Distribution to non-controlling interest holder























(6,171
)

(6,171
)Dividends accrued on preferred stock

















(7,008
)

(7,008
)




(7,008
)Non-controlling interest through acquistion























7,227


7,227Balance at September 30, 2009


49,859

$
50

$
111,205

$
1,078,828

$
(142,260
)
$
(427,327
)
$
620,496

$
2,824

$
623,320

$
(403,062
)


The accompanying notes are an integral part of these financial statements.

3

---





Table of Contents



Gramercy Capital Corp.        Condensed Consolidated Statements of Cash Flows        (Unaudited, amounts in thousands)

Nine months ended
September 30,2009

2008Operating ActivitiesNet income (loss)

$
(421,541
)
$
47,526Adjustments to net cash provided by operating activities:Depreciation and amortization


92,857


42,546Non-controlling interest


(944
)

219Amortization of leasehold interests


(2,174
)

Amortization of acquired leases to rental revenue


(58,477
)

(17,833
)Amortization of deferred costs


8,741


6,903Amortization of discount and other fees


(18,744
)

(21,568
)Payment of capitalized tenant leasing costs


(1,254
)

(539
)Straight-line rent adjustment


19,735


9,808Non-cash impairment charges


161,996


Net gain on sale of properties and lease terminations


(11,492
)

Equity in net (income) loss of joint ventures


(6,276
)

(6,117
)Gain on extinguishment of debt


(107,229
)

(33,378
)Amortization of stock compensation


845


3,878Provision for loan loss


425,692


50,089Unrealized gain on derivative instruments





(6,733
)Net realized gain on loans held for sale





(10
)Changes in operating assets and liabilities:Restricted cash


(290
)

31,146Tenant and other receivables


(14,789
)

(5,879
)Other assets


(3,353
)

20,285Management and incentive fees payable





(528
)Accounts payable, accrued expenses and other liabities


(4,558
)

12,092Deferred revenue


(23,427
)

(10,617
)Net cash provided by operating activities


35,318


121,290Investing ActivitiesTransaction costs of business combination





(108,199
)Cash consideration paid for business combination, net of cash acquired of $155,356





(586,900
)Capital expenditures and leasehold costs


(6,533
)

(6,773
)Proceeds from sale of real estate


111,865


63,878New investment originations and funded commitments


(51,702
)

(305,066
)Principal collections on investments


79,645


410,508Proceeds from sale of loans and loan commitments


52,926


92,090Investment in commercial mortgage-backed securities


(109,866
)

(61,736
)Investment in joint venture


(3,429
)

(2,071
)Change in accrued interest income


(61
)

57Purchase of marketable investments


(7
)

(5,354
)Sale of marketable investments


5,042


3,402Change in restricted cash from investing activities


(3,474
)

(50,625
)Deferred investment costs


(657
)

(1,856
)Net cash provided by (used in) investing activities


73,749


(558,645
)


4

---



Table of Contents

Gramercy Capital Corp.

Condensed Consolidated Statements of Cash Flows (Continued)

(Unaudited, amounts in thousands)

Nine months ended
September 30,2009

2008Financing ActivitiesDistribution to non-controlling interest holders


(6,171
)

Proceeds from repurchase facilities


9,500


35,946Repayments of repurchase facilities


(49,296
)

(128,149
)Proceeds of unsecured credit facility





172,301Repayment of unsecured credit facility


(45,000
)

Repurchase of collateralized debt obligations





(38,922
)Repayment of mortgage notes


(36,721
)

(742,034
)Proceeds from stock options excerised





1,352Proceeds from acquisition financing





1,114,743Deferred financing costs and other liabilities


(3,196
)

(32,195
)Net proceeds of sale of common stock





46Dividends paid


(16
)

(164,592
)Change in restricted cash from financing activities


(18,250
)

20,928Net cash (used in) provided by financing activities


(149,150
)

239,424Net (decrease) in cash and cash equivalents


(40,083
)

(197,931
)Cash and cash equivalents at beginning of period


136,828


293,126Cash and cash equivalents at end of period

$
96,745

$
95,195Non-cash activityDeferred gain (loss) and other non-cash activity related to derivatives

$
17,852

$
(17,441
)Issuance of common stock for acquistion advisory costs

$


$
11,213Issuance of common stock in business combination

$


$
378,672Assumptions of mortgage loans

$


$
1,316,004Mark-to-market of debt assumed

$


$
24,743Debt assumed by purchaser in sale of real estate

$
103,621

$
Supplemental cash flow disclosuresCash paid for interest

$
153,164

$
114,254Cash paid for income taxes

$
504

$
393


The accompanying notes are an integral part of these financial statements.

5

---





Table of Contents



Gramercy Capital Corp.        Notes To Condensed Consolidated Financial Statements        (Unaudited, amounts in thousands, except share and per share data)        September 30, 2009

1. Business and Organization

Gramercy Capital Corp. (the "Company" or "Gramercy") is a self-managed, integrated, commercial real estate finance and property investment company. The Company was formed in
April 2004 and commenced operations upon the completion of its initial public offering in August 2004. On April 1, 2008, the Company completed the acquisition of American Financial Realty Trust
(NYSE: AFR) ("American Financial") in a transaction with a total value of approximately $3.3 billion, including the assumption of approximately $1.3 billion of American Financial's
secured debt.

From
its inception until April 2009, the Company was externally managed and advised by GKK Manager LLC, or the Manager, a wholly-owned subsidiary of SL Green Realty Corp., or SL
Green. On
April 24, 2009, the Company completed the internalization of its management through the direct acquisition of the Manager from SL Green. Beginning in May 2009, management and incentive fees
payable by the Company to the Manager ceased and the Company added 77 former employees of the Manager to its own staff. The Company expensed $5,010 for the costs incurred through September 30,
2009 in connection with the Company's acquisition of the Manager. At September 30, 2009 and December 31, 2008, SL Green Operating Partnership, L.P., or SL Green OP, owned
approximately 12.5% of the outstanding shares of the Company's common stock.

The
Company relies on the credit and equity markets to finance and grow its business. Beginning during the second half of 2007, severe credit and liquidity issues in the
sub-prime residential lending and single family housing sectors negatively impacted the asset-backed and corporate fixed income markets, and the equity securities of financial institutions
and real estate companies. As the severity of residential sector issues increased, nearly all securities markets experienced reduced liquidity and greater risk premiums as concerns about the outlook
for the U.S. and world economic growth increased. These concerns continue to persist in 2009 and risk premiums in many capital markets remain at or near all-time highs with liquidity
extremely low or virtually non-existent when compared to historical standards. As a result, most commercial real estate finance and financial services industry participants, including the
Company, have reduced new investment activity until the capital markets become more stable, the macroeconomic outlook becomes clearer and market liquidity increases. In this environment, the Company
is focused on actively managing portfolio credit, generating and recycling liquidity from existing assets, leasing vacant space, extending debt maturities and reducing capital expenditures.

The
Company's commercial real estate finance business, which operates under the name Gramercy Finance, focuses on the direct origination and acquisition of whole loans, bridge loans,
subordinate interests in whole loans, mezzanine loans, preferred equity, commercial mortgage-backed securities, or CMBS, and other real estate related securities. The Company's property investment
business, which operates under the name Gramercy Realty, focuses on the acquisition and management of commercial properties leased primarily to regulated financial institutions and affiliated users
throughout the United States. These institutions are, for the most part, deposit-taking commercial banks, thrifts and credit unions, which the Company generally refers to as "banks." The Company's
portfolio of wholly-owned and jointly-owned bank branches and office buildings is leased to large banks such as Bank of America, N.A., or Bank of America, Wachovia Bank National Association, (now
owned by Wells Fargo & Company, or Wells Fargo), or Wachovia Bank, Regions Financial Corporation, or Regions Financial and Citizens Financial Group, Inc., or Citizens Financial, and to
mid-sized and community banks.

6

---



Table of Contents

Gramercy Capital Corp.

Notes To Condensed Consolidated Financial Statements (Continued)

(Unaudited, amounts in thousands, except share and per share data)

September 30, 2009

1. Business and Organization (Continued)

Neither
Gramercy Finance nor Gramercy Realty is a separate legal entity but are divisions of the Company through which the Company's commercial real estate finance and property
investment businesses are conducted.

Substantially
all of the Company's operations are conducted through GKK Capital LP, a Delaware limited partnership, or the Operating Partnership. The Company, as the sole general
partner of, and currently the holder of 100% of the common units of the Operating Partnership, has responsibility and discretion in the management and control of the Operating Partnership Accordingly,
the Company consolidates the accounts of the Operating Partnership. The Company qualified as a real estate investment trust, or REIT, under the Internal Revenue Code of 1986, as amended, or the
Internal Revenue Code, commencing with its taxable year ended December 31, 2004 and the Company expects to qualify for the current fiscal year. To maintain the Company's qualification as a
REIT, the Company plans to distribute at least 90% of taxable income, if any.

As
of September 30, 2009, Gramercy Finance held loans and other lending investments and CMBS of $2,478,948 net of fees, discounts, valuation allowances and unfunded commitments,
reserves for possible loan losses, valuation allowances and other adjustments, with an average spread to 30-day LIBOR of 437 basis points for its floating rate investments, and an average
yield of approximately 7.71% for its fixed rate investments. As of September 30, 2009, Gramercy Finance also held interests in two credit tenant net lease investments, or CTL investments, two
interests in joint ventures holding fee positions on properties subject to long-term ground leases, and a 100% fee interest in a property subject to a long-term ground lease.

As
of September 30, 2009, Gramercy Realty's portfolio consisted of 638 bank branches, 327 office buildings and six land parcels, of which 54 bank branches and one office building
were partially-owned through joint ventures. Gramercy Realty's wholly-owned properties aggregated approximately 26.0 million rentable square feet and its partially-owned properties aggregated
approximately 0.6 million rentable square feet, including 0.3 million rentable square feet in an unconsolidated joint venture. As of September 30, 2009, the occupancy of Gramercy
Realty's wholly-owned properties was 85.9% and the occupancy for its partially-owned properties was 99.8%. Gramercy Realty's two largest tenants are Bank of America and Wachovia Bank, and for the
three months ended September 30, 2009, they represented approximately 39.4% and 15.3%, respectively, and for the nine months ended September 30, 2009, they represented approximately
41.6% and 15.5%, respectively, of the rental revenue of the Company's portfolio. As of September 30, 2009, Bank of America and Wachovia occupied approximately 44.2% and 17.2%, respectively, of
Gramercy Realty's total rentable square feet.

Due
to the nature of the business of Gramercy Realty's tenant base, Gramercy Realty typically enters into long-term leases with its financial institution tenants. As of
September 30, 2009, the weighted average remaining term of Gramercy Realty's leases was 9.5 years and approximately 79.1% of its base revenue was derived from long-term
leases with financial institution tenants. With in-house capabilities in acquisitions, asset management, property management and leasing, Gramercy Realty is focused on maximizing the value
of its portfolio through strategic sales, effective and efficient property management, asset management and leasing.

7

---



Table of Contents

Gramercy Capital Corp.

Notes To Condensed Consolidated Financial Statements (Continued)

(Unaudited, amounts in thousands, except share and per share data)

September 30, 2009

1. Business and Organization (Continued)

Basis of Quarterly Presentation

The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally
accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, it
does not include all of the information and footnotes required by accounting principles generally accepted in the United States, or GAAP, for complete financial statements. In management's opinion,
all adjustments (consisting of normal recurring accruals) considered necessary for fair presentation have been included. The 2009 operating results for the period presented are not necessarily
indicative of the results that may be expected for the year ending December 31, 2009. These financial statements should be read in conjunction with the consolidated financial statements and
accompanying notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2008.

The
balance sheet at December 31, 2008 has been derived from the audited financial statement at that date, but does not include all the information and footnotes required by GAAP
for complete financial statements.

The
Company has evaluated subsequent events through the date that the financial statements were issued, which was November 9, 2009, the date of the Company's Quarterly Report on
Form 10-Q for the period ended September 30, 2009.

Accounting Standards Codification

The Company follows accounting standards set by the Financial Accounting Standards Board, commonly referred to as the "FASB." The FASB
sets GAAP that the Company follows to ensure it consistently reports its financial condition, results of operations and cash flows. References to GAAP issued by the FASB in these footnotes are to the
FASB Accounting Standards Codification (the "Codification"). The FASB finalized the Codification effective for periods ending on or after September 15, 2009. The Codification does not change
how the Company accounts for its transactions or the nature of the related disclosures made.

2. Significant Accounting Policies

Principles of Consolidation

The condensed consolidated financial statements include the Company's accounts and those of the Company's subsidiaries which are
wholly-owned or controlled by the Company, or entities which are variable interest entities in which the Company is the primary beneficiary. GAAP for consolidation requires that a variable interest
entity, or VIE, to be consolidated by its primary beneficiary. The primary beneficiary is the party that absorbs a majority of the VIE's anticipated losses and/or a majority of the expected returns.
The Company has evaluated its investments for potential classification as variable interests by evaluating the sufficiency of each entity's equity investment at risk to absorb losses, and determined
that the Company is the primary beneficiary for one variable interest entity and has included the accounts of this entity in the condensed consolidated financial statements. Entities which the Company
does not control and entities which are VIE's, but where the Company is not the

8

---



Table of Contents

Gramercy Capital Corp.

Notes To Condensed Consolidated Financial Statements (Continued)

(Unaudited, amounts in thousands, except share and per share data)

September 30, 2009

2. Significant Accounting Policies (Continued)

primary
beneficiary, are accounted for under the equity method. All significant intercompany balances and transactions have been eliminated.

Variable Interest Entities

The Company's ownership of the subordinated classes of CMBS from a single issuer may provide the Company with the right to control the
foreclosure/workout process on the underlying loans. An investor that holds a variable interest in a qualifying special-purpose entity ("QSPE") does not consolidate that entity unless the investor has
the unilateral ability to cause the entity to liquidate. GAAP provides the requirements for an entity to qualify as a QSPE. To maintain the QSPE exception, the special-purpose entity must initially
meet the QSPE criteria and must continue to satisfy such criteria in subsequent periods. A special-purpose entity's QSPE status can be affected in future periods by activities by its transferors or
other involved parties, including the manner in which certain servicing activities are performed. To the extent that the Company's CMBS investments were issued by a special-purpose entity that meets
the QSPE requirements, the Company records those investments at the purchase price paid. To the extent the underlying special-purpose entities do not satisfy the QSPE requirements, the Company
evaluates for consolidation the special-purpose entities that would be determined to be VIEs. The Company has analyzed the pooling and servicing agreements governing each of its controlling class CMBS
investments and the Company believes that the terms of those agreements conform to industry standards and are consistent with the QSPE criteria.

In
June 2009, the FASB issued new guidance that eliminates the qualifying special purpose entity concept including the exemption under which the Company excludes certain CMBS investments
from consolidation. Accordingly, in January 2010, the Company anticipates it will be required to consolidate these CMBS investments. The Company is currently evaluating the impact of the new
standards.

At
September 30, 2009, the Company owned securities of three controlling class CMBS trusts with a carrying value of $39,481. The total par amount of CMBS issued by the three CMBS
trusts was $921,654. Using the fair value approach to calculate expected losses or residual returns, the Company has concluded that it would not be the primary beneficiary of any of the underlying
special-purpose entities. At September 30, 2009, the Company's maximum exposure to loss as a result of its investment in these QSPEs totaled $39,481 which equals the book value of these
investments as of September 30, 2009.

The
financing structures that the Company offers to the borrowers on certain of its real estate loans involve the creation of entities that could be deemed VIEs and, therefore, could be
subject to GAAP consolidation guidance. The Company's management has evaluated these entities and has concluded that none of these such entities are VIEs that would require evaluation for
consolidation.

9

---



Table of Contents

Gramercy Capital Corp.

Notes To Condensed Consolidated Financial Statements (Continued)

(Unaudited, amounts in thousands, except share and per share data)

September 30, 2009

2. Significant Accounting Policies (Continued)

The
following is a summary of the Company's involvement with VIEs (excluding QSPEs) as of September 30, 2009:

Company
carrying
value
assets

Company
carrying
value
liabilities

Face value of
assets held
by the VIE

Face value of
liabilities issued by the VIEConsolidated VIEsTotal real estate investments, net

$
43,284

$
42,128

$
43,284

$
42,128Collateralized debt obligations





2,608,230


3,100,000


3,100,000$
43,284

$
2,650,358

$
3,143,284

$
3,142,128Unconsolidated VIEsCommercial mortgage-backed securities

$
39,481

$


$
921,654

$
921,654


The
Company has determined that it is the non-transferor sponsor of one of the Company's non-investment grade CMBS investments, GS Mortgage Securities Trust
2007-GKKI, or the Trust. The Trust is a resecuritization of approximately $634,000 of CMBS originally rated AA+ through BB structured in a QSPE. The Company purchased a portion of the
below investment securities, totaling approximately $27,300. The Manager is the collateral administrator on the transaction and receives a total fee of 5.5 basis points on the par value of the
underlying collateral. As collateral administrator, the Manager's on-going duty is to liquidate defaulted securities for the Trust if very specific triggers have been reached. The Manager
can be removed as collateral administrator for cause only, with the vote of 662/3% of the certificate holders. There are no liquidity facilities or financing agreements associated with
the Trust. Neither the Company nor the Manager has any on-going financial obligations, including advancing, funding, or purchasing collateral in the Trust. The Company's maximum exposure
to the QSPE is limited to its investment in the bonds purchased.

Real Estate and CTL Investments

The Company records acquired real estate and CTL investments at cost. Costs directly related to the acquisition of such investments are
expensed as incurred. Certain improvements are capitalized when they are determined to increase the useful life of the building. Depreciation is computed using the straight-line method
over the shorter of the estimated useful life of the capitalized item or 40 years for buildings, five to ten years for building equipment and fixtures, and the lesser of the useful life or the
remaining lease term for tenant improvements and leasehold interests. Maintenance and repair expenditures are expensed as incurred. Results of operations of properties acquired are included in the
consolidated statements of operations from the date of acquisition.

In
leasing office space, the Company may provide funding to the lessee through a tenant allowance. In accounting for tenant allowances, the Company determines whether the allowance
represents funding for the construction of leasehold improvements and evaluates the ownership, for accounting purposes, of such improvements. If the Company is considered the owner of the leasehold
improvements for accounting purposes, the Company capitalizes the amount of the tenant allowance and depreciates it over the shorter of the useful life of the leasehold improvements or the lease term.

10

---



Table of Contents

Gramercy Capital Corp.

Notes To Condensed Consolidated Financial Statements (Continued)

(Unaudited, amounts in thousands, except share and per share data)

September 30, 2009

2. Significant Accounting Policies (Continued)

If
the tenant allowance represents a payment for a purpose other than funding leasehold improvements, or in the event the Company is not considered the owner of the improvements for accounting
purposes, the allowance is considered to be a lease incentive and is recognized over the lease term as a reduction of rental revenue. Factors considered during this evaluation usually include
(i) who holds legal title to the improvements, (ii) evidentiary requirements concerning the spending of the tenant allowance, and (iii) other controlling rights provided by the
lease agreement (e.g. unilateral control of the tenant space during the build-out process.) Determination of the
accounting for a tenant allowance is made on a case-by-case basis, considering the facts and circumstances of the individual tenant lease.

The
Company also reviews the recoverability of the property's carrying value when circumstances indicate a possible impairment of the value of a property. The review of recoverability is
based on an estimate of the future undiscounted cash flows, excluding interest charges, expected to result from the property's use and eventual disposition. These estimates consider factors such as
expected future operating income, market and other applicable trends and residual value, as well as the effects of leasing demand, competition and other factors. If management determines impairment
exists due to the inability to recover the carrying value of a property, an impairment loss is recorded in the consolidated statement of operations in the period the determination is made to the
extent that the carrying value exceeds the estimated fair value of the property for properties to be held and used, and for assets held for sale, an impairment loss is recorded to the extent that the
carrying value exceeds the fair value less estimated cost to dispose of assets held for sale.

The
Company allocates the purchase price of real estate to land, building, improvements and intangibles, such as the value of above-, below- and at-market leases, and
origination costs associated with the in-place leases. The Company depreciates the amount allocated to building and other intangible assets over their estimated useful lives, which
generally range from three to 40 years. The values of the above- and below-market leases are amortized and recorded as either an increase (in the case of below-market leases) or a decrease (in
the case of above-market leases) to rental income over the remaining term of the associated lease. The value associated with in-place leases are amortized over the initial term of the
respective leases. If a tenant vacates its space prior to the contractual termination of the lease and no rental payments are being made on the lease, any unamortized balance of the related intangible
will be written off. The tenant improvements and origination costs are amortized as an expense over the remaining life of the lease or charged against earnings if the lease is terminated prior to its
contractual expiration date. The Company assesses fair value of the leases based on estimated cash flow projections that utilize appropriate discount and capitalization rates and available market
information. Estimates of future cash flows are based on a number of factors including the historical operating results, known trends and market/economic conditions that may affect the property.

Leasehold Interests

Leasehold interest assets and liabilities are recorded based on the difference between the fair value of management's estimate of the
net present value of cash flows expected to be paid and earned from the subleases over the non-cancelable lease terms and any payments received in consideration for

11

---



Table of Contents

Gramercy Capital Corp.

Notes To Condensed Consolidated Financial Statements (Continued)

(Unaudited, amounts in thousands, except share and per share data)

September 30, 2009

2. Significant Accounting Policies (Continued)

assuming
the leasehold interests. Factors used in determining the net present value of cash flows include contractual rental amounts, costs of tenant improvements, costs of capital expenditures and
amounts due under the corresponding operating lease assumed. Amounts allocated to leasehold interests, based on their respective fair values, are amortized on a straight-line basis over
the remaining lease term.

Investments in Unconsolidated Joint Ventures

The Company accounts for its investments in unconsolidated joint ventures under the equity method of accounting since it exercises
significant influence, but does not unilaterally control the entities and is not considered to be the primary beneficiary. In the joint ventures, the rights of the other investors are protective and
participating. Unless the Company is determined to be the primary beneficiary, these rights preclude it from consolidating the investments. The investments are recorded initially at cost as an
investment in unconsolidated joint ventures, and subsequently are adjusted for equity in net income (loss) and cash contributions and distributions. Any difference between the carrying amount of the
investments on the Company's balance sheet and the underlying equity in net assets is amortized as an adjustment to equity in net income (loss) of unconsolidated joint ventures over the lesser of the
joint venture term or 40 years. None of the joint venture debt is recourse to the Company. As of September 30, 2009 and December 31, 2008, the Company had investments of $106,803
and $93,919 in unconsolidated joint ventures, respectively.

Cash and Cash Equivalents

The Company considers all highly liquid investments with maturities of three months or less when purchased to be cash equivalents.

Restricted Cash

Restricted cash at September 30, 2009 consists of $103,401 on deposit with the trustee of the Company's collateralized debt
obligations, or CDOs. The remaining balance consists of $71,003 held as collateral for letters of credit, $2,064 of interest reserves held on behalf of borrowers and $82,849, which includes $5,189
related to assets held for sale, which represents amounts escrowed pursuant to mortgage agreements securing the Company's real estate investments and CTL investments for insurance, taxes, repairs and
maintenance, tenant improvements, interest, and debt service and amounts held as collateral under security and pledge agreements relating to leasehold interests.

Assets Held for Sale

Loans and Other Lending Investments Held For Sale

Loans held for investment are intended to be held to maturity and, accordingly, unless deemed to be impaired, such loans are carried at
cost, net of unamortized loan origination fees, discounts, repayments, unfunded commitments, and other adjustments. Loans held for sale are carried at the lower of cost or market value using available
market information obtained through consultation with dealers or other originators of such investments. As of September 30, 2009 and December 31, 2008, the

12

---



Table of Contents

Gramercy Capital Corp.

Notes To Condensed Consolidated Financial Statements (Continued)

(Unaudited, amounts in thousands, except share and per share data)

September 30, 2009

2. Significant Accounting Policies (Continued)

Company
had loans and other lending investments held for sale of $43,878 and $0, respectively. The Company recorded impairment charges of $12,191 and $138,570 related to the
mark-to-market of the loans designated as held for sale for the three and nine months ended September 30, 2009, respectively.

Real Estate and CTL Investments Held for Sale

Real estate investments or CTL investments to be disposed of are reported at the lower of carrying amount or estimated fair value, less
cost to sell. Once an asset is classified as held for sale, depreciation expense is no longer recorded and current and prior periods are reclassified as Discontinued Operations. As of
September 30, 2009 and December 31, 2008, the Company had real estate investments held for sale of $103,018 and $192,780, respectively.

Commercial Mortgage-Backed Securities

The Company designates its CMBS investments on the date of acquisition of the investment. Held-to-maturity investments are stated at
cost plus any premiums or discounts which are amortized through the consolidated statements of operations using the level yield method. CMBS securities that the Company does not hold for the purpose
of selling in the near-term but may dispose of prior to maturity, are designated as available-for-sale and are carried at estimated fair value with the net
unrealized gains or losses recorded as a component of accumulated other comprehensive income (loss) in stockholders' equity. Unrealized losses that are, in the judgment of management, an
other-than-temporary impairment are bifurcated into (i) the amount related to credit losses, and (ii) the amount related to all other factors. The portion of the
other-than-temporary impairment related to credit losses is computed by comparing the amortized cost of the investment to the present value of cash flows expected to be
collected, discounted at the investment's current yield, and is charged against earnings on the consolidated statement of operations. The portion of the other-than-temporary
impairment related to all other factors is recognized as a component of other comprehensive loss on the consolidated balance sheet. The determination of an other-than-temporary
impairment is a subjective process, and different judgments and assumptions could affect the timing of loss realization. In November 2007, subsequent to financing the Company's CMBS investments in its
CDOs, the Company redesignated all of its available-for-sale CMBS investments with a book value of approximately $43,600 to held to maturity. As of September 30, 2009
and December 31, 2008, the unrealized loss on the redesignated CMBS investments included in other comprehensive income (loss) was $4,363 and $4,986, respectively.

On
a quarterly basis, when significant changes in estimated cash flows from the cash flows previously estimated occur due to actual prepayment and credit loss experience, and the present
value of the revised cash flow is less than the present value previously estimated, an other-than-temporary impairment is deemed to have occurred. The security is written down
to fair value with the resulting charge against earnings and a new cost basis is established. The Company calculates a revised yield based on the current amortized cost of the investment (including
any other-than-temporary impairments recognized to date) and the revised yield is then applied prospectively to recognize interest income. In January 2009, the FASB clarified
the guidance for impairment by removing the requirement to place exclusive reliance on market participants' assumptions about future cash flows when evaluating

13

---



Table of Contents

Gramercy Capital Corp.

Notes To Condensed Consolidated Financial Statements (Continued)

(Unaudited, amounts in thousands, except share and per share data)

September 30, 2009

2. Significant Accounting Policies (Continued)

an
asset for other-than-temporary impairment. The standard now requires that assumptions about future cash flows consider reasonable management judgment about the probability
that the holder of an asset will be unable to collect all amounts due. During the three months ended September 30, 2009, the Company recognized an other-than-temporary
impairment of $1,360 due to an adverse change in expected cash flows related to credit losses for one CMBS investment which is recorded in impairment on loans held for sale and CMBS in the Company's
Consolidated Statement of Operations.

The
Company determines the fair value of CMBS based on the types of securities in which the Company has invested. For liquid, investment-grade securities, the Company consults with
dealers of such securities to periodically obtain updated market pricing for the same or similar instruments. For non-investment grade securities, the Company actively monitors the
performance of the underlying properties and loans and updates the Company's pricing model to reflect changes in projected cash flows. The value of the securities is derived by applying discount rates
to such cash flows based on current market yields. The yields employed are obtained from the Company's own experience in the market, advice from dealers when available, and/or information obtained in
consultation with other investors in similar instruments. Because fair value estimates, when available, may vary to some degree, the Company must make certain judgments and assumptions about the
appropriate price to use to calculate the fair values for financial reporting purposes. Different judgments and assumptions could result in materially different presentations of value.

Pledged Government Securities

The Company maintains a portfolio of treasury securities that are pledged to provide principal and interest payments for mortgage debt
previously collateralized by properties in its real estate portfolio. The Company does not intend to sell the securities and believes it is more likely than not that it will realize the full amortized
cost basis of the securities over their remaining life. These securities had a carrying value of $98,337, a fair value of $100,524 and unrealized gains of $2,187 at September 30, 2009, and have
maturities that extend through November 2013.

Tenant and Other Receivables

Tenant and other receivables are primarily derived from the rental income that each tenant pays in accordance with the terms of its
lease, which is recorded on a straight-line basis over the initial term of the lease. Since many leases provide for rental increases at specified intervals, straight-line basis
accounting requires the Company to record a receivable, and include in revenues, unbilled rent receivables that will only be received if the tenant makes all rent payments required through the
expiration of the initial term of the lease. Tenant and other receivables also include receivables related to tenant reimbursements for common area maintenance expenses and certain other recoverable
expenses that are recognized as revenue in the period in which the related expenses are incurred.

Tenant
and other receivables are recorded net of the allowances for doubtful accounts, which as of September 30, 2009 and December 31, 2008, were $5,720 and $6,361,
respectively. The Company continually reviews receivables related to rent, tenant reimbursements and unbilled rent receivables and determines collectability by considering the tenant's payment
history, the financial condition of the

14

---



Table of Contents

Gramercy Capital Corp.

Notes To Condensed Consolidated Financial Statements (Continued)

(Unaudited, amounts in thousands, except share and per share data)

September 30, 2009

2. Significant Accounting Policies (Continued)

tenant,
business conditions in the industry in which the tenant operates and economic conditions in the area in which the property is located. In the event that the collectability of a receivable is
in doubt, the Company increases the allowance for doubtful accounts or records a direct write-off of the receivable in the consolidated statements of operations.

Intangible Assets

The Company follows the purchase method of accounting for business combinations. The Company allocates the purchase price of acquired
properties to tangible and identifiable intangible assets acquired based on their respective fair values. Tangible assets include land, buildings and improvements on an as-if-vacant basis.
The Company utilizes various estimates, processes and information to determine the as-if-vacant property value. Estimates of value are made using customary methods, including data from
appraisals, comparable sales, discounted cash flow analyses and other methods. Identifiable intangible assets include amounts allocated to acquired leases for above- and below-market lease rates and
the value of in-place leases.

Above-market,
below-market and in-place lease values for properties acquired are recorded based on the present value (using an interest rate which reflects the risks
associated with the leases acquired) of the difference between the contractual amount to be paid pursuant to each in-place lease and management's estimate of the fair market lease rate for
each such in-place lease, measured over a period equal to the remaining non-cancelable term of the lease. The capitalized above-market lease values are amortized as a reduction
of rental income over the remaining non-cancelable terms of the respective leases. The capitalized below-market lease values are amortized as an increase to rental income over the initial
term and any fixed-rate renewal periods in the respective leases.

The
aggregate value of intangible assets related to in-place leases is primarily the difference between the property valued with existing in-place leases adjusted
to market rental rates and the property valued as-if-vacant. Factors considered by management in its analysis of the in-place lease intangibles include an estimate of carrying
costs during the expected lease-up period for each property taking into account current market conditions and costs to execute similar leases. In estimating carrying costs, management
includes real estate taxes, insurance and other operating expenses and estimates of lost rentals at market rates during the anticipated lease-up period, which is expected to average six
months. Management also estimates costs to execute similar leases including leasing commissions, legal and other related expenses.

The
value of in-place leases is amortized to expense over the initial term of the respective leases, which range primarily from one to 20 years. In no event does the
amortization period for intangible assets exceed the remaining depreciable life of the building. If a tenant terminates its lease, the unamortized portion of the in-place lease value is
charged to expense.

In
making estimates of fair values for purposes of allocating purchase price, management utilizes a number of sources, including independent appraisals that may be obtained in connection
with the acquisition or financing of the respective property and other market data. Management also considers information obtained about each property as a result of its pre-acquisition
due diligence, as well as subsequent marketing and leasing activities, in estimating the fair value of the tangible and intangible assets acquired and intangible liabilities assumed.

15

---



Table of Contents

Gramercy Capital Corp.

Notes To Condensed Consolidated Financial Statements (Continued)

(Unaudited, amounts in thousands, except share and per share data)

September 30, 2009

2. Significant Accounting Policies (Continued)

Intangible assets and acquired lease obligations consist of the following:

September 30,
2009

December 31,
2008Intangible assets:In-place leases, net of accumulated amortization of $59,514 and $22,283

$
379,461

$
428,977Above market leases, net of accumulated amortization of $19,748 and $8,865


89,676


110,489Amounts related to assets held for sale, net of accumulated amortization of $824 and $388


(3,635
)

(3,254
)Total intangible assets

$
465,502

$
536,212Intangible liabilities:Below market leases, net of accumulated amortization of $122,249 and $53,597

$
797,211

$
847,528Amounts related to assets held for sale, net of accumulated amortization of $316 and $228


(1,378
)

(1,177
)Total intangible liabilities

$
795,833

$
846,351


Deferred Costs

Deferred costs include deferred financing costs that represent commitment fees, legal and other third party costs associated with
obtaining commitments for financing which result in a closing of such financing. These costs are amortized over the terms of the respective agreements and the amortization is reflected as interest
expense. Unamortized deferred financing costs are expensed when the associated debt is refinanced or repaid before maturity. Costs incurred in seeking financing transactions that do not close are
expensed in the period in which it is determined that the financing will not close. Deferred costs also consist of fees and direct costs incurred to originate new investments and are amortized using
the effective yield method over the related term of the investment.

The
Company has deferred certain expenditures related to the leasing of certain properties. Direct costs of leasing included internally capitalized payroll costs associated with leasing
activities are deferred and amortized over the terms of the underlying leases.

Other Assets

The Company makes payments for certain expenses such as insurance and property taxes in advance of the period in which it receives the
benefit. These payments are classified as other assets and amortized over the respective period of benefit relating to the contractual arrangement. The Company also escrows deposits related to pending
acquisitions and financing arrangements, as required by a seller or lender, respectively. Costs prepaid in connection with securing financing for a property are reclassified into deferred financing
costs at the time the transaction is completed.

16

---



Table of Contents

Gramercy Capital Corp.

Notes To Condensed Consolidated Financial Statements (Continued)

(Unaudited, amounts in thousands, except share and per share data)

September 30, 2009

2. Significant Accounting Policies (Continued)

Valuation of Financial Instruments

ASC 820-10,Fair Value Measurements and Disclosures(formerly known as SFAS
No. 157 Fair Value Measurement"), which among other things requires additional disclosures about financial instruments carried at fair value. ASC 820-10 establishes a hierarchical
disclosure framework associated with the level of pricing observability utilized in measuring financial instruments at fair value. Considerable judgment is necessary to interpret market data and
develop estimated fair values. Accordingly, fair values are not necessarily indicative of the amounts the Company could realize on disposition of the financial instruments. Financial instruments with
readily available active quoted prices or for which fair value can be measured from actively quoted prices, generally will have a higher degree of pricing observability and will require a lesser
degree of judgment to be utilized in measuring fair value. Conversely, financial instruments rarely traded or not quoted will generally have less, or no, pricing observability and will require a
higher degree of judgment to be utilized in measuring fair value. Pricing observability is generally affected by such items as the type of financial instrument, whether the financial instrument is new
to the market and not yet established, the characteristics specific to the transaction and overall market conditions. The use of different market assumptions and/or estimation methodologies may have a
material effect on estimated fair value amounts.

Fair
value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date,
or an exit price. The level of pricing observability generally correlates to the degree of judgment utilized in measuring the fair value of financial instruments. The less judgment utilized in
measuring fair value financial instruments such as with readily available active quoted prices or for which fair value can be measured from actively quoted prices in active markets generally have more
pricing observability. Conversely, financial instruments rarely traded or not quoted have less observability and are measured at fair value using valuation models that require more judgment. Impacted
by a number of factors, pricing observability is generally affected by such items as the type of financial instrument, whether the financial instrument is new to the market and not yet established,
the characteristics specific to the transaction and overall market conditions.

The
three broad levels defined by the hierarchy are:



17

---



Table of Contents

Gramercy Capital Corp.

Notes To Condensed Consolidated Financial Statements (Continued)

(Unaudited, amounts in thousands, except share and per share data)

September 30, 2009

2. Significant Accounting Policies (Continued)



For
a further discussion regarding the measurement of financial instruments see Note 13, "Fair Value of Financial Instruments."

Revenue Recognition

Real Estate and CTL Investments

Rental income from leases is recognized on a straight-line basis regardless of when payments are contractually due. Certain
lease agreements also contain provisions that require tenants to reimburse the Company for real estate taxes, common area maintenance costs and the amortized cost of capital expenditures with
interest. Such amounts are included in both revenues and operating expenses when the Company is the primary obligor for these expenses and assumes the risks and rewards of a principal under these
arrangements. Under leases where the tenant pays these expenses directly, such amounts are not included in revenues or expenses.

Deferred
revenue represents rental revenue and management fees received prior to the date earned. Deferred revenue also includes rental payments received in excess of rental revenues
recognized as a result of straight-line basis accounting.

Other
income includes fees paid by tenants to terminate their leases, which are recognized when fees due are determinable, no further actions or services are required to be performed by
the Company, and
collectability is reasonably assured. In the event of early termination, the unrecoverable net book values of the assets or liabilities related to the terminated lease are recognized as depreciation
and amortization expense in the period of termination.

The
Company recognizes sales of real estate properties only upon closing. Payments received from purchasers prior to closing are recorded as deposits. Profit on real estate sold is
recognized using the full accrual method upon closing when the collectability of the sale price is reasonably assured and the Company is not obligated to perform significant activities after the sale.
Profit may be deferred in whole or part until the sale meets the requirements of profit recognition on sale of real estate.

Finance Investments

Interest income on debt investments is recognized over the life of the investment using the effective interest method and recognized on
the accrual basis. Fees received in connection with loan commitments are deferred until the loan is funded and are then recognized over the term of the loan using the effective interest method.
Anticipated exit fees, whose collection is expected, are also recognized over the term of the loan as an adjustment to yield. Fees on commitments that expire unused are recognized at expiration. Fees
received in exchange for the credit enhancement of another lender, either subordinate or senior to the Company, in the form of a guarantee are recognized over the term of that guarantee using the
straight-line method.

18

---



Table of Contents

Gramercy Capital Corp.

Notes To Condensed Consolidated Financial Statements (Continued)

(Unaudited, amounts in thousands, except share and per share data)

September 30, 2009

2. Significant Accounting Policies (Continued)

Income
recognition is generally suspended for debt investments at the earlier of the date at which payments become 90 days past due or when, in the opinion of management, a full
recovery of income and principal becomes doubtful. Income recognition is resumed when the loan becomes contractually current and performance is demonstrated to be resumed.

The
Company designates loans as non-performing at such time as: (1) the loan becomes 90 days delinquent or (2) the loan has a maturity default. All
non-performing loans are placed on non-accrual status and income is recognized only upon actual cash receipt. At September 30, 2009, the Company had four first mortgage
loans with an aggregate carrying value of $73,366, four mezzanine loans with a carrying value of $12,881, one second lien loan with a carrying value of $0, and one third lien loan with a carrying
value of $0, which were classified as non-performing loans. At December 31, 2008, the Company had three first mortgage loans with an aggregate carrying value of $164,809, one second
lien loan with a carrying value of $0,
and one third lien loan with a carrying value of $0, which were classified as non-performing loans.

The
Company classifies loans as sub-performing if they are not performing in material accordance with their terms, but they do not qualify as non-performing
loans, and the specific facts and circumstances of these loans may cause them to develop into non-performing loans should certain events occur in the normal passage of time, which the
Company considers to be 90 days from the measurement date. At September 30, 2009, four first mortgage loans with an aggregate carrying value of $160,633, one subordinate interest in a
whole loan with a carrying value of $36,770, and two mezzanine loans with a carrying value of $22,115, were classified as sub-performing. At December, 2008, five first mortgage loans with
a total carrying value of $216,597 were classified as sub-performing.

Reserve for Possible Loan Losses

Specific valuation allowances are established for possible loan losses on loans in instances where it is deemed possible that the
Company may be unable to collect all amounts of principal and interest due according to the contractual terms of the loan. The Company considers the estimated value of the collateral securing the
loan, and compares it to the carrying value of the loan. The estimated value of the collateral is determined by selecting the most appropriate valuation methodology, or methodologies, among several
generally available and accepted in the commercial real estate industry. The determination of the most appropriate valuation methodology is based on the key characteristics of the collateral type,
collateral location, quality and prospects of the sponsor, the amount and status of any senior debt, and other factors. These methodologies include the evaluation of operating cash flow from the
property during the projected holding period, and the estimated sales value of the collateral computed by applying an expected capitalization rate to the stabilized net operating income of the
specific property, less selling costs, all of which are discounted at market discount rates. Because the determination of estimated value is based upon projections of future economic events, which are
inherently subjective, amounts ultimately realized from loans and investments may differ materially from the carrying value at the balance sheet date.

If,
upon completion of the valuation, the estimated fair value of the underlying collateral securing the loan is less than the net carrying value of the loan, an allowance is created
with a corresponding

19

---



Table of Contents

Gramercy Capital Corp.

Notes To Condensed Consolidated Financial Statements (Continued)

(Unaudited, amounts in thousands, except share and per share data)

September 30, 2009

2. Significant Accounting Policies (Continued)

charge
to the provision for possible loan losses. The allowance for each loan is maintained at a level the Company believes is adequate to absorb possible losses. Realized losses are recognized as a
direct write-down of the loan investment with a corresponding charge-off to the allowance. As of September 30, 2009, the Company incurred charge-offs
totaling $112,647 relating to realized losses on 12 loans. The Company maintained a reserve for possible loan losses of $402,037 against 17 separate investments with a carrying value of $525,070 as of
September 30,
2009, and a reserve for possible loan losses of $88,992 against 13 separate investments with a carrying value of $424,177 as of December 31, 2008.

Rent Expense

Rent expense is recognized on a straight-line basis regardless of when payments are due. Accounts payable and accrued
expenses in the accompanying consolidated balance sheet as of September 30, 2009 and December 31, 2008 includes an accrual for rental expense recognized in excess of amounts due at that
time. Rent expense related to leasehold interests is included in property operating expenses, and rent expense related to office rentals is included in marketing, general and administrative expense.

Stock Based Compensation Plans

The Company has a stock-based compensation plan, described more fully in Note 14. The Company accounts for this plan using the
fair value recognition provisions.

The
Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition,
option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's plan has characteristics significantly different from
those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in the Company's opinion, the existing models do not necessarily provide
a reliable single measure of the fair value of the Company's stock options.

Prior
to amending and restating the management agreement in October 2008, which was subsequently terminated in April 2009, employees of the Manager who provided services to the Company
pursuant to the then-existing management agreement were characterized as its co-leased employees. Stock option awards granted to such persons under the Company's 2004 Equity
Incentive Plan were valued at the time of grant using the Black-Scholes option pricing model, which value was amortized over the option vesting period. The amended management agreement that was
executed in October 2008 resulted in the re-characterization of such employees of the Manager, and they were no longer classified as the Company's co-leased employees.
Consequently, the Company determined fair value of the stock options granted to such persons using a mark-to-market model, until April 2009 when the Company completed the
internalization of management through the direct acquisition of the Manager. Stock option awards were re-valued at the date of the
internalization and such value will be amortized over the remaining vesting period of the award for employees that remained with the Manager.

20

---



Table of Contents

Gramercy Capital Corp.

Notes To Condensed Consolidated Financial Statements (Continued)

(Unaudited, amounts in thousands, except share and per share data)

September 30, 2009

2. Significant Accounting Policies (Continued)

Compensation
cost for stock options, if any, is recognized ratably over the vesting period of the award. The Company's policy is to grant options with an exercise price equal to the
quoted closing market price of its stock on the business day preceding the grant date. Awards of stock or restricted stock are expensed as compensation over the benefit period.

The
fair value of each stock option granted is estimated on the date of grant for options issued to employees, and quarterly awards to non-employees, using the Black-Scholes
option pricing model with the following weighted average assumptions for grants in 2009 and 2008.

2009

2008Dividend yield


14.0%


8.8%Expected life of option


5.0 years


5.8 yearsRisk-free interest rate


1.72%


3.21%Expected stock price volatility


90.0%


35.0%


Incentive Distribution (Class B Limited Partner Interest)

Prior to the internalization, the Class B limited partner interests were entitled to receive an incentive return equal to 25% of
the amount by which funds from operations, or FFO, plus certain accounting gains (as defined in the partnership agreement of the Operating Partnership) exceed the product of the Company's weighted
average stockholders equity (as defined in the partnership agreement of the Operating Partnership) multiplied by 9.5% (divided by four to adjust for quarterly calculations). The Company recorded any
distributions on the Class B limited partner interests as an incentive distribution expense in the period when earned and when payment of such amounts became probable and reasonably estimable
in accordance with the partnership agreement. These cash distributions reduced the amount of cash available for distribution to the common unit holders in the Operating Partnership and to the
Company's common stockholders. In October 2008, the Company entered into a letter agreement with the Class B limited partners to waive the incentive distribution that would have otherwise been
earned for the period July 1, 2008 through December 31, 2008 and provide that the starting January 1, 2009, the incentive distribution could be paid, at the Company's option, in
cash or shares of common stock. In December 2008, the Company entered into a letter agreement with the Manager and SL Green, pursuant to which the Manager agreed to pay $2,750 in cash, and SL Green
transferred to the Company 1.9 million shares of the Company's common stock, in full satisfaction of all potential obligations that the holders of the Class B limited partner interests
may have had to the Operating Partnership, and the Operating Partnership may have to the holders, each in accordance with the amended operating partnership agreement of the Operating Partnership, in
respect of the recalculation of the distribution amount to the holders at the end of the 2008 calendar year. In April 2009, the Company completed the internalization of its management through the
direct acquisition of the Manager from SL Green. Accordingly, beginning in May 2009, management and incentive fees payable by the Company to the Manager ceased and the Company now owns all
Class B limited partner interests (which have been cancelled) and all of the interests in the Manager. No incentive distribution was earned for the three and nine months ended
September 30, 2009, respectively. The Company incurred approximately $0 and $5,100 with respect to incentive distributions

21

---



Table of Contents

Gramercy Capital Corp.

Notes To Condensed Consolidated Financial Statements (Continued)

(Unaudited, amounts in thousands, except share and per share data)

September 30, 2009

2. Significant Accounting Policies (Continued)

on
such Class B limited partner interests for the three and nine months ended September 30, 2008, respectively.

Derivative Instruments

In the normal course of business, the Company uses a variety of derivative instruments to manage, or hedge, interest rate risk. The
Company requires that hedging derivative instruments be effective in reducing the interest rate risk exposure that they are designated to hedge. This effectiveness is essential for qualifying for
hedge accounting. Instruments that meet these hedging criteria are formally designated as hedges at the inception of the derivative contract. The Company uses a variety of commonly used derivative
products that are considered "plain vanilla"
derivatives. These derivatives typically include interest rate swaps, caps, collars and floors. The Company expressly prohibits the use of unconventional derivative instruments and using derivative
instruments for trading or speculative purposes. Further, the Company has a policy of only entering into contracts with major financial institutions based upon their credit ratings and other factors.

To
determine the fair value of derivative instruments, the Company uses a variety of methods and assumptions that are based on market conditions and risks existing at each balance sheet
date. For the majority of financial instruments including most derivatives, long-term investments and long-term debt, standard market conventions and techniques such as
discounted cash flow analysis, option-pricing models, replacement cost, and termination cost are used to determine fair value. All methods of assessing fair value result in a general approximation of
value, and such value may never actually be realized.

In
the normal course of business, the Company is exposed to the effect of interest rate changes and limits these risks by following established risk management policies and procedures
including the use of derivatives. To address exposure to interest rates, the Company uses derivatives primarily to hedge the cash flow variability caused by interest rate fluctuations of its
liabilities. Each of the Company's CDOs maintain a minimum amount of allowable unhedged interest rate risk. The 2005 CDO permits 20% of the net outstanding principal balance to be unhedged and the
2006 CDO and the 2007 CDO permit 5% of the net outstanding principal balance to be unhedged.

The
Company recognizes all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If a derivative is a hedge,
depending on the nature of the hedge, changes in the fair value of the derivative will either be offset against the change in fair value of the hedged asset, liability, or firm commitment through
earnings, or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in
earnings. Derivative accounting may increase or decrease reported net income and stockholders' equity prospectively, depending on future levels of LIBOR, swap spreads and other variables affecting the
fair values of derivative instruments and hedged items, but will have no effect on cash flows, provided the contract is carried through to full term.

22

---



Table of Contents

Gramercy Capital Corp.

Notes To Condensed Consolidated Financial Statements (Continued)

(Unaudited, amounts in thousands, except share and per share data)

September 30, 2009

2. Significant Accounting Policies (Continued)

All
hedges held by the Company are deemed effective based upon the hedging objectives established by the Company's corporate policy governing interest rate risk management. The effect of
the Company's derivative instruments on its financial statements is discussed more fully in Note 17.

Income Taxes

The Company elected to be taxed as a REIT, under Sections 856 through 860 of the Internal Revenue Code, beginning with its
taxable year ended December 31, 2004. To qualify as a REIT, the Company must meet certain organizational and operational requirements, including a requirement to distribute at least 90% of its
ordinary taxable income, if any to stockholders. As a REIT, the Company generally will not be subject to U.S. federal income tax on taxable income that the Company distributes to its stockholders. If
the Company fails to qualify as a REIT in any taxable year, it will then be subject to U.S. federal income taxes on taxable income at regular corporate rates and will not be permitted to qualify for
treatment as a REIT for U.S. federal income tax purposes for four years following the year during which qualification is lost unless the Internal Revenue Service grants the Company relief under
certain statutory provisions. Such an event could materially adversely affect the Company's net income and net cash available for distributions to stockholders. However, the Company believes that it
will be organized and operate in such a manner as to qualify for treatment as a REIT and the Company intends to operate in the foreseeable future in such a manner so that it will qualify as a REIT for
U.S. federal income tax purposes. The Company is subject to certain state and local taxes. The Company's taxable REIT subsidiaries individually referred to as a TRS, are subject to U.S. federal, state
and local taxes.

For
the three and nine months ended September 30, 2009, the Company recorded $88 and $2,489 of income tax expense, respectively. For the three and nine months ended
September 30, 2008, the Company recorded $36 and $47 of income tax expense, respectively. Included in tax expense for the nine months ended September 30, 2009 is $2,100 of state income
taxes on the gain of extinguishment of debt of $107,229. Under federal tax law, the Company is allowed to defer this gain until 2014; however not all states follow this federal rule.

Earnings Per Share

The Company presents both basic and diluted earnings per share, or EPS. Basic EPS excludes dilution and is computed by dividing net
income available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted EPS reflects the potential dilution that could occur if securities or
other contracts to issue common stock were exercised or converted into common stock, as long as their inclusion would not be anti-dilutive.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the
amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

23

---



Table of Contents

Gramercy Capital Corp.

Notes To Condensed Consolidated Financial Statements (Continued)

(Unaudited, amounts in thousands, except share and per share data)

September 30, 2009

2. Significant Accounting Policies (Continued)

Concentrations of Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash investments, debt
investments, derivative instruments, and accounts receivable. The Company places its cash investments in excess of insured amounts with high quality financial institutions. The Company performs
ongoing analysis of credit risk concentrations in the Company's loan and other lending investment portfolio by evaluating exposure to various markets, underlying property types, investment structure,
term, sponsors, tenants and other credit metrics.

Four
investments accounted for approximately 20.7% of the total carrying value of the Company's debt investments as of September 30, 2009 compared to five investments which
accounted for more than 20% of the total carrying value of the Company's debt investments as of December 31, 2008. Six investments accounted for approximately 17.8% and 17.0% of the revenue
earned on the Company's loan and other lending investments for the three and nine months ended September 30, 2009 compared to six investments, which accounted for approximately 16.3% and 15.9%
of the revenue earned on the Company's loan and other lending investments for the three and nine months ended September 30, 2008, respectively. The largest sponsor accounted for approximately
6.1% and 5.7% of the revenue earned on the Company's loan and other lending investments for the three and nine months ended September 30, 2009, respectively, compared to approximately 5.5% and
4.7% of the revenue earned on the Company's loan and other lending investments for the three and nine months ended September 30, 2008, respectively.

Additionally,
two tenants, Bank of America and Wachovia Bank, accounted for approximately 39.4% and 15.3% of the Company's rental revenue for the three months ended September 30,
2009, respectively, and approximately 41.6% and 15.5% of the Company's rental revenue for the nine months ended September 30, 2009.

Recently Issued Accounting Pronouncements

In January 2009, the FASB issued clarification guidance on impairment of securities by removing the requirement to place exclusive
reliance on market participants' assumptions about future cash flows when evaluating an asset for other-than-temporary impairment. The standard now requires that assumptions
about future cash flows consider reasonable management judgment about the probability that the holder of an asset will be unable to collect all amounts due. The new guidance is effective for interim
and annual reporting periods ending after December 15, 2008. The Company has adopted the new guidance and it did not have a material impact on the Company's consolidated financial statements.

In
April 2009, the FASB issued guidance that requires fair value disclosures to be included for interim reporting periods. The Company has adopted this new accounting standard effective
April 1, 2009. The Company has made the appropriate disclosures in the September 30, 2009 financial statements.

In
April 2009, the FASB issued guidance on other-than-temporary-impairments that amends the impairment guidance relating to certain debt securities and will
require a company to assess the

24

---



Table of Contents

Gramercy Capital Corp.

Notes To Condensed Consolidated Financial Statements (Continued)

(Unaudited, amounts in thousands, except share and per share data)

September 30, 2009

2. Significant Accounting Policies (Continued)

likelihood
of selling the security prior to recovering its cost basis. Additionally, when a company meets the criteria for impairment, the impairment charges related to credit losses would be
recognized in earnings, while non-credit losses would be reflected in other comprehensive income. The Company adopted this standard effective April 1, 2009. Adoption of the new
guidance did not have a material impact on the Company's consolidated financial statements.

In
April 2009, the FASB issued clarifying guidance on determining when the trading volume and activity for an asset or liability has significantly decreased, which may indicate an
inactive market, and on measuring the fair value of an asset or liability in inactive markets. The Company adopted this new accounting standard effective April 1, 2009. Adoption of the new
guidance did not have a material impact on the Company's consolidated financial statements.

In
April 2009, the FASB issued guidance that requires that an acquirer to recognize at fair value, at the acquisition date, an asset acquired or a liability assumed in a business
combination that arises from a contingency if the acquisition-date fair value of the asset or liability can be determined during the measurement period. The Company adopted this new
accounting standard on January 1,
2009. Adoption of the new guidance did not have a material impact on the consolidated financial statements.

In
May 2009, the FASB issued new guidance that incorporates into authoritative accounting literature certain guidance that already existed within generally accepted auditing standards
relative to the reporting of subsequent events, with the requirements concerning recognition and disclosure of subsequent events remaining essentially unchanged. This guidance addresses events which
occur after the balance sheet date but before the issuance of financial statements. Under the new guidance, as under previous practice, an entity must record the effects of subsequent events that
provide evidence about conditions that existed at the balance sheet date and must disclose but not record the effects of subsequent events which provide evidence about conditions that did not exist at
the balance sheet date. This standard added an additional required disclosure relative to the date through which subsequent events have been evaluated and whether that is the date on which the
financial statements were issued. The Company adopted this standard effective beginning April 1, 2009. The additional disclosures required by this standard are included in Note 1.

In
June 2009, the FASB issued guidance amending the guidance on transfers of financial assets to, among other things, eliminate the qualifying special-purpose entity concept, include a
new unit of account definition that must be met for transfers of portions of financial assets to be eligible for sale accounting, clarify and change the derecognition criteria for a transfer to be
accounted for as a sale, and require significant additional disclosure. This standard is effective January 1, 2010. The Company is currently evaluating the impact of this standard.

In
June 2009, the FASB issued new guidance which revised the consolidation guidance for variable-interest entities. The modifications include the elimination of the exemption for
qualifying special purpose entities, a new approach for determining who should consolidate a variable-interest entity, and changes to when it is necessary to reassess who should consolidate a
variable-interest entity. This standard is effective January 1, 2010. The Company is currently evaluating the impact of this standard.

25

---



Table of Contents

Gramercy Capital Corp.

Notes To Condensed Consolidated Financial Statements (Continued)

(Unaudited, amounts in thousands, except share and per share data)

September 30, 2009

2. Significant Accounting Policies (Continued)

In
June 2009, the FASB issued guidance and approved the FASB Accounting Standards Codification (Codification) as the single source of authoritative nongovernmental
US GAAP. The Codification does not change current US GAAP, but is intended to simplify user access to all authoritative US GAAP by providing all the authoritative literature
related to a particular topic in one place. All existing accounting standard documents will be superseded and all other accounting literature not included in the Codification will be considered
non-authoritative. Codification is effective July 1, 2009 and requires future references to authoritative US GAAP to coincide with the appropriate section of the
Codification. Accordingly, this standard will not have an impact the Company's consolidated results of operations or financial condition.

3. Loans and Other Lending Investments

The aggregate carrying values, allocated by product type and weighted-average coupons, of the Company's loan and other lending investments and CMBS investments as of September 30,
2009 and December 31, 2008, including loans held-for-sale, were as follows:

Carrying Value(1)

Allocation by
Investment Type

Fixed Rate:
Average Yield(2)

Floating Rate:
Average Spread over
LIBOR(3)2009

2008

2009

2008

2009

2008

2009

2008Whole loans, floating rate

$
904,774

$
1,222,991


60.5
%

55.3
%







403 bps


418 bpsWhole loans, fixed rate


122,839


189,946


8.2
%

8.6
%

6.89
%

7.17
%




Subordinate interests in whole loans, floating rate


77,761


80,608


5.2
%

3.6
%







259 bps


564 bpsSubordinate interests in whole loans, fixed rate


44,900


63,179


3.0
%

2.9
%

8.85
%

9.22
%




Mezzanine loans, floating rate


218,825


396,190


14.6
%

17.9
%







597 bps


654 bpsMezzanine loans, fixed rate


86,037


248,558


5.8
%

11.2
%

7.99
%

10.21
%




Preferred equity, floating rate


28,198





1.9
%










1,064 bps


Preferred equity, fixed rate


12,247


12,001


0.8
%

0.5
%

7.20
%

10.22
%




Subtotal/weighted average


1,495,581


2,213,473


100.0
%

100.0
%

7.59
%

8.96
%

444 bps


480 bpsCMBS, floating rate


71,078


70,893


7.2
%

8.1
%







315 bps


945 bpsCMBS, fixed rate


912,289


799,080


92.8
%

91.9
%

7.75
%

6.26
%




Subtotal/weighted average


983,367


869,973


100.0
%

100.0
%

7.75
%

6.26
%

315 bps


945 bpsTotal

$
2,478,948

$
3,083,446


100.0
%

100.0
%

7.71
%

7.32
%

437 bps


498 bps


(1)Loans
and other lending investments and CMBS investments are presented after scheduled amortization payments and prepayments, and are net of unamortized
fees, discounts, unfunded commitments, reserves for possible loan losses, and other adjustments.(2)Weighted
average effective yield and weighted average effective spread calculations include loans classified as non-performing. The schedule
includes non-performing loans classified as whole loansfloating rate of approximately $73,366 with an effective spread of 638 basis points and non-performing loans
classified as mezzanine loansfloating rate of approximately $12,881 with an effective spread of 858 basis points.(3)Spreads
over an index other than 30 day-LIBOR have been adjusted to a LIBOR based equivalent. In some cases, LIBOR is floored, giving
rise to higher current effective spreads.


26

---



Table of Contents

Gramercy Capital Corp.

Notes To Condensed Consolidated Financial Statements (Continued)

(Unaudited, amounts in thousands, except share and per share data)

September 30, 2009

3. Loans and Other Lending Investments (Continued)

As of September 30, 2009, the Company's loans and other lending investments, excluding CMBS investments, had the following maturity
characteristics:

Year of Maturity

Number of
Investments
Maturing

Current
Carrying Value
(In thousands)

% of
Total2009 (October 1 to December 31)(1)


11

$
254,556


17.0
%2010


21


564,433


37.8
%2011


18


440,997


29.5
%2012


3


88,532


5.9
%2013


0





0.0
%Thereafter


11


147,063


9.8
%Total


64

$
1,495,581


100.0
%Weighted average maturity(2)





1.5 years


(1)Of
the loans maturing in 2009, eight investments with a carrying value of $173,997 have extension options, which may be subject to performance criteria.(2)The
calculation of weighted-average maturity is based upon the remaining initial term of the investment and does not include option or extension periods, or
the ability to prepay the investment after a negotiated lock-out period, which may be available to the borrower.


For
the three and nine months ended September 30, 2009 and 2008, the Company's investment income from loans and other lending investments and CMBS investments, including loans
held-for-sale, was generated by the following investment types:

Three months ended
September 30, 2009

Three months ended
September 30, 2008Investment Type

Investment
Income

% of
Total

Investment
Income

% of
TotalWhole loans

$
15,162


35.9
%
$
27,416


45.3
%Subordinate interests in whole loans


1,342


3.2
%

2,154


3.6
%Mezzanine loans


7,229


17.1
%

16,529


27.3
%Preferred equity


591


1.4
%

316


0.5
%CMBS


17,898


42.4
%

14,137


23.3
%Total

$
42,222


100.0
%
$
60,552


100.0
%


27

---



Table of Contents

Gramercy Capital Corp.

Notes To Condensed Consolidated Financial Statements (Continued)

(Unaudited, amounts in thousands, except share and per share data)

September 30, 2009

3. Loans and Other Lending Investments (Continued)



Nine months ended
September 30, 2009

Nine months ended
September 30, 2008Investment Type

Investment
Income

% of
Total

Investment
Income

% of
TotalWhole loans

$
57,880


41.3
%
$
98,699


50.0
%Subordinate interests in whole loans


3,653


2.6
%

7,549


3.8
%Mezzanine loans


31,042


22.2
%

49,445


25.0
%Preferred equity


1,208


0.9
%

943


0.4
%CMBS


46,231


33.0
%

41,246


20.8
%Total

$
140,014


100.0
%
$
197,882


100.0
%


At
September 30, 2009 and December 31, 2008, the Company's loans and other lending investments, excluding CMBS investments, had the following geographic diversification:

September 30, 2009

December 31, 2008Region

Carrying
Value

% of
Total

Carrying
Value

% of
TotalNortheast

$
685,418


45.8
%
$
1,023,718


46.2
%West


381,222


25.5
%

626,180


28.3
%South


142,872


9.6
%

225,674


10.2
%Mid-Atlantic


127,734


8.5
%

121,515


5.5
%Southwest


83,883


5.6
%

107,735


4.9
%Various(1)


52,232


3.5
%

86,293


3.9
%Midwest


22,220


1.5
%

22,358


1.0
%Total

$
1,495,581


100.0
%
$
2,213,473


100.0
%


(1)Includes
interest-only strips and a defeased loan.


28

---



Table of Contents

Gramercy Capital Corp.

Notes To Condensed Consolidated Financial Statements (Continued)

(Unaudited, amounts in thousands, except share and per share data)

September 30, 2009

3. Loans and Other Lending Investments (Continued)

At
September 30, 2009 and December 31, 2008, the Company's loans and other lending investments, excluding CMBS investments, by property type are as follows:

September 30, 2009

December 31, 2008Property Type

Carrying
Value

% of
Total

Carrying
Value

% of
TotalOffice

$
684,984


45.8
%
$
874,682


39.5
%Hotel


231,772


15.5
%

345,615


15.6
%Land-commercial


178,175


11.9
%

209,572


9.5
%Multifamily


112,252


7.5
%

272,950


12.4
%Retail


106,963


7.2
%

218,763


9.9
%Condo


59,671


4.0
%

91,418


4.1
%Industrial


50,743


3.4
%

47,229


2.1
%Land-residential(1)


34,407


2.3
%

65,973


3.0
%Mixed-use


26,952


1.8
%

78,107


3.5
%Other(2)


9,662


0.6
%

9,164


0.4
%Total

$
1,495,581


100.0
%
$
2,213,473


100.0
%


(1)All
of the loans secured by residential land are secured by first mortgages or first deeds of trust, except for two loans secured by second and third
mortgage liens to the same sponsor with an aggregate carrying value of $0. The second and third lien loans are secured by land, which is intended primarily for residential development. These loans
were classified as non-performing as of September 30, 2009 and December 31, 2008.(2)Includes
interest-only strips and a defeased loan, and a loan to one sponsor secured by the equity interests in seven properties.


The
Company recorded provisions for loan losses of $205,508 and $425,692 and $18,875 and $50,089 for the three and nine months ended September 30, 2009 and September 30,
2008, respectively. These provisions represent increases in loan loss reserves based on management's estimates considering delinquencies, loss experience and collateral quality by individual asset or
category of asset.

For
the nine months ended September 30, 2009, the Company incurred charge-offs of $112,647 related to realized losses on 12 loan investments. During the year ended
December 31, 2008, the Company incurred charge-offs totaling $17,519 related to two defaulted loans the Company foreclosed upon which had a carrying value totaling $31,760 and three
additional loans, two of which were sold at a loss and the other was a negotiated payoff below par.

29

---



Table of Contents

Gramercy Capital Corp.

Notes To Condensed Consolidated Financial Statements (Continued)

(Unaudited, amounts in thousands, except share and per share data)

September 30, 2009

3. Loans and Other Lending Investments (Continued)

Changes
in the reserve for possible loan losses were as follows:

Reserve for possible loan losses, December 31, 2007

$
8,658Additional provision for loan losses


97,853Charge-offs


(17,519
)Reserve for possible loan losses, December 31, 2008


88,992Additional provision for loan losses


425,692Charge-offs


(112,647
)Reserve for possible loan losses, September 30, 2009

$
402,037


The
following is a summary of the Company's CMBS investments at September 30, 2009:

Description

Number of
Securities

Face Value

Book Value

Gross
Unrealized
Gain

Gross
Unrealized
Loss

Fair
ValueHeld to maturity:Floating rate CMBS


8

$
73,664

$
71,078

$


$
(34,143
)
$
36,935Fixed rate CMBS


88


1,086,690


912,289


36,715


(342,265
)

606,739Total


96

$
1,160,354

$
983,367

$
36,715

$
(376,408
)
$
643,674


The
following is a summary of the Company's CMBS investments at December 31, 2008:

Description

Number of
Securities

Face Value

Book Value

Gross
Unrealized
Gain

Gross
Unrealized
Loss

Fair
ValueHeld to maturity:Floating rate CMBS


8

$
73,664

$
70,894

$


$
(33,596
)
$
37,298Fixed rate CMBS


66


835,578


799,079





(536,392
)

262,687Total


74

$
909,242

$
869,973

$


$
(569,988
)
$
299,985


As
of September 30, 2009, the Company's CMBS investments had the following maturity characteristics:

Year of Maturity

Number of
Investments
Maturing

Current
Carrying
Value

Current
Market Value

% of Total
Carrying
Value

% of Total
Market
ValueUnder one year


1

$
13,604

$
6,300


1.4
%

1.0
%One to five years


6


78,456


52,377


8.0
%

8.1
%Five to ten years


87


885,634


583,559


90.0
%

90.7
%Thereafter


2


5,673


1,438


0.6
%

0.2
%Total


96

$
983,367

$
643,674


100.0
%

100.0
%


30

---



Table of Contents

Gramercy Capital Corp.

Notes To Condensed Consolidated Financial Statements (Continued)

(Unaudited, amounts in thousands, except share and per share data)

September 30, 2009

3. Loans and Other Lending Investments (Continued)

The
following is a summary of the underlying credit ratings of the Company's CMBS investments at September 30, 2009 and December 31, 2008 (for split-rated securities, the
higher rating was used):

September 30, 2009

December 31, 2008Book Value

Percentage

Book Value

PercentageAAA

$
258,645


26.3
%
$
799,440


91.90
%AA+


13,604


1.4
%




0.00
%AA


89,699


9.1
%

26,689


3.40
%AA-


30,620


3.1
%




0.00
%A+


114,678


11.7
%




0.00
%A


267,997


27.3
%




0.00
%A-


29,425


3.0
%




0.00
%BBB


74,135


7.4
%




0.00
%BBB-


43,408


4.4
%

13,229


1.50
%BB+





0.0
%

7,442


0.90
%BB


20,632


2.1
%

4,901


0.60
%B+





0.0
%

7,659


0.50
%B


8,100


0.8
%

4,309


0.50
%B-


6,114


0.6
%




0.00
%CCC+


12,477


1.3
%




0.00
%CCC


3,600


0.4
%

5,241


0.60
%CCC-


4,560


0.5
%




0.00
%Not rated


5,673


0.6
%

1,063


0.10
%Total

$
983,367


100.00
%
$
869,973


100.00
%


The
Company evaluates CMBS investments to determine if there has been an other-than-temporary impairment. The Company's unrealized losses (the carrying value is
in excess of the market value) are primarily the result of market factors other than credit impairment which is generally indicated by significant change in estimated cash flows from the cash flows
previously estimated based on actual prepayments and credit loss experience. Unrealized losses can be caused by changes in interest rates, changes in credit spreads, realized losses in the underlying
collateral, or general market conditions. The Company evaluates CMBS investments on a quarterly basis and has determined that there has been an adverse change in expected cash flows related to credit
losses for one CMBS investment. Therefore, the Company recognized an other-than-temporary impairment of $1,360 during the three months ended September 30, 2009 that was
recorded in impairment on real estate loans and CMBS in the Company's Consolidated Statement of Operations. The Company's assessment of cash flows, which is supplemented by third-party research
reports and dialogue with market participants, combined with the Company's ability and intent to hold its CMBS investments to maturity, at which point the Company expects to recover book value, is the
basis for its conclusion the remainder of these investments are not other-than-temporarily impaired, despite the difference between the carrying value the and fair value. The
Company has considered the rating downgrades in its evaluation and apart from the one bond noted above, it believes that their investment is recoverable at

31

---



Table of Contents

Gramercy Capital Corp.

Notes To Condensed Consolidated Financial Statements (Continued)

(Unaudited, amounts in thousands, except share and per share data)

September 30, 2009

3. Loans and Other Lending Investments (Continued)

September 30,
2009. The Company attributes the current difference between carrying value and market value to current market conditions including a negative bias against structured financial
products and commercial real estate. The Company has concluded that it does not intend to sell these securities and it is not more likely than not it will be required to sell the securities before
recovering the amortized costs basis.

In
connection with a preferred equity investment, which was repaid in October 2006, the Company has guaranteed a portion of the outstanding principal balance of the first mortgage loan
that is a financial obligation of the entity in which the Company has invested in the event of a borrower default under such loan. The loan matures in 2032. This guarantee is considered to be an
off-balance-sheet arrangement and will survive until the repayment of the first mortgage loan. As compensation, the Company received a credit enhancement fee of $125 from the borrower,
which is recognized as the fair value of the guarantee and has been recorded on its consolidated Balance Sheet as a liability. The liability is amortized over the life of the guarantee using the
straight-line method and corresponding fee income will be recorded. The Company's maximum exposure under this guarantee is approximately $1,392 and $1,406 as of September 30, 2009
and December 31, 2008, respectively. Under the terms of the guarantee, the investment sponsor is required to reimburse the Company for the entire amount paid under the guarantee until the
guarantee expires.

4. Acquisitions

American Financial Realty Trust

On April 1, 2008, the Company completed the acquisition of American Financial Realty Trust (NYSE: AFR), or American Financial,
in a transaction with a total value of approximately $3.3 billion, including the assumption of approximately $1.3 billion of American Financial's secured debt. The following table
represents the cost of the acquired entity, and the consideration paid:

Cash consideration ($5.50 per share)

$
710,910Common stock consideration(1)


378,672Additional cash consideration equal to a portion of Gramercy's special common stock dividend declared(2)


31,271Purchase of minority interest in American Financial


14,497Merger costs


150,396Total consideration


1,285,746Repayment of American Financial's convertible notes and credit facilities at closing


707,650Assumption of American Financial's liabilities


1,316,004Total purchase price

$
3,309,400


(1)Reflects
the outstanding common shares of American Financial multiplied by (a) the fixed exchange ratio of 0.12096 shares of the Company's common
stock for each American Financial common share and (b) the closing price of the Company's common stock on the


32

---



Table of Contents

Gramercy Capital Corp.

Notes To Condensed Consolidated Financial Statements (Continued)

(Unaudited, amounts in thousands, except share and per share data)

September 30, 2009

4. Acquisitions (Continued)

New
York Stock Exchange on November 2, 2007 of $24.22 per share, the last trading day before the merger was publicly announced. (2)Represents
the outstanding common shares of American Financial multiplied by (a) the fixed exchange ratio of 0.12096 shares of the Company's common
stock for each American Financial common share and (b) $2.00, which represents the special dividend per share of the Company's common stock declared on November 28, 2007 and paid on
January 15, 2008 to stockholders of record on December 31, 2007.


GKK Manager

On April 24, 2009, in connection with the Company's internalization of the Manager, the Company and the Operating Partnership
entered into a securities transfer agreement with SL Green OP, GKK Manager Member Corp. ("Manager Corp") and SL Green, pursuant to which (i) SL Green OP and Manager Corp agreed to transfer to
the Operating Partnership, membership interests in the Manager and (ii) SL Green OP agreed to transfer to the Operating Partnership its Class B limited partner interests in the Operating
Partnership, in exchange for certain de minimis cash consideration. The securities transfer agreement contains standard representations, warranties, covenants and indemnities.

Pro Forma

The following table summarizes, on an unaudited pro forma basis, the Company's combined results of operations for the nine months ended
September 30, 2008 and 2009 as though the acquisitions of American Financial and GKK Manager were completed on January 1, 2008. The supplemental pro forma operating data is not
necessarily indicative of what the actual results of operations would have been assuming the transaction had been completed as set forth above, nor do they purport to represent the Company's results
of operations for future periods. In addition, the following supplement pro forma operating data does not present the sale of assets through September 30, 2009. The Company accounted for the
acquisition of assets utilizing the purchase method of accounting.

2009

2008Pro forma revenues

$
476,417

$
535,676Pro forma net income (loss) available to common stockholders

$
(427,926
)
$
61,628Pro forma earnings per common sharebasis

$
(8.59
)
$
1.20Pro forma earnings per common sharediluted

$
(8.59
)
$
1.20Pro forma common sharesbasis


49,844


51,226Pro forma common sharesdiluted


49,844


51,428


33

---



Table of Contents

Gramercy Capital Corp.

Notes To Condensed Consolidated Financial Statements (Continued)

(Unaudited, amounts in thousands, except share and per share data)

September 30, 2009

5. Dispositions and Assets Held for Sale

During the three and nine months ended September 30, 2009, the Company sold or disposed of 16 and 51 properties, for net sales proceeds of $68,368 and $112,960, respectively.
During the three and nine months ended September 30, 2008, the Company sold 16 and 36 properties for net sales proceeds of $19,308 and $63,877, respectively. The sales transactions resulted in
gains totaling $3,021 and $5,189 for the three and nine months ended September 30, 2009, respectively. The sales transactions resulted in no gains or losses for the three and nine months ended
September 30, 2008.

In
January 2009, the Company sold to a third party its 49.75% TIC interest in 55 Corporate Drive, an office complex located in Bridgewater, New Jersey, at a gain of $215 for the nine
months ended September 30, 2009. As part of the transaction, the purchaser assumed the outstanding mortgage debt on the property.

The
Company classified 63 and 104 properties as held for sale as of September 30, 2009 and December 31, 2008, respectively. The following table summarizes information for
these properties:

September 30,
2009

December 31,
2008Assets held for sale:Real estate investments, at cost:Land

$
14,266

$
34,560Buildings and improvements


78,778


140,685Total real estate investments, at cost


93,044


175,245Less accumulated depreciation


(1,590
)

(4,629
)Real estate investments held for sale, net


91,454


170,616Accrued interest and receivables


1,885


10,656Loans and other lending investments, net


43,878


Acquired lease assets, net of accumulated amortization


3,635


Deferred costs


422


59Other assets


5,622


11,449Total assets held for sale:

$
146,896

$
192,780Liabilities related to assets held for sale:Mortgages payable

$
51,766

$
104,262Accrued expenses


5,689


4,628Deferred revenue


2,153


1,405Below market lease liabilities, net of accumulated amortization


1,378


Other liabilities


15


248Total liabilities related to assets held for sale


61,001


110,543Net assets held for sale

$
85,895

$
82,237


34

---



Table of Contents

Gramercy Capital Corp.

Notes To Condensed Consolidated Financial Statements (Continued)

(Unaudited, amounts in thousands, except share and per share data)

September 30, 2009

5. Dispositions and Assets Held for Sale (Continued)

The
following operating results of the assets held for sale as of September 30, 2009 and 2008, and the assets sold, are included in discontinued operations for all periods
presented:

Three months
ended
September 30,

Nine months
ended
September 30,2009

2008

2009

2008Operating results:Revenues

$
6,936

$
11,820

$
19,716

$
26,322Operating expenses


(8,496
)

(6,813
)

(36,872
)

(14,632
)Interest expense


(687
)

(1,912
)

(2,038
)

(5,829
)Depreciation and amortization


(191
)

(1,585
)

(1,233
)

(3,863
)Equity in net income from unconsolidated joint venture





(336
)

(474
)

(1,037
)Net income (loss) from operations


(2,438
)

1,174


(20,901
)

961Net gains from disposals


3,021





11,506


Net income (loss) from discontinued operations

$
583

$
1,174

$
(9,395
)
$
961


Discontinued
operations have not been segregated in the consolidated statements of cash flows.

6. Investments in Unconsolidated Joint Ventures

200 Franklin Square Drive, Somerset, New Jersey

The Company owns a 25% interest in an equity owner and a fee interest in 200 Franklin Square Drive, a 200,000 square foot building
located in Somerset, New Jersey which is 100% net leased to Philips Holdings, USA Inc, a wholly-owned subsidiary of Royal Phillips Electronics through December 2021. As of September 30, 2009
and December 31, 2008, the investment had a carrying value of $1,063 and $2,142, respectively. The Company recorded its pro rata share of net income of the joint venture of $27 and $86 for the
three and nine months ended September 30, 2009, respectively, and $26 and $62 for the three and nine months ended September 30, 2008, respectively.

101 S. Marengo Avenue, Pasadena, California

In November 2005, the Company closed on the purchase of a 50% interest in an office building in Pasadena, CA. The Company also acquired
an interest in certain related assets as part of the transaction. The 345,000 square foot office property, which was net leased to Bank of America through September 2015, assuming the exercise of
options, and related collateral were acquired for $52,000 plus closing costs, using a non-recourse, $50,000, ten-year fixed-rate first mortgage loan. The Company
sold its 50% interest in April 2009 for a gain of $6,317. The Company recorded its pro rata share of net loss of the joint venture of $0 and $343 for the three and nine months ended
September 30, 2009, respectively, and $336 and $1,037 for the three and nine months ended September 30, 2008, respectively, within discontinued operations.

35

---



Table of Contents

Gramercy Capital Corp.

Notes To Condensed Consolidated Financial Statements (Continued)

(Unaudited, amounts in thousands, except share and per share data)

September 30, 2009

6. Investments in Unconsolidated Joint Ventures (Continued)

2 Herald Square, New York, New York

In April 2007, the Company purchased for $103,200 a 45% Tenant-In-Common, or TIC, interest to acquire the fee
interest in a parcel of land located at 2 Herald Square, located along 34th Street in New York, New York. The acquisition was financed with a $86,063 ten-year fixed rate mortgage
loan. The property is subject to a long-term ground lease with an unaffiliated third party for a term of 70 years. The remaining TIC interest is owned by a wholly-owned subsidiary
of SL Green. The TIC
interests are pari-passu. As of September 30, 2009 and December 31, 2008, the investment had a carrying value of $30,163 and $26,118, respectively. The Company recorded its
pro rata share of net income of the joint venture of $1,237 and $3,750 for the three and nine months ended September 30, 2009, respectively, and $1,237 and $3,991 for the three and nine months
ended September 30, 2008, respectively.

885 Third Avenue, New York, New York

In July 2007, the Company purchased for $144,240 an investment in a 45% TIC interest to acquire a 79% fee interest and 21% leasehold
interest in the fee position in a parcel of land located at 885 Third Avenue, on which is situated The Lipstick Building. The transaction was financed with a $120,443 ten-year
fixed-rate mortgage loan. The property is subject to a 70-year leasehold ground lease with an unaffiliated third party. The remaining TIC interest is owned by a wholly-owned
subsidiary of SL Green. The TIC interests are pari-passu. As of September 30, 2009 and December 31, 2008, the investment had a carrying value of $43,558 and $37,070
respectively. The Company recorded its pro rata share of net income of the joint venture of $1,478 and $4,494 for the three and nine months ended September 30, 2009, respectively, and $1,475
and $4,815 for the three and nine months ended September 30, 2008, respectively.

Citizens Portfolio

The Company, through its acquisition of American Financial on April 1, 2008, obtained an interest in a joint venture with UBS.
The joint venture, as of September 30, 2009, owns and manages 54 bank branches totaling approximately 251,000 square feet. These branches are fully occupied, on a triple-net basis,
by Citizens Bank, N.A. and Charter One Bank, N.A., two bank subsidiaries of Citizens Financial. The investment had a carrying value of $7,970 and $10,495 at September 30, 2009 and
December 31, 2008, respectively. The Company recorded its pro rata share of net loss of the joint venture of $659 and $1,975 for the three and nine months ended September 30, 2009,
respectively, and $674 and $1,402 for the three and nine months ended September 30, 2008, respectively.

Whiteface, Lake Placid, New York

In April 2008, the Company acquired via a deed-in-lieu of foreclosure, a 40% interest in the Whiteface Lodge, a
hotel and condominium located in Lake Placid, New York. As of September 30, 2009 and December 31, 2008, the investment had a carrying value of $24,049 and $22,161, respectively. The
Company recorded its pro rata share of net income of the joint venture of $314 and $229 for the

36

---



Table of Contents

Gramercy Capital Corp.

Notes To Condensed Consolidated Financial Statements (Continued)

(Unaudited, amounts in thousands, except share and per share data)

September 30, 2009

6. Investments in Unconsolidated Joint Ventures (Continued)

three
and nine months ended September 30, 2009, respectively, and net loss of $312 and $312 for the three and nine months ended September 30, 2008, respectively.

7. Collateralized Debt Obligations

During 2005, the Company issued approximately $1,000,000 of CDO bonds through two indirect subsidiaries, Gramercy Real Estate CDO 2005-1 Ltd., or the 2005 Issuer, and
Gramercy Real Estate CDO 2005-1 LLC, or the 2005 Co-Issuer. At issuance the CDO consisted of $810,500 of investment grade notes, $84,500 of non-investment
grade notes, which were co-issued by the 2005 Issuer and the 2005 Co-Issuer, and $105,000 of preferred shares, which were issued by the 2005 Issuer. The investment grade notes
were issued with floating rate coupons with a combined weighted average rate of three-month LIBOR plus 0.49%. The Company incurred approximately $11,957 of costs related to Gramercy Real Estate CDO
2005-1, which are amortized on a level- yield basis over the average life of the CDO.

During
2006 the Company issued approximately $1,000,000 of CDO bonds through two newly-formed indirect subsidiaries, Gramercy Real Estate CDO 2006-1 Ltd., or the 2006
Issuer, and
Gramercy Real Estate CDO 2006-1 LLC, or the 2006 Co-Issuer. At issuance the CDO consisted of $903,750 of investment grade notes, $38,750 of non-investment
grade notes, which were co-issued by the 2006 Issuer and the 2006 Co-Issuer, and $57,500 of preferred shares, which were issued by the 2006 Issuer. The investment grade notes
were issued with floating rate coupons with a combined weighted average rate of three-month LIBOR plus 0.37%. The Company incurred approximately $11,364 of costs related to Gramercy Real Estate CDO
2006-1, which are amortized on a level-yield basis over the average life of the CDO.

In
August 2007, the Company issued $1,100,000 of CDO bonds through two newly-formed indirect subsidiaries, Gramercy Real Estate CDO 2007-1 Ltd., or the 2007 Issuer,
and Gramercy Real Estate CDO 2007-1 LLC, or the 2007 Co-Issuer. At issuance the CDO consisted of $1,045,550 of investment grade notes, $22,000 of
non-investment grade notes, which were co-issued by the 2007 Issuer and the 2007 Co-Issuer, and $32,450 of preferred shares, which were issued by the 2007 Issuer.
The investment grade notes were issued with floating rate coupons with a combined weighted average rate of three-month LIBOR plus 0.46%. The Company incurred approximately $16,816 of costs related to
Gramercy Real Estate CDO 2007-1, which are amortized on a level-yield basis over the average life of the CDO.

During
the three and nine months ended September 30, 2008, the Company repurchased, at a discount, CDO bonds with a par value of $21,000 and $72,300, respectively, of investment
grade notes previously issued by the Company's CDOs. The Company recorded a net gain on the early extinguishment of debt of $11,681 and $33,378 for the three and nine months ended September 30,
2008, respectively, in connection with the repurchase of such notes.

The
Company retained all non-investment grade securities, the preferred shares and the common shares in the Issuers and Co-Issuers of each CDO. The Issuer in each
CDO holds assets, consisting primarily of whole loans, subordinate interests in whole loans, mezzanine loans, preferred equity investments and CMBS, which serve as collateral for the CDO. Each CDO may
be replenished, pursuant to certain rating agency guidelines relating to credit quality and diversification, with substitute collateral for loans that are repaid or otherwise resolved during the first
five years of the CDO.

37

---



Table of Contents

Gramercy Capital Corp.

Notes To Condensed Consolidated Financial Statements (Continued)

(Unaudited, amounts in thousands, except share and per share data)

September 30, 2009

7. Collateralized Debt Obligations (Continued)

Thereafter,
the CDO securities will be retired in sequential order from senior-most to junior-most as loans are repaid or otherwise resolved. The financial statements of the
Issuer of each CDO are consolidated in the Company's financial statements. The investment grade notes are treated as a secured financing, and are non-recourse to the Company. Proceeds from
the sale of the investment grade notes issued in each CDO were used to repay substantially all outstanding debt under the Company's repurchase agreements and to fund additional investments. Loans and
other investments owned by the CDO Issuers and Co-Issuers serve as collateral for the CDO bonds, and the income generated from these investments is used to fund interest obligations of the CDO
bonds and the remaining income, if any, is retained by the Company. The CDO bonds contain minimum interest coverage and asset over collateralization covenants that must be
satisfied in order for the Company to receive cash flow on the interests retained by the Company in its CDOs and to receive the subordinate collateral management fee earned. If the Company fails these
covenants in some or all of its CDOs, all cash flows from the applicable CDO, other than senior collateral management fees, would be diverted to repay principal and interest on the most senior
outstanding CDO bonds and the Company may not receive some or all residual payments or the subordinate collateral management fee until that CDO regained compliance with such tests. The Company was in
compliance with all such covenants as of September 30, 2009 and December 31, 2008, however, the compliance margin was narrow and a relatively small decline in the Company's performance
and credit metrics could cause it to fall out of compliance in the future.

8. Debt Obligations

Term Loan, Credit Facility and Repurchase Facility

The facility with Wachovia Capital Markets, LLC or one or more of its affiliates, or Wachovia, was initially established as a
$250,000 facility in 2004, and was subsequently increased to $500,000 effective April 2005. In July 2008, the original facility was terminated and a new facility was executed with Wachovia to provide
for a total credit availability of $215,680, comprised of a term loan equal to $115,680 and a revolving credit facility equal to $100,000 with a credit spread of 242.5 basis points (which would have
been increased to 267.5 basis points upon an extension of the maturity of the credit facility). The term of the credit facility was two years and the borrowers were able to extend the term for an
additional twelve-month period if certain conditions were met. Advance rates for assets acquired pursuant to the credit facility varied from 50% to 80% of purchase price, depending on the type and
structure of the asset. In April 2009, the Company entered into an amendment with Wachovia, pursuant to which the maturity date of the credit facility was extended to March 31, 2011 and the
interest rate remained unchanged. The amendment also eliminated all financial covenants, eliminated Wachovia's right to impose future margin calls, reduced the recourse guarantee to be no more than
$10,000, and eliminated cross default provisions with respect to the Company's other indebtedness. The Company made a $13,000 deposit and provided other credit support to backstop letters of credit
Wachovia issued in connection with the Company's mortgage debt obligations of certain of the Company's subsidiaries. The Company also agreed to attempt to divest of certain loan investments in the
future in order to further deleverage the credit facility and to forego additional borrowing under the facility. Borrowings under the Wachovia facility at September 30, 2009 and
December 31, 2008 were

38

---



Table of Contents

Gramercy Capital Corp.

Notes To Condensed Consolidated Financial Statements (Continued)

(Unaudited, amounts in thousands, except share and per share data)

September 30, 2009

8. Debt Obligations (Continued)

secured
by mezzanine loans with a carrying value of $55,055 and $202,823, respectively. The Company had no accrued interest and borrowings of $44,542 at a weighted average spread to LIBOR of 1.68% as
of September 30, 2009, and no accrued interest and borrowings of $72,254 on the repurchase facility at a weighted average spread to LIBOR of 2.68% as of December 31, 2008.

The
Wachovia credit facility requires that borrowings under the facility be repaid as principal payments on the loans and investments pledged are received or as proceeds from the sale of
those investments are received.

Subsidiaries
of the Company also have entered into a repurchase facility with Goldman Sachs Mortgage Company, or Goldman. In October 2006, this facility was increased from $200,000 to
$400,000 and its maturity date extended until September 2009. In August 2008, the facility was amended to reduce the borrowing capacity to $200,000 and to provide for an extension of the maturity to
December 2010 for a fee, provided that no event of default has occurred. The facility bore interest at spreads of 2.00% to 2.30% over one-month LIBOR and provides for advance rates that
vary from 65% to 75% based upon the collateral provided under a borrowing base calculation. In April 2009, the Company entered into an amendment to the amended and restated master repurchase agreement
and amended guaranty with Goldman, pursuant to which all financial covenants in the amended and restated repurchase agreement and the amended guaranty were eliminated and certain other provisions
of the amended and restated repurchase agreement and the amended guaranty were amended or deleted, including, among other things, the elimination of the existing recourse liability and a relaxation of
certain affirmative and negative covenants. Borrowings under the Goldman repurchase facility at September 30, 2009 and December 31, 2008 were secured by mezzanine loans with a carrying
value of $29,467 and $64,960, respectively. The Company had no accrued interest and borrowings of $4,339 at a weighted average spread to LIBOR of 2.5% as of September 30, 2009, and no accrued
interest and borrowings of $23,643 at a weighted average spread to LIBOR of 2.50% under this facility at December 31, 2008. On October 27, 2009, the Company repaid the borrowings in full
and terminated the Goldman facility.

In
January 2009, the Company closed a master repurchase facility with JP Morgan Chase Bank, N.A. or JP Morgan, in the amount of $9,500. The term of the facility was through
July 23, 2010, the interest rate was 30-day LIBOR plus 175 basis points, the facility was recourse to the Company for 30% of the facility amount, and the facility was subject to
normal mark-to-market provisions after March 2009. Proceeds under the facility, which was fully drawn at closing, were used to retire certain borrowings under the Wachovia
credit facility. This facility was secured by a perfected security interest in a single debt investment. In March 2009, the Company terminated this facility by making a cash payment of approximately
$1,880 and transferring the full ownership and control of, and responsibility for, the related loan collateral to JP Morgan. The Company recorded an impairment charge of $8,843 in connection with the
collateral transfer.

Unsecured Credit Facility

In May 2006, the Company closed on a $100,000 senior unsecured revolving credit facility with KeyBank National Association, or KeyBank,
with an initial term of three years and a one-year

39

---



Table of Contents

Gramercy Capital Corp.

Notes To Condensed Consolidated Financial Statements (Continued)

(Unaudited, amounts in thousands, except share and per share data)

September 30, 2009

8. Debt Obligations (Continued)

extension
option. In June 2007, the facility was increased to $175,000. The facility was supported by a negative pledge of an identified asset base. In March 2009, the Company entered into an
amendment and compromise agreement with KeyBank to settle and satisfy the loan obligations at a discount for a current cash payment of $45,000, and a future cash payment in a maximum amount of up to
$15,000 from 50% of all payments from distributions after May 2009 from certain junior tranches and preferred classes of securities in the Company's CDOs. The remaining balance of $8,451 in potential
cash distribution is recorded in other liabilities on the Company's balance sheet as of September 30, 2009. The Company recorded a net gain on extinguishment of debt of $107,229 as a result of
to this agreement. The Company had accrued interest of $1,405 and borrowings of $172,301 as of December 31, 2008.

Mortgage Loans

Certain real estate assets are subject to mortgage liens. As of September 30, 2009, 715 of the Company's real estate assets were
encumbered with mortgage and mezzanine loans with a cumulative outstanding balance of $2,356,093. The Company's mortgage notes payable typically require that specified
loan-to-value and debt service coverage ratios be maintained with respect to the financed properties before the Company can exercise certain rights under the loan agreements
relating to such properties. The Company is in compliance with these ratios as of September 30, 2009. If the specified criteria are not satisfied, in addition to other conditions that the
Company may have to observe, the Company's ability to release properties from the financing may be restricted and the lender may be able to "trap" portfolio cash flow until the required ratios are met
on an ongoing basis.

Certain
of the Company's mortgage notes payable related to assets held-for-sale contain provisions that require the Company to compensate the lender for the early repayment of the loan.

On
June 30, 2009, First States Investors 225, LLC, an indirect wholly-owned subsidiary of the Company ("First States 225") executed a first amendment of note, deed of trust
and other loan documents (the "Amendment") with Wells Fargo Bank, N.A., as trustee under a pooling and servicing agreement. First States 225 is the borrower under a $51,766 mortgage loan secured by a
Class A high rise office tower located in St. Louis, Missouri, designated as held for sale. The Amendment extends the original maturity of the mortgage from July 1, 2009 to
January 1, 2010. In addition, the Amendment establishes a monthly principal reserve requirement of $90 and implements monthly financial and operational reporting requirements. The Company paid
a 50 basis point extension fee totaling $263 as well as lender's legal fees to secure the extension.

Goldman Mortgage Loan

On April 1, 2008, certain subsidiaries of the Company, collectively, the Goldman Loan Borrowers, entered into a mortgage loan
agreement, or the Goldman Mortgage Loan, with Goldman Sachs Commercial Mortgage Capital, L.P., or GSCMC, Citicorp North America, Inc., or Citicorp and SL Green in connection with a
mortgage loan in the amount of $250,000, which is secured by certain properties owned or ground leased by the Goldman Loan Borrowers. The Goldman Mortgage Loan matures on March 9, 2010, with a
single one-year extension option. The terms of the Goldman

40

---



Table of Contents

Gramercy Capital Corp.

Notes To Condensed Consolidated Financial Statements (Continued)

(Unaudited, amounts in thousands, except share and per share data)

September 30, 2009

8. Debt Obligations (Continued)

Mortgage
Loan were negotiated between the Goldman Borrowers and GSCMC and Citicorp. The Goldman Mortgage Loan bore interest at 4.35% over one-month LIBOR. The Goldman Mortgage Loan
provides for customary events of default, the occurrence of which could result in an acceleration of all amounts payable under the Goldman Mortgage Loan. The Goldman Mortgage Loan allows for
prepayment under the terms of the agreement, subject to a 1.00% prepayment fee, during the first six months payable to the lender, as long as simultaneously therewith a proportionate prepayment of the
Goldman Mezzanine Loan (discussed below) shall also be made on such date. In August 2008, an amendment to the loan agreement described below was entered into for the Goldman Mortgage Loan in
conjunction with the bifurcation of the Goldman Mezzanine loan into two separate mezzanine loans. Under this loan agreement amendment, the Goldman Mortgage Loan bears interest at 1.99% over LIBOR. The
Company had accrued interest of $239 and borrowings of $241,324 as of September 30, 2009 and accrued interest of $367 and borrowings of $242,568 as of December 31, 2008.

Secured Term Loan

On April 1, 2008, First States Group 3300 B, L.P., an indirect wholly-owned subsidiary of the Company ("PB Loan
Borrower"), entered into a loan agreement, or the PB Loan Agreement, with PB Capital Corporation, as agent for itself and other lenders, in connection with a secured term loan in the
amount of $240,000 ("the PB Loan") in part to refinance a portion of a portfolio of American Financial's properties known as the WBBD Portfolio. The PB Loan matures on April 1,
2013 and bears interest at 1.65% over one-month LIBOR. The PB Loan is secured by mortgages on the 48 properties owned by the PB Loan Borrower and all other assets of the
PB Loan Borrower. The PB Loan Agreement provides for customary events of default, the occurrence of which could result in an acceleration of all amounts payable under the PB Loan
Agreement. The PB Loan Borrower may prepay the PB Loan, in whole or in part (in amounts equal to at least $1,000), on any date. The Company had accrued interest of $379 and borrowings of
$238,103 as of September 30, 2009 and accrued interest of $657 and borrowings of $240,000 as of December 31, 2008.

The
PB Loan requires the Company to enter into an interest rate protection agreement within five days of the tenth consecutive LIBOR banking day on which the strike rate exceeds
6.00% per annum. The interest rate protection agreement must protect the PB Loan Borrower against upward fluctuations of interest rates in excess of 6.25% per annum.

The
PB Loan Agreement contains certain semi-annual covenants relating to liquidity and tangible net worth. As of June 30, 2009 and December 31, 2008, the
last testing date, the Company was in compliance with these covenants.

Goldman Senior and Junior Mezzanine Loans

On April 1, 2008, certain subsidiaries of the Company, collectively, the Mezzanine Borrowers, entered into a mezzanine loan
agreement with GSCMC, Citicorp and SL Green in connection with a mezzanine loan in the amount of $600,000, or the Goldman Mezzanine Loan, which is secured by pledges of certain equity interests owned
by the Mezzanine Borrowers and any amounts receivable by the Mezzanine Borrowers whether by way of distributions or other sources. The Goldman Mezzanine

41

---



Table of Contents

Gramercy Capital Corp.

Notes To Condensed Consolidated Financial Statements (Continued)

(Unaudited, amounts in thousands, except share and per share data)

September 30, 2009

8. Debt Obligations (Continued)

Loan
matures on March 9, 2010, with a single one-year extension option. The terms of the Goldman Mezzanine Loan were negotiated between The Mezzanine Borrowers and GSCMC and
Citicorp. The Goldman Mezzanine Loan bore interest at 4.35% over one-month LIBOR. The Goldman Mezzanine Loan provides for customary events of default, the occurrence of which could result
in an acceleration of all amounts payable under the Goldman Mezzanine Loan. The Goldman Mezzanine Loan allows for prepayment under the terms of the agreement, subject to a 1.00% prepayment fee during
the first six months, payable to the lender, as long as simultaneously therewith a proportionate prepayment of the Goldman Mortgage Loan shall also be made on such date. In addition, under certain
circumstances the Goldman Mezzanine Loan is cross-defaulted with events of default under the Goldman Mortgage Loan and with other mortgage loans, pursuant to which an indirect wholly-owned subsidiary
of the Company is the mortgagor. In August 2008, the $600,000 mezzanine loan was bifurcated into two separate mezzanine loans (the Junior Mezzanine loan and the Senior Mezzanine Loan) by the lenders.
Additional loan agreement amendments were entered into for the Goldman Mezzanine Loan and Goldman Mortgage Loan. Under these loan agreement amendments, the Junior Mezzanine Loan bears interest at
6.00% over LIBOR, the Senior Mezzanine Loan bears interest at 5.20% over LIBOR, and the Goldman Mortgage Loan bears interest at 1.99% over LIBOR. The weighted average of these interest rate spreads is
equal to the combined weighted average of the interest rates spreads on the initial loans. The Company had accrued interest of $1,475 and borrowings of $566,442 as of September 30, 2009 and
accrued interest of $1,821 and borrowings of $580,462 as of December 31, 2008.

Junior Subordinated Notes

In May 2005, August 2005 and January 2006, the Company completed issuances of $50,000 each in unsecured trust preferred securities
through three Delaware Statutory Trusts, or DSTs, Gramercy Capital Trust I, or GCTI, Gramercy Capital Trust II, or GCTII, and Gramercy Capital Trust III, or GCT III, that were wholly-owned
subsidiaries of the Operating Partnership. The securities issued in May 2005 bore interest at a fixed rate of 7.57% for the first ten years ending June 2015 and the securities issued in August 2005
bore interest at a fixed rate of 7.75% for the first ten years ending October 2015. Thereafter, the rates were to float based on the three-month LIBOR plus 300 basis points. The securities issued in
January 2006 bore interest at a fixed rate of 7.65% for the first ten years ending January 2016, with an effective rate of 7.43% when giving effect to the swap arrangement previously entered into in
contemplation of this financing. Thereafter, the rate was to float based on the three-month LIBOR plus 270 basis points.

In
January 2009, the Operating Partnership entered into an exchange agreement with the holders of the securities, pursuant to which the Operating Partnership and the holders agreed to
exchange all of the previously issued trust preferred securities for newly issued unsecured junior subordinated notes, or the Junior Notes, in the aggregate principal amount of $150,000. The Junior
Notes will mature on June 30, 2035, or the Maturity Date, and will bear (i) a fixed interest rate of 0.50% per annum for the period beginning on January 30, 2009 and ending on
January 29, 2012 and (ii) a fixed interest rate of 7.50% per annum for the period commencing on January 30, 2012 through and including the Maturity Date. The Company, at its
option, may redeem the Junior Notes in whole at any time, or in part from

42

---



Table of Contents

Gramercy Capital Corp.

Notes To Condensed Consolidated Financial Statements (Continued)

(Unaudited, amounts in thousands, except share and per share data)

September 30, 2009

8. Debt Obligations (Continued)

time
to time, at a redemption price equal to 100% of the principal amount of the Junior Notes. The optional redemption of the Junior Notes in part must be made in at least $25,000 increments. The
Junior Notes also contain additional covenants restricting, among other things, the Company's ability to declare or pay any dividends during the calendar year 2009, or make any payment or redeem any
debt securities ranked pari passu or junior to the Junior Notes. In connection with the exchange agreement, the final payment on the trust preferred securities for the period October 30, 2008
through January 29, 2009 was revised to be at a reduced interest rate of 0.50% per annum. On October 15, 2009, a subsidiary of the Operating Partnership exchanged $97,500 of the Junior
Notes for $97,533 face amount of bonds issued by the Company's CDOs that the Company had repurchased in the open market. Certain indenture covenants which restrict the Company from declaring or paying
dividends and certain other corporate activities during the 2009 calandar year have been eliminated for the remaining $52,500 of the junior notes. See Note 20 to the Company's Consolidated
Financial Statements.

The
following is a summary of mortgage notes payable, mezzanine loan and acquisition loan facilities as of September 30, 2009:

Encumbered Properties

Balance

Interest Rate

Maturity DatesFixed-rate mortgages


475

$
1,310,224
(1)
4.55% to 8.29%

January 2010 to September 2023Variable-rate mortgages


240


479,427

1.91% to 6.25%

March 2010 to April 2013Total mortgage notes payable


715


1,789,651Above/below market interest





17,061Mortgage notes payable related to assets held for sale


(1
)

(51,766
)Balance, September 30, 2009


714

$
1,754,946


(1)Includes
$88,447 of debt that is collateralized by $98,337 of pledged Treasury securities, net of discounts and premiums and $4,420 of debt that relates to
the proportionate share of the 11% minority interest holder in 801 Market Street as of September 30, 2009.


Combined aggregate principal maturities of the Company's consolidated CDOs, Goldman repurchase facility and Wachovia credit facility, term loan,
junior subordinated notes, mortgage loans

43

---



Table of Contents

Gramercy Capital Corp.

Notes To Condensed Consolidated Financial Statements (Continued)

(Unaudited, amounts in thousands, except share and per share data)

September 30, 2009

8. Debt Obligations (Continued)

and
mezzanine loans (including the Goldman Mortgage, Senior Mezzanine Loan and Junior Mezzanine loan) as of September 30, 2009 are as follows:

CDOs

Term Loan,
Credit
Facility and
Repurchase
Facility

Junior
Subordinated
Notes

Mortgage and
Mezzanine
Loans

Interest
Payments

Total2009 (October 1December 31)

$


$
4,339

$


$
7,412

$
49,388

$
61,1392010











896,511


166,182


1,062,6932011





44,542





25,220


164,119


233,8812012











80,407


154,623


235,0302013











621,190


134,794


755,984Thereafter


2,608,230





150,000


725,354


622,863


4,106,447Above/Below Market Interest











17,061





17,061Total

$
2,608,230

$
48,881

$
150,000

$
2,373,155

$
1,291,969

$
6,472,235


9. Lease Agreements

The Company's properties are leased and subleased to tenants under operating leases with expiration dates extending through the year 2027. These leases generally contain rent increases
and renewal options. Future minimum rental payments under non-cancelable leases, excluding reimbursements for operating expenses, as of September 30, 2009 are as follows:

Operating
Leases2009 (October 1December 31)

$
63,0912010


243,0142011


205,1252012


189,1962013


177,688Thereafter


1,321,448Total minimum lease payments

$
2,199,562


10. Operating Partnership Agreement/The Manager

At September 30, 2009 and December 31, 2008, the Company owned all of the Class A limited partner interests in the Operating Partnership. For the period
January 1, 2009 through April 24, 2009 and at December 31, 2008, all of the Class B limited partner interests were owned by SL Green OP. For the
period January 1, 2009 through April 24, 2009 and at December 31, 2008, all of the interests in the Manager were held by SL Green OP. On April 24, 2009, the Company
completed the internalization of management through the direct acquisition of the Manager. The consideration paid to SL Green in the transaction was de minimis. Accordingly, beginning in May 2009,
management and incentive fees payable by the Company to the Manager ceased and the Company owns all of the Class B limited partner interests (which have been cancelled) and all of the interests
in the Manager.

44

---



Table of Contents

Gramercy Capital Corp.

Notes To Condensed Consolidated Financial Statements (Continued)

(Unaudited, amounts in thousands, except share and per share data)

September 30, 2009

11. Related Party Transactions

On April 24, 2009, in connection with the internalization, the Company and the Operating Partnership entered into a securities transfer agreement with SL Green OP, GKK
Manager Member Corp. and SL Green, pursuant to which (i) SL Green OP and Manager Corp. agreed to transfer to the Operating Partnership membership interests in the Manager and
(ii) SL Green OP agreed to transfer to the Operating Partnership its Class B limited partner interests in the Operating Partnership, in exchange for certain de minimis cash
consideration. The securities transfer agreement contains standard representations, warranties, covenants and indemnities. No distributions were due on the Class B limited partner interests for
the period ended September 30, 2009 or otherwise in connection with the internalization.

Concurrently
with the execution of the securities transfer agreement, the Company also entered into a special rights agreement with SL Green OP and SL Green, pursuant to
which SL Green and SL Green OP agreed to provide the Company certain management information systems services from April 24, 2009 through the date that is 90 days thereafter
and the Company agreed to pay SL Green OP a monthly cash fee of $25 in connection therewith. The Company also agreed to use its best efforts to operate as a REIT during each taxable year and to
cause the Company's tax counsel to provide legal opinions to SL Green relating to the Company's REIT status. Other than with respect to the transitional services provisions of the special
rights agreement as set forth therein, the special rights agreement will terminate when SL Green OP ceases to own at least 7.5% of the shares of the Company's common stock.

In
connection with its initial public offering, the Company entered into a management agreement with the Manager, which was subsequently amended and restated in April 2006. The
management agreement was further amended in September 2007, and amended and restated in October 2008 and was subsequently terminated in connection with the internalization. The management agreement
provided for a term through December 2009 with automatic one-year extension options and was subject to certain termination rights. The Company paid the Manager an annual management fee
equal to 1.75% of the Company's gross stockholders equity (as defined in the management agreement) inclusive of the Company's trust preferred securities. In October 2008, the Company entered into the
second amended and restated management agreement with the Manager which generally contained the same terms and conditions as the amended and restated management agreement, as amended, except for the
following material changes: (1) reduced the annual base management fee to 1.50% of the Company's gross stockholders equity; (2) reduces the termination fee to an amount equal to the
management fee earned by the Manager during the 12 months preceding the termination date; and (3) commencing July 2008, all fees in connection with collateral management agreements were
to be remitted by the Manager to the Company. The Company incurred expense to the Manager under this agreement of an aggregate of $0 and $7,787 for the three and nine months ended September 30,
2009, and $5,978 and $15,934 for the three and nine months ended September 30, 2008, respectively.

Prior
to the internalization, to provide an incentive to enhance the value of the Company's common stock, the holders of the Class B limited partner interests of the Operating
Partnership were entitled to an incentive return equal to 25% of the amount by which FFO plus certain accounting gains and losses (as defined in the partnership agreement of the Operating Partnership)
exceed the product of the weighted average stockholders equity (as defined in the partnership agreement of the Operating

45

---



Table of Contents

Gramercy Capital Corp.

Notes To Condensed Consolidated Financial Statements (Continued)

(Unaudited, amounts in thousands, except share and per share data)

September 30, 2009

11. Related Party Transactions (Continued)

Partnership)
multiplied by 9.5% (divided by four to adjust for quarterly calculations). The Company recorded any distributions on the Class B limited partner interests as an incentive
distribution expense in the period when earned and when payments of such became probable and reasonably estimable in accordance with the partnership agreement. In October 2008, the Company entered
into a letter agreement with the Class B limited partners to waive the incentive distribution that would have otherwise been earned for the period July 1, 2008 through
December 31, 2008 and provided that the starting January 1, 2009, the incentive distribution could have been paid, at the Company's option, in cash or shares of common stock. In December
2008, the Company entered into a letter agreement with the Manager and SL Green, pursuant to which the Manager agreed to pay $2,750 in cash and SL Green transferred to the Company,
1.9 million shares of the Company's common stock, in full satisfaction of all potential obligations that the holders of the Class B limited partner interests of the Operating Partnership
may have had to the Operating Partnership, and the Operating Partnership may have to the holders, each in accordance with the amended operating partnership agreement of the Operating Partnership, in
respect of the recalculation of the distribution amount to the holders at the end of the 2008 calendar year. The Company incurred approximately $0 and $5,100 with respect to such Class B
limited partner interests for the three and nine months ended September 30, 2008, respectively. No incentive distribution was earned by the Class B limited partner interests for the
three and nine months ended September 30, 2009.

Prior
to the internalization, the Company was obligated to reimburse the Manager for its costs incurred under an asset servicing agreement between the Manager and an affiliate of
SL Green OP and a separate outsource agreement between the Manager and SL Green OP. The asset servicing agreement, which was amended and restated in April 2006, provided for an annual
fee payable to SL Green OP by the Company of 0.05% of the book value of all credit tenant lease assets and non-investment grade bonds and 0.15% of the book value of all other
assets. The outsource agreement provided for an annual fee payable by the Company, which became $2,814 per year subsequent to the closing of the American Financial merger to reflect higher costs
resulting from the increased size and number of assets of the combined company, increasing 3% annually over the prior year on the anniversary date of the outsource agreement in August of each year.
For the three and nine months ended September 30, 2008, respectively, the Company realized expense of $697 and $1,721, to the Manager under the outsource agreement. For the three and nine
months ended September 30, 2009, the Company incurred expense of $617 and $868, respectively, pursuant to the special servicing agreement. For the three and nine months ended
September 30, 2008 the Company realized expense of $1,350 and $4,022 to the Manager under the asset servicing agreement. In October 2008, each of the asset servicing agreement and outsource
agreement was terminated, effective as of September 30, 2008. In October 2008, the outsource agreement was terminated and the asset servicing agreement was replaced with that certain interim
asset servicing agreement between the Manager and an affiliate of SL Green, pursuant to which the Company was obligated to reimburse the Manager for its costs incurred thereunder from October
2008 until April 24, 2009 when such agreement was terminated in connection with the internalization. Pursuant to that agreement, the SL Green affiliate acted as the rated special
servicer to the Company's CDOs, for a fee equal to two basis points per year on the carrying value of the specially serviced loans assigned to it. Concurrent with the internalization, the interim
asset servicing agreement was terminated and the Manager entered into a special servicing

46

---



Table of Contents

Gramercy Capital Corp.

Notes To Condensed Consolidated Financial Statements (Continued)

(Unaudited, amounts in thousands, except share and per share data)

September 30, 2009

11. Related Party Transactions (Continued)

agreement
with an affiliate of SL Green, pursuant to which the SL Green affiliate agreed to act as the rated special servicer to the Company's CDOs for a period beginning on
April 24, 2009 through the date that is the earlier of (i) 60 days thereafter and (ii) a date on which a new special servicing agreement is entered into between the Manager
and a rated third-party special servicer. The SL Green affiliate will be entitled to a servicing fee equal to (i) 25 basis points per year on the outstanding principal balance of assets
with respect to certain specially serviced assets and (ii) two basis points per year on the outstanding principal balance of assets with respect to certain other assets. The April 24,
2009 agreement was terminated effective June 23, 2009; however, the Company previously entered into new special servicing arrangements with Situs Serve, L.P., which became the rated
special servicer for the Company's CDOs. An affiliate of SL Green continues to provide special servicing services with respect to a limited number of loans owned by the Company that are secured
by properties in New York City, or in which the Company and SL Green are co-investors.

On
October 27, 2008, the Company entered into a services agreement with SL Green and SL Green OP which was subsequently terminated in connection with the
internalization. Pursuant to the services agreement, SL Green agreed to provide consulting and other services to the Company. SL Green would make Marc Holliday, Andrew Mathias and David
Schonbraun available in connection with the provision of the services until the earliest of (i) September 30, 2009, (ii) the termination of the management agreement or
(iii) with respect to a particular executive, the termination of any such executive's employment with SL Green. In consideration for the consulting services, the Company paid a fee to
SL Green of $200 per month, payable, at its option, in cash or, if permissible under applicable law or the requirements of the exchange on which the shares of the Company's common stock trade,
shares of its common stock. SL Green also provided the Company with certain other services described in the services agreement for a fee of $100 per month in cash and for a period terminating
at the earlier of (i) three months after the date of the services agreement, subject to a one-time 30-day extension, or (ii) the termination of the management
agreement. By a separate agreement and a separate fee, SL Green and SL Green OP agreed to perform special servicer activities for the Company through one of their rated special servicing affiliates
for a period beginning on April 24, 2009 through the date that is the earlier of (i) 60 days thereafter or (ii) a date on which a new special servicer agreement is entered
into between the Manager and a rated third party servicer. The April 24, 2009 agreement was terminated effective June 23, 2009; however the Company previously entered into the new
special servicing arrangements with SitusServe, L.P., which became the rated special servicer for the Company's CDOs. An affiliate of SL Green continues to provide special servicing services with
respect to a limited number of loans owned by the Company that are secured by properties in New York City, or in which the Company and SL Green are co-investors.

In
connection with the closing of the Company's first CDO in July 2005, the 2005 Issuer, entered into a collateral management agreement with the Manager. Pursuant to the collateral
management agreement, the Manager has agreed to provide certain advisory and administrative services in relation to the collateral debt securities and other eligible investments securing the CDO
notes. The collateral management agreement provides for a senior collateral management fee, payable quarterly in accordance with the priority of payments as set forth in the indenture, equal to 0.15%
per annum of the net outstanding portfolio balance, and a subordinate collateral management fee, payable quarterly

47

---



Table of Contents

Gramercy Capital Corp.

Notes To Condensed Consolidated Financial Statements (Continued)

(Unaudited, amounts in thousands, except share and per share data)

September 30, 2009

11. Related Party Transactions (Continued)

in
accordance with the priority of payments as set forth in the indenture, equal to 0.25% per annum of the net outstanding portfolio balance. Net outstanding portfolio balance is the sum of the
(i) aggregate principal balance of the collateral debt securities, excluding defaulted securities, (ii) aggregate principal balance of all principal proceeds held as cash and eligible
investments in certain accounts, and (iii) with respect to the defaulted securities, the calculation amount of such defaulted securities. As compensation for the performance of its obligations
as collateral manager under the first CDO, the Board of Directors had allocated to the Manager the subordinate collateral management fee paid on the CDO notes not held by the Company. In October 2008,
pursuant to the second amended and restated management agreement, the Manager had, commencing July 1, 2008, agreed to remit this amount to the Company. At September 30, 2009 and
December 31, 2008, the Company owned all of the non-investment grade bonds, preferred equity and equity in the 2005 CDO. The senior collateral management fee and balance of the
subordinate collateral management fee is allocated to the Company. For the three and nine months ended September 30, 2008, the Company realized expense of $0 and $1,024, respectively, to the
Manager under such collateral management agreement.

Prior
to the internalization, fees payable in connection with CDOs or other securitization vehicles, except for the 2005 CDO, were governed by the management agreement. Pursuant to the
management agreement, if a collateral manager is retained as part of the formation of a CDO or other securitization vehicle, the Manager or an affiliate will be the collateral manager and will receive
the following fees: (i) 0.25% per annum of the principal amount outstanding of bonds issued by a managed transitional CDO that are owned by third-party investors unaffiliated with the Company
or the Manager, which CDO is structured to own loans secured by transitional properties, (ii) 0.15% per annum of the book value of the principal amount outstanding of bonds issued by a managed
non-transitional CDO that are owned by third-party investors unaffiliated with the Company or the Manager, which CDOs structured to own loans secured by non-transitional
properties, (iii) 0.10% per annum of the principal amount outstanding of bonds issued by a static CDO that are owned by third-party investors unaffiliated with the Company or the Manager, which
CDO is structured to own non-investment grade bonds, and (iv) 0.05% per annum of the principal amount outstanding of bonds issued by a static CDO that are owned by third-party
investors unaffiliated the Company or the Manager, which CDO is structured to own investment grade bonds. For the purposes of the management agreement, a "managed transitional" CDO means a CDO that is
actively managed, has a reinvestment period and is structured to own debt collateral secured primarily by non-stabilized real estate assets that are expected to experience substantial net
operating income growth, and a "managed non-transitional" CDO means a CDO that is actively managed, has a reinvestment period and is structured to own debt collateral secured primarily by
stabilized real estate assets that are not expected to experience substantial net operating income growth. Both "managed transitional" and "managed non-transitional" CDOs may at any given
time during the reinvestment period of the respective vehicles invest in and own non-debt collateral (in limited quantity) as defined by the respective indentures. If any fees are paid to
the collateral manager in excess of the fee structure provided for above, such fees are paid to the Company. In October 2008, pursuant to the second amended and restated management agreement, the
Manager, commencing July 1, 2008, agreed to remit this amount to the Company. For the three and nine months ended September 30, 2008, the Company realized expense of approximately $0 and
$1,142, respectively, to the Manager under this agreement. With respect to the CDO which closed in August,

48

---



Table of Contents

Gramercy Capital Corp.

Notes To Condensed Consolidated Financial Statements (Continued)

(Unaudited, amounts in thousands, except share and per share data)

September 30, 2009

11. Related Party Transactions (Continued)

2007,
the Company realized expense to the Manager of $0 and $432 for the three and nine months ended September 30, 2008, respectively.

In
connection with the internalization, the management agreement was terminated and the fees payable in connection with the Company's 2006 and 2007 CDOs will be governed by their
respective collateral management agreements. The collateral management agreement for the Company's 2006 CDO provides for a senior collateral management fee, payable quarterly in accordance with the
priority of payments as set forth in the indenture, equal to 0.15% per annum of the net outstanding portfolio balance, and a subordinate collateral management fee, payable quarterly in accordance with
the priority of payments as set forth in the indenture, equal to 0.25% per annum of the net outstanding portfolio balance. Net outstanding portfolio balance is the sum of the (i) aggregate
principal balance of the collateral debt securities, excluding defaulted securities, (ii) aggregate principal balance of all principal proceeds held as cash and eligible investments in certain
accounts, and (iii) with respect to the defaulted securities, the calculation amount of such defaulted securities. The collateral management agreement for the Company's 2007 CDO provides for a
senior collateral management fee, payable quarterly in accordance with the priority of payments as set forth in the indenture, equal to (i) 0.05% per annum of the aggregate principal balance of
the CMBS securities, (ii) 0.10% per annum of the aggregate principal
balance of loans, preferred equity securities, cash and certain defaulted securities, and (iii) a subordinate collateral management fee, payable quarterly in accordance with the priority of
payments as set forth in the indenture, equal to 0.15% per annum of the aggregate principal balance of the loans, preferred equity securities, cash and certain defaulted securities.

Commencing
in May 2005, the Company is party to a lease agreement with SLG Graybar Sublease LLC, an affiliate of SL Green, for the Company's corporate offices at 420
Lexington Avenue, New York, New York. The lease is for approximately 7,300 square feet and carries a term of 10 years with rents of approximately $249 per annum for year one rising to $315 per
annum in year ten. In May and June 2009, the Company amended its lease with SLG Graybar Sublease LLC to increase the leased premises by approximately 2,260 square feet. The additional premises
is leased on a co-terminus basis with the remainder of the Company's leased premises and carries rents of approximately $103 per annum during the initial lease year and $123 per annum
during the final lease year. For the three and nine months ended September 30, 2009 and 2008, the Company paid $30 and $315 and $118 and $247, under this lease, respectively.

In
July 2005, the Company closed on the purchase from an SL Green affiliate of a $40,000 mezzanine loan which bears interest at 11.20%. As part of that sale, the seller retained
an interest-only participation. The mezzanine loan is secured by the equity interests in an office property in New York, New York. As of September 30, 2009 and December 31,
2008, the loan had a book value of $39,350 and $39,520, respectively.

In
March 2006, the Company closed on the purchase of a $25,000 mezzanine loan, which bears interest at one-month LIBOR plus 8.00%, to a joint venture in which SL Green
is an equity holder. The mezzanine loan was repaid in full on May 9, 2006, when the Company originated a $90,287 whole loan, which bears interest at one-month LIBOR plus 2.75%, to
the joint venture. The whole loan is

49

---



Table of Contents

Gramercy Capital Corp.

Notes To Condensed Consolidated Financial Statements (Continued)

(Unaudited, amounts in thousands, except share and per share data)

September 30, 2009

11. Related Party Transactions (Continued)

secured
by office and industrial properties in northern New Jersey and had a book value of $78,630 and $90,595 as of September 30, 2009 and December 31, 2008, respectively.

In
June 2006, the Company closed on the acquisition of a 49.75% TIC interest in 55 Corporate Drive, located in Bridgewater, New Jersey with a 0.25% interest to be acquired in the future.
The remaining 50% of the property was owned as a TIC interest by an affiliate of SL Green OP. The property was comprised of three buildings totaling approximately 670,000 square feet which was
100% net leased to an entity whose obligations were guaranteed by Sanofi-Aventis Group through April 2023. The transaction was valued at $236,000 and was financed with a $190,000, 10-year,
fixed-rate first mortgage loan. In January 2009, the Company and SL Green sold 100% of the respective interests in 55 Corporate Drive.

In
December 2006, the Company acquired from a financial institution a pari-passu interest of $125,000 in a $200,000 mezzanine loan, which bears interest at 6.384% and is
secured by a multi-family portfolio in New York, New York. An affiliate of SL Green simultaneously acquired the remaining $75,000 pari-passu interest in the mezzanine loan. As of
September 30, 2009 and December 31, 2008, the loan had a book value of $0 and $118,702, respectively.

In
January 2007, the Company originated two mezzanine loans totaling $200,000. The $150,000 loan was secured by a pledge of cash flow distributions and partial equity interests in a
portfolio of multi-family properties and bore interest at one-month LIBOR plus 6.00%. The $50,000 loan was initially secured by cash flow distributions and partial equity interests in an
office property. On March 8, 2007 the $50,000 loan was increased by $31,000 when the existing mortgage loan on the property was defeased, upon which event the Company's loan became secured by a
first mortgage lien on the property and was reclassified as a whole loan. The whole loan currently bears interest at one-month LIBOR plus 6.00% for the initial funding and
one-month LIBOR plus 1.00% for the subsequent funding. At closing, an affiliate of SL Green acquired from the Company and held a 15.15% pari-passu interest in the
mezzanine loan and the whole loan. As of September 30, 2009 and December 31, 2008, the Company's interest in the whole loan had a carrying value of $63,236 and $66,607, respectively. The
investment in the mezzanine loan was repaid in full in September 2007.

In
April 2007, the Company purchased for $103,200 a 45% TIC interest to acquire the fee interest in a parcel of land located at 2 Herald Square, located along
34th Street in New York, New York. The acquisition was financed with a $86,063 10-year fixed rate mortgage loan. The property is subject to a long-term
ground lease with an unaffiliated third party for a term of 70 years. The remaining TIC interest is owned by a wholly-owned subsidiary of SL Green. The TIC interests are
pari-passu. As of September 30, 2009 and December 31, 2008, the investment had a carrying value of $30,163 and $26,118, respectively. The Company recorded its pro rata share
of net income of $1,237 and $3,750 and $1,238 and $3,990 for the three and nine months ended September 30, 2009 and 2008, respectively.

In
July 2007, the Company purchased for $144,240 an investment in a 45% TIC interest to acquire a 79% fee interest and 21% leasehold interest in the fee position in a parcel of land
located at 885 Third Avenue, on which is situated The Lipstick Building. The transaction was financed with a $120,443 10-year fixed rate mortgage loan. The property is subject to a
70-year leasehold ground lease with an unaffiliated third party. The remaining TIC interest is owned by a wholly-owned subsidiary of

50

---



Table of Contents

Gramercy Capital Corp.

Notes To Condensed Consolidated Financial Statements (Continued)

(Unaudited, amounts in thousands, except share and per share data)

September 30, 2009

11. Related Party Transactions (Continued)

SL Green.
The TIC interests are pari passu. As of September 30, 2009 and December 31, 2008, the investment had a carrying value of $43,558 and $37,070, respectively. The Company
recorded its pro rata share of net income of $1,477 and $4,493 and $1,476 and $4,815 for the three and nine months ended September 30, 2009 and 2008, respectively.

The
Company's agreements with SL Green in connection with the Company's commercial property investments in 885 Third Avenue and Two Herald Square, contain a buy-sell
provision that can be triggered by the Company in the event it and SL Green are unable to agree upon a major decision that would materially impair the value of the assets. Such major decisions
involve the sale or refinancing of the assets, any extensions or modifications to the leases with the tenant therein or any material capital expenditures.

In
September 2007, the Company acquired a 50% interest in a $25,000 senior mezzanine loan from SL Green. Immediately thereafter the Company, along with SL Green, sold all
of its interests in the loan to an unaffiliated third party. Additionally, the Company acquired from SL Green a 100% interest in a $25,000 junior mezzanine loan associated with the same
properties as the preceding senior mezzanine loan. Immediately thereafter the Company participated 50% of its interest in the loan back to SL Green. As of September 30, 2009 and
December 31, 2008, the loan has a book value of $12,881 and $11,925, respectively. In October 2007, the Company acquired a 50% pari-passu interest in $57,795 of two additional
tranches in the senior mezzanine loan from an unaffiliated third party. At closing, an affiliate of SL Green simultaneously acquired the other 50% pari-passu interest in the two
tranches. As of September 30, 2009 and December 31, 2008 the loan had a book value of $12,881 and $28,026, respectively.

In
November 2007, the Company acquired from a syndicate comprised of financial institutions a $25,000 interest in a $100,000 junior mezzanine investment secured by a hotel portfolio and
franchise headquarters. An affiliate of SL Green simultaneously acquired and owns another $25,000 interest in the investment. The investment was purchased at a discount and bears interest at an
effective spread to one-month LIBOR of 9.50%. As of September 30, 2009 and December 31, 2008, the loan had a book value of $0 and $15,655, respectively.

In
December 2007, the Company acquired a $52,000 interest in a senior mezzanine loan from a financial institution. Immediately thereafter the Company participated 50% of its interest in
the loan to an affiliate of SL Green. The investment, which is secured by an office building in New York, New York, was purchased at a discount and bears interest at an effective spread to
one-month LIBOR of 5.00%. In July 2009, the Company sold its remaining interest in the loan to an affiliate of SL Green for $16,120 pursuant to purchase rights established when the
loan was acquired. The loan was originally funded under the Company's credit facility with Wachovia as amended in April 2009. Accordingly, terms of the sale were subject to approval by Wachovia. The
sale includes contingent participation in future net proceeds from SL Green of up to $1,040 in excess of the purchase price upon their ultimate disposition of the loan. As of
September 30, 2009 and December 31, 2008, the loan had a book value of $0 and $24,599, respectively.

In
December 2007, the Company acquired a 50% interest in a $200,000 senior mezzanine loan from a financial institution. Immediately thereafter the Company participated 50% of the
Company's

51

---



Table of Contents

Gramercy Capital Corp.

Notes To Condensed Consolidated Financial Statements (Continued)

(Unaudited, amounts in thousands, except share and per share data)

September 30, 2009

11. Related Party Transactions (Continued)

interest
in the loan to an affiliate of SL Green. The investment was purchased at a discount and bears interest at an effective spread to one-month LIBOR of 6.50%. As of
September 30, 2009 and December 31, 2008, the loan had a book value of $28,198 and $46,488, respectively.

In
connection with the closing of the acquisition of American Financial, the Company, as part of a larger financing, received financing of $50,000 from SL Green, which is
described more fully in Note 8. An affiliate SL Green was granted 644,787 shares of common stock for services rendered, subject to a one-year vesting period. These shares had
a value of approximately $11,213 on the date of issuance.

In
August 2008, the Company closed on the purchase from an SL Green affiliate of a $9,375 pari-passu participation interest in a $18,750 first mortgage. The loan is
secured by a retail shopping center located in Staten Island, New York. The investment bears interest at a fixed rate of 5.28%. As of September 30, 2009 and December 31, 2008, the loan
had a book value of $9,921 and $9,324, respectively.

In
September 2008, the Company closed on the purchase from an SL Green affiliate of a $30,000 interest in a $135,000 mezzanine loan. The loan is secured by the borrower's
interests in a retail condominium located New York, New York. The investment bears interest at an effective spread to one-month LIBOR of 10.00%. As of September 30, 2009 and
December 31, 2008, the loan had a book value of $29,467 and $30,367, respectively.

12. Deferred Costs

Deferred costs at September 30, 2009 and December 31, 2008 consisted of the following:

2009

2008Deferred Financing costs

$
75,421

$
77,102Deferred Acquisition Costs


1,041


1,600Deferred Leasing Costs


2,249


1,05678,711


79,758Accumulated Amortization


(39,674
)

(26,451
)39,037


53,307Less Held for Sale


(422
)

(59
)$
38,615

$
53,248


Deferred
financing costs relate to the Company's existing Goldman repurchase facility, the Company's term loan and credit facility with Wachovia, the Goldman Mortgage Loan, the Goldman
Senior and Junior Mezzanine Loans, the PB Loan Agreement, the Company's CDOs, mortgage loans, and the junior subordinated notes. These costs are amortized on a straight-line basis to
interest expense based on the contractual term of the related financing.

Deferred
acquisition costs consist of fees and direct costs incurred to originate the Company's investments and are amortized using the effective yield method over the related term of
the investment.

52

---



Table of Contents

Gramercy Capital Corp.

Notes To Condensed Consolidated Financial Statements (Continued)

(Unaudited, amounts in thousands, except share and per share data)

September 30, 2009

12. Deferred Costs (Continued)

Deferred
leasing costs include direct costs incurred to initiate and renew operating leases and are amortized on a straight-line basis over the related lease term.

13. Fair Value of Financial Instruments

The Company discloses fair value information about financial instruments, whether or not recognized in the statement of financial condition, for which it is practicable to estimate that
value. In cases where quoted market prices are not available, fair values are based upon the application of discount rates to estimated future cash flows based upon market yields or by using other
valuation methodologies. Considerable judgment is necessary to interpret market data and develop estimated fair value. Accordingly, fair values are not necessarily indicative of the amounts the
Company could realize on disposition of the financial instruments. The use of different market assumptions and/or estimation methodologies may have a material effect on estimated fair value amounts.

The
following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate the value:



53

---



Table of Contents

Gramercy Capital Corp.

Notes To Condensed Consolidated Financial Statements (Continued)

(Unaudited, amounts in thousands, except share and per share data)

September 30, 2009

13. Fair Value of Financial Instruments (Continued)

The
following table presents the carrying value in the financial statements, and approximate fair value of other financial instruments at September 30, 2009 and
December 31, 2008:

September 30, 2009

December 31, 2008Carrying
Value

Fair Value

Carrying
Value

Fair ValueFinancial assets:Government securities

$
98,337

$
100,524

$
101,576

$
106,796Lending investments

$
1,495,581

$
1,370,348

$
2,213,473

$
2,040,914CMBS

$
983,367

$
643,674

$
869,973

$
299,985Financial liabilities:Mortgage note payable and senior and junior mezzanine loans

$
2,373,154

$
2,274,640

$
2,413,467

$
1,821,448Unsecured credit facility

$


$
8,439

$
172,301

$
167,916Term loan, credit facility and repurchase facility

$
48,881

$
48,397

$
95,897

$
94,321Collateralized debt obligations

$
2,608,230

$
1,185,196

$
2,608,065

$
1,021,114Junior subordinated debentures

$
150,000

$
38,029

$
150,000

$
134,300


Disclosure
about fair value of financial instruments is based on pertinent information available to the Company at September 30, 2009 and December 31, 2008. Although the
Company is not aware of any factors that would significantly affect the reasonable fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements
since September 30, 2009 and current estimates of fair value may differ significantly from the amounts presented herein.

The
following discussion of fair value was determined by the Manager, using available market information and appropriate valuation methodologies. Considerable judgment is necessary to
interpret market data and develop estimated fair value. Accordingly, fair values are not necessarily indicative of the amounts the Company could realize on disposition of the financial instruments.
Financial instruments with readily available active quoted prices or for which fair value can be measured from actively quoted prices generally will have a higher degree of pricing observability and a
lesser degree of judgment utilized in measuring fair value. Conversely, financial instruments rarely traded or not quoted will generally have less, or no, pricing observability and a higher degree of
judgment utilized in measuring fair value. The use of different market assumptions and/or estimation methodologies may have a material effect on estimated fair value amounts.

Fair Value on a Recurring Basis

Liabilities measured at fair value on a recurring basis are categorized in the table below based upon the lowest level of significant
input to the valuations. Derivatives were classified as Level III due to the significance of the credit valuation allowance which is based upon less observable inputs:

At September 30, 2009

Total

Level I

Level II

Level IIIFinancial Liabilities:Derivative instruments

$
139,421

$


$


$
139,421


54

---



Table of Contents

Gramercy Capital Corp.

Notes To Condensed Consolidated Financial Statements (Continued)

(Unaudited, amounts in thousands, except share and per share data)

September 30, 2009

13. Fair Value of Financial Instruments (Continued)

Fair Value on a Non-Recurring Basis

The Company uses fair value measurements on a nonrecurring basis in its assessment of assets classified as loans and other lending
investments, which are reported at cost and have been written down to fair value as a result of valuation allowances established for possible loan losses. The following table shows the fair value
hierarchy for those assets measured at fair value on a non-recurring basis based upon the lowest level of significant input to the valuations for which a non-recurring change
in fair value has been recorded:

At September 30, 2009

Total

Level I

Level II

Level IIIFinancial Assets:Lending investments

$
525,070

$


$


$
525,070Lending investments held for sale

$
43,878

$


$


$
43,878


The
total change in fair value of financial instruments for which a fair value adjustment has been included in the condensed consolidated statements of operations for the three and nine
months ended September 30, 2009 was $219,059 and $565,622, respectively.

The
valuations derived from pricing models used in the overall valuation process may include adjustments to the financial instruments. These adjustments may be made when, in management's
judgment, either the size of the position in the financial instrument or other features of the financial instrument such as its complexity, or the market in which the financial instrument is traded
(such as counterparty, credit, concentration or liquidity) require that an adjustment be made to the value derived from the pricing models. Additionally, an adjustment from the price derived from a
model typically reflects management's judgment that other participants in the market for the financial instrument being measured at fair value would also consider such an adjustment in pricing that
same financial instrument.

Financial
assets and liabilities presented at fair value and categorized as Level III are generally those that are marked to model using relevant empirical data to extrapolate an
estimated fair value. The models' inputs reflect assumptions that market participants would use in pricing the instrument in a current period transaction and outcomes from the models represent an exit
price and expected future cash flows. The parameters and inputs are adjusted for assumptions about risk and current market conditions. Changes to inputs in valuation models are not changes to
valuation methodologies, rather, the inputs are modified to reflect direct or indirect impacts on asset classes from changes in market conditions. Accordingly, results from valuation models in one
period may not be indicative of future period measurements.

14. Stockholders' Equity

The Company's authorized capital stock consists of 125,000,000 shares, $0.001 par value, of which the Company has authorized the issuance of up to 100,000,000 shares of common stock,
$0.001 par value per share, and 25,000,000 shares of preferred stock, par value $0.001 per share. As of September 30, 2009, 49,859,322 shares of common stock and 4,600,000 shares of preferred
stock were issued and outstanding.

55

---



Table of Contents

Gramercy Capital Corp.

Notes To Condensed Consolidated Financial Statements (Continued)

(Unaudited, amounts in thousands, except share and per share data)

September 30, 2009

14. Stockholders' Equity (Continued)

Preferred Stock

In April 2007, the Company issued 4,600,000 shares of its 8.125% Series A cumulative redeemable preferred stock (including the
underwriters' over-allotment option of 600,000 shares) with a mandatory liquidation preference of $25.00 per share. Holders of the Series A cumulative redeemable preferred shares
are entitled to annual dividends of $2.03125 per share on a quarterly basis and dividends are cumulative, subject to certain provisions. On or after April 18, 2012, the Company may at its
option redeem the Series A cumulative redeemable preferred stock at par for cash. Net proceeds (after deducting underwriting fees and expenses) from the offering were approximately $111,205.
Beginning with the fourth quarter of 2008, the Company's board of directors, elected not to pay the quarterly Series A preferred stock dividend of $0.50781 per share. As of September 30,
2009 and December 31, 2008 the Company accrued preferred stock dividends of $9,317 and $2,325, respectively.

Common Stock

In April 2008, the Company issued approximately 15,634,854 shares of common stock in connection with the American Financial
acquisition. These shares had a value of approximately $378,672 on the date the merger agreement was executed. Also, as a result of the American Financial acquisition, an affiliate of SL Green was
granted 644,787 shares of common stock for services rendered, subject to a one-year vesting period. These shares had a value of approximately $11,213 on the date of issuance. Subsequent to
issuance, SL Green OP owned approximately 15.8% of the outstanding shares of the Company's common stock.

In
December 2008, the Company entered into a letter agreement with the Manager and SL Green, pursuant to which the Manager agreed to pay $2,750 in cash and SL Green transferred to the
Company, 1.9 million shares of the Company's common stock, in full satisfaction of all potential obligations that the holders of Class B limited partner interests may have in respect of
the recalculation of the distribution amount to the holders at the end of 2008 calendar year. The shares of common stock were cancelled upon receipt by the Company. Subsequent to the letter agreement,
SL Green OP owned approximately 12.5% of the outstanding shares of the Company's common stock.

Equity Incentive Plan

As part of the Company's initial public offering, the Company instituted its Equity Incentive Plan. The Equity Incentive Plan, as
amended, authorizes (i) the grant of stock options that qualify as incentive stock options under Section 422 of the Internal Revenue Code of 1986, as amended, or ISOs, (ii) the
grant of stock options that do not qualify, or NQSOs, (iii) the grant of stock options in lieu of cash directors' fees and (iv) grants of shares of restricted and unrestricted common
stock. The exercise price of stock options will be determined by the compensation committee, but may not be less than 100% of the fair market value of the shares of common stock on the date of grant.
At September 30, 2009, 1,158,123 shares of common stock were available for issuance under the Equity Incentive Plan.

Options
granted under the Equity Incentive Plan to recipients who are employees of Gramercy are exercisable at the fair market value on the date of grant and, subject to termination of
employment, expire ten years from the date of grant, are not transferable other than on death, and are exercisable in

56

---



Table of Contents

Gramercy Capital Corp.

Notes To Condensed Consolidated Financial Statements (Continued)

(Unaudited, amounts in thousands, except share and per share data)

September 30, 2009

14. Stockholders' Equity (Continued)

three
to four annual installments commencing one year from the date of grant. In some instances, options may have been granted under the Equity Incentive Plan to persons who provide significant
services to the Company or are employees of SL Green. Options granted to recipients that are not employees have the same terms as those issued to employees except as it relates to any
performance-based provisions within the grant. To the extent there are performance provisions associated with a grant to a recipient who is not an employee, an estimated expense related to these
options is recognized over the vesting period and the final expense is reconciled at the point performance has been met, or the measurement date. If no performance based provision exists, the fair
value of the options is calculated on a quarterly basis and the related expense is recognized over the vesting period.

A
summary of the status of the Company's stock options as of September 30, 2009 and December 31, 2008 are presented below:

September 30, 2009

December 31, 2008Options
Outstanding

Weighted
Average
Exercise
Price

Options
Outstanding

Weighted
Average
Exercise
PriceBalance at beginning of period

$
1,691,336

$
17.61

$
1,428,169

$
22.82Modification








110,716


Granted


30,000


1.25


385,000


5.30Exercised








(85,547
)

14.83Lapsed or cancelled


(171,264
)

(21.56
)

(147,002
)

25.52Balance at end of period

$
1,550,072

$
16.81

$
1,691,336

$
17.61


For
the nine months ended September 30, 2009, all options were granted at a price of $1.25. The remaining weighted average contractual life of the options was 6.9 years.
Compensation expense of $29 and $91 and $245 and $771 was recorded for the three and nine months ended September 30, 2009 and 2008, respectively, related to the issuance of stock options.

Through
September 30, 2009, 1,135,004 restricted shares had been issued under the Equity Incentive Plan, of which 50% have vested. The vested and unvested shares are currently
entitled to receive distributions on common stock if declared by the Company. Holders of restricted shares are prohibited from selling such shares until they vest but are provided the ability to vote
such shares beginning on the date of grant. Compensation expense of $107 and $258 and $672 and $2,202 was recorded for the three and nine months ended September 30, 2009 and 2008, respectively,
related to the issuance of restricted shares.

Employee Stock Purchase Plan

In November 2007, the Company's board of directors adopted, and the stockholders subsequently approved in June 2008, the 2008 Employee
Stock Purchase Plan, or ESPP, to encourage its employees to increase their efforts to make the Company's business more successful by providing equity-based incentives to eligible employees. The ESPP
is intended to qualify as an "employee stock purchase plan"

57

---



Table of Contents

Gramercy Capital Corp.

Notes To Condensed Consolidated Financial Statements (Continued)

(Unaudited, amounts in thousands, except share and per share data)

September 30, 2009

14. Stockholders' Equity (Continued)

under
Section 423 of the Internal Revenue Code and has been adopted by the board to enable the Company's eligible employees to purchase its shares of common stock through payroll deductions.
The ESPP became effective on January 1, 2008 with a maximum of 250,000 shares of the common stock available for issuance, subject to adjustment upon a merger, reorganization, stock split or
other similar corporate change. The Company filed a registration statement on Form S-8 with the Securities and Exchange Commission with respect to the ESPP. The common stock will be
offered for purchase through a series of successive offering periods. Each offering period will be three months in duration and will begin on the first day of each calendar quarter, with the first
offering period having commenced on January 1, 2008. The ESPP provides for eligible employees to purchase the common stock at a purchase price equal to 85% of the lesser of (1) the
market value of the common stock on
the first day of the offering period or (2) the market value of the common stock on the last day of the offering period.

Outperformance Plan

In June 2005, the compensation committee of the board of directors approved a long-term incentive compensation program, the
2005 Outperformance Plan. Participants in the 2005 Outperformance Plan, were to share in a "performance pool" if the Company's total return to stockholders for the period from June 1, 2005
through May 31, 2008 exceeded a cumulative total return to stockholders of 30% during the measurement period over a base share price of $20.21 per share. Compensation expense of $308 and $926
was recorded for the three and nine months ended September 30, 2008, respectively, related to the 2005 Outperformance Plan. Based on the Company's total return to stockholders as of the
May 31, 2008 measurement period conclusion date, the Company did not meet the minimum 30% return threshold and accordingly, the plan participants automatically forfeited the LTIP Units and the
2005 Outperformance Plan expired as of that date.

Deferred Stock Compensation Plan for Directors

Under the Company's Independent Director's Deferral Program, which commenced April 2005, the Company's independent directors may elect
to defer up to 100% of their annual retainer fee, chairman fees and meeting fees. Unless otherwise elected by a participant, fees deferred under the program shall be credited in the form of phantom
stock units. The phantom stock units are convertible into an equal number of shares of common stock upon such directors' termination of service from the Board of Directors or a change in control by
the Company, as defined by the program. Phantom stock units are credited to each independent director quarterly using the closing price of the Company's common stock on the applicable dividend record
date for the respective quarter. Each participating independent director who elects to receive fees in the form of phantom stock units has the option to have their account credited for an equivalent
amount of phantom stock units based on the dividend rate for each quarter or have dividends paid in cash.

As
of September 30, 2009, there were approximately 247,961 phantom stock units outstanding, of which 235,961 units are vested.

58

---



Table of Contents

Gramercy Capital Corp.

Notes To Condensed Consolidated Financial Statements (Continued)

(Unaudited, amounts in thousands, except share and per share data)

September 30, 2009

14. Stockholders' Equity (Continued)

Earnings per Share

Earnings per share for the three and nine months ended September 30, 2009 and 2008 is computed as follows:

Three Months
Ended
September 30,

Nine Months
Ended
September 30,2009

2008

2009

2008NumeratorIncome (loss)Basic Earnings:Net income (loss) available to common stockholders

$
(203,116
)
$
7,323

$
(428,549
)
$
40,518Effect of dilutive securities











Diluted Earnings:Net income (loss) available to common stockholders

$
(203,116
)
$
7,323

$
(428,549
)
$
40,518DenominatorWeighted average sharesBasicShares available to common shareholders


49,857


51,307


49,844


45,736Effect of dilutive securitiesStock based compensation plans











29Phantom stock units





49





49Diluted shares


49,857


51,356


49,844


45,814


Diluted
income (loss) per share assumes the conversion of all common share equivalents into an equivalent number of common shares, if the effect is not dilutive. For the three and nine
months ended September 30, 2009, 161 and 150 share options and 248 and 248 phantom share units, both computed under the treasury share method, respectively, were excluded from the diluted loss
per share computation as their effect would have been antidilutive for both periods.

Accumulated
other comprehensive income (loss) for the nine months ended September 30, 2009 and 2008 was comprised of the following:

September 30,2009

2008Net unrealized gains on held to maturity securities

$
1,522

$
5,860Net realized and unrealized losses on interest rate swap and cap agreements accounted for as cash flow hedges


(143,782
)

(88,851
)Total accumulated and other comprehensive loss

$
(142,260
)
$
(82,991
)


Total
comprehensive income (loss) totaled $(403,062) and $30,193 for the nine months ended September 30, 2009 and 2008, respectively

59

---



Table of Contents

Gramercy Capital Corp.

Notes To Condensed Consolidated Financial Statements (Continued)

(Unaudited, amounts in thousands, except share and per share data)

September 30, 2009

15. Benefit Plans

In June 2009, the Company implemented a 401(K) Savings/Retirement Plan, or the 401(K) Plan, to
cover eligible employees of the Company, and any designated affiliate. The 401(K) Plan permits eligible employees to defer up to 15% of their annual compensation, subject to certain limitations
imposed by the Code. The employees' elective deferrals are immediately vested and non-forfeitable. The 401(K) Plan provides for discretionary matching contributions by the Company. Prior
to the implementation of the 401(K) Plan, as an affiliate of SL Green, the Company's employees were eligible to participate in a 401(K) Savings/Retirement Plan implemented by SL Green. Except for the
401(k) Plan, at September 30, 2009, the Company did not maintain a defined benefit pension plan, post-retirement health and welfare plan or other benefit plans.

16. Commitments and Contingencies

The Company and the Operating Partnership are not presently involved in any material litigation nor, to the Company's knowledge, is any material litigation threatened against the Company
or its investments, other than routine litigation arising in the ordinary course of business. Management believes the costs, if any, incurred by the Operating Partnership and the Company related to
litigation will not materially affect its financial position, operating results or liquidity.

The
Company's corporate offices at 420 Lexington Avenue, New York, New York are subject to an operating lease agreement with SLG Graybar Sublease LLC, an affiliate of SL Green,
effective May 1, 2005. The lease is for approximately 7,300 square feet and carries a term of 10 years with rents of approximately $249 per annum for year one rising to $315 per annum in
year ten. In May and June 2009, the Company amended its lease with SLG Graybar Sublease LLC to increase the leased premises by approximately 2,260 square feet. The additional premises is leased
on a co-terminus basis with the remainder of the Company's leased premises and carries rents of approximately $103 per annum during the initial lease year and $123 per annum during the
final lease year.

As
of September 30, 2009, the Company leased certain of its commercial properties from third parties with expiration dates extending to the year 2085 and has various ground leases
with expiration dates extending through 2101. These lease obligations generally contain rent increases and renewal options.

Future
minimum lease payments under non-cancelable operating leases as of September 30, 2009 are as follows:

Operating Leases2009 (October 1December 31)

$
4,7682010


19,1972011


19,0272012


18,5832013


18,457Thereafter


152,370Total minimum lease payments

$
232,402


60

---



Table of Contents

Gramercy Capital Corp.

Notes To Condensed Consolidated Financial Statements (Continued)

(Unaudited, amounts in thousands, except share and per share data)

September 30, 2009

16. Commitments and Contingencies (Continued)

The
Company, through certain of its subsidiaries, may be required in its role in connection with its CDOs, to repurchase loans that it contributed to its CDOs in the event of breaches of
certain representations or warranties provided at the time the CDOs were formed and the loans contributed. These obligations do not relate to the credit performance of the loans or other collateral
contributed to
the CDOs, but only to breaches of specific representations and warranties. Since inception, the Company has not been required to make any repurchases.

Certain
real estate assets are pledged as collateral for mortgage loans held by two of the Company's CDOs. Additionally, borrowings secured by these pledges are guaranteed by the
Company.

17. Financial Instruments: Derivatives and Hedging

The Company recognizes all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If a derivative is a hedge,
depending on the nature of the hedge, changes in the fair value of the derivative will either be offset against the change in fair value of the hedged asset, liability, or firm commitment through
earnings, or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in
earnings. Derivative accounting may increase or decrease reported net income and stockholders' equity prospectively, depending on future levels of LIBOR interest rates and other variables affecting
the fair values of derivative instruments and hedged items, but will have no effect on cash flows, provided the contract is carried through to full term.

The
following table summarizes the notional and fair value of the Company's derivative financial instruments at September 30, 2009. The notional value is an indication of the
extent of the Company's

61

---



Table of Contents

Gramercy Capital Corp.

Notes To Condensed Consolidated Financial Statements (Continued)

(Unaudited, amounts in thousands, except share and per share data)

September 30, 2009

17. Financial Instruments: Derivatives and Hedging (Continued)

involvement
in this instrument at that time, but does not represent exposure to credit, interest rate or market risks:

Benchmark
Rate

Notional
Value

Strike
Rate

Effective
Date

Expiration
Date

Fair
ValueInterest Rate Swap

1 month LIBOR

$
3,465


4.280
%

07/2005


12/2009

$
(23
)Interest Rate Swap

3 month LIBOR


3,465


5.178
%

04/2006


03/2010


(68
)Interest Rate Swap

3 month LIBOR


12,000


9.850
%

08/2006


08/2011


(852
)Interest Rate Swap

1 month LIBOR


42,718


4.990
%

01/2007


01/2017


(5,760
)Interest Rate Swap

3 month LIBOR


347,908


5.408
%

08/2007


05/2017


(34,514
)Interest Rate Swap

3 month LIBOR


699,441


5.331
%

08/2007


01/2018


(89,695
)Interest Rate Swap

3 month LIBOR


14,650


4.425
%

11/2007


07/2015


(1,121
)Interest Rate Swap

3 month LIBOR


12,000


3.063
%

01/2008


07/2010


(245
)Interest Rate Swap

3 month LIBOR


2,000


3.073
%

01/2008


07/2010


(39
)Interest Rate Swap

3 month LIBOR


24,143


5.114
%

02/2008


01/2017


(2,721
)Interest Rate Swap

3 month LIBOR


16,412


5.203
%

02/2008


05/2017


(1,949
)Interest Rate Swap

3 month LIBOR


4,700


3.170
%

04/2008


04/2012


(178
)Interest Rate Swap

1 month LIBOR


9,375


4.260
%

08/2008


01/2015


(659
)Interest Rate Swap

3 month LIBOR


10,000


3.920
%

10/2008


10/2013


(580
)Interest Rate Swap

3 month LIBOR


17,500


3.920
%

10/2008


10/2013


(1,015
)Interest Rate Cap

1 month LIBOR


250,000


5.250
%

04/2008


03/2010


Interest Rate Cap

1 month LIBOR


600,000


5.250
%

08/2008


03/2010


Total



$
2,069,777










$
(139,419
)


At September 30, 2009, derivative instruments were reported at their fair value as a net liability of $139,419. The changes in fair value
of derivatives for the nine months ended September 30, 2009 are represented as deferred losses in Accumulated Other Comprehensive Income (loss) of $17,852. For the three and nine months ended
September 30, 2009, the Company recognized a decrease to interest expense of $259 and $240, respectively, attributable to any ineffective component of its derivative instruments designated as
cash flow hedges. Currently, all derivative instruments are designated as cash flow hedging instruments. Over time, the realized and unrealized gains and losses held in Accumulated Other Comprehensive
Income (loss) will be reclassified into earnings in the same periods in which the hedged interest payments affect earnings.

18. Income Taxes

The Company has elected to be taxed as a REIT, under Sections 856 through 860 of the Internal Revenue Code beginning with its taxable year ended December 31, 2004. To
qualify as a REIT, the Company must meet certain organizational and operational requirements, including a requirement to distribute at least 90% of its ordinary taxable income, if any, to
stockholders. As a REIT, the Company generally will not be subject to U.S. federal income tax on taxable income that it distributes to its stockholders. If the Company fails to qualify as a REIT in
any taxable year, it will then be subject to U.S. federal income taxes on taxable income at regular corporate rates and will not be permitted to qualify for treatment as a REIT for U.S. federal income
tax purposes for four years following the year

62

---



Table of Contents

Gramercy Capital Corp.

Notes To Condensed Consolidated Financial Statements (Continued)

(Unaudited, amounts in thousands, except share and per share data)

September 30, 2009

18. Income Taxes (Continued)

during
which qualification is lost unless the Internal Revenue Service grants the Company relief under certain statutory provisions. Such an event could materially adversely affect the Company's net
income and net cash available for distributions to stockholders. However, the Company believes that it is organized and will operate in such a manner as to qualify for treatment as a REIT and the
Company intends to operate in the foreseeable future in such a manner so that it will qualify as a REIT for U.S. federal income tax purposes. The Company may, however, be subject to certain state and
local taxes.

For
the three and nine months ended September 30, 2009, the Company recorded $88 and $2,489 of income tax expense, respectively. For the three and nine months ended
September 30, 2008 the Company recorded $36 and $47 of income tax expense, respectively. Included in tax expense for the nine months ended September 30, 2009 is $2,100 of state income
taxes on the gain of extinguishment of debt of $107,229. Under federal tax law, the Company is allowed to defer this gain until 2014, however not all states follow this federal rule.

19. Segment Reporting

Prior to the acquisition of American Financial, the Company was a REIT focused primarily on originating and acquiring loans and securities related to real estate, and under the
provisions of ASC 280-10 (SFAS 131) operated in only one segment. As a result of the acquisition of American Financial, the Company has determined that it has two reportable
operating segments: Finance and Real Estate. The reportable segments were determined based on the management approach, which looks to the Company's internal organizational structure. These two lines
of business require different support infrastructures.

The
Finance segment includes all of the Company's activities related to senior and mezzanine real estate debt and senior and mezzanine capital investment activities and the financing
thereof, including the Company's CMBS investments. These include a dedicated management team within Gramercy Finance for real estate lending origination, acquisition and servicing.

The
Real Estate segment includes all of the Company's activities related to the ownership and leasing of commercial real estate and credit net lease properties. In connection with the
Company's significant increase in the size and scope of its real estate portfolio resulting from the American Financial acquisition, the Company initiated the build-out of an integrated
asset management platform within Gramercy Realty to consolidate responsibility for, and control over, leasing, lease administration, property management, and tenant relationship management.

63

---



Table of Contents

Gramercy Capital Corp.

Notes To Condensed Consolidated Financial Statements (Continued)

(Unaudited, amounts in thousands, except share and per share data)

September 30, 2009

19. Segment Reporting (Continued)

The
Company evaluates performance based on the following financial measures for each segment:

Finance

Real
Estate

Corporate/
Other(1)

Total
CompanyThree months ended September 30, 2009Total revenues(2)

$
44,811

$
108,819

$


$
153,630Earnings (loss) from unconsolidated joint ventures


3,056


(659
)




2,397Total operating and interest expense(3)


(244,507
)

(104,345
)

(8,478
)

(357,330
)Net income (loss) from continuing operations

$
(196,640
)
$
3,815

$
(8,478
)
$
(201,303
)




Finance

Real
Estate

Corporate/
Other(1)

Total
CompanyNine months ended September 30, 2009Total revenues(2)

$
146,648

$
329,769

$


$
476,417Earnings (loss) from unconsolidated joint ventures


8,559


(1,975
)




6,584Total operating and interest expense(3)


(551,527
)

(314,977
)

(29,589
)

(896,093
)Net income (loss) from continuing operations

$
(396,320
)
$
12,817

$
(29,589
)
$
(413,092
)Total Assets

$
3,680,489

$
4,014,921

$
(709,977
)
$
6,985,433


(1)Corporate
and Other represents all corporate level items, including general and administrative expenses and any intercompany elimination necessary to
reconcile to the consolidated Company totals.(2)Total
revenue represents all revenue earned during the period from the assets in each segment. Revenue from the Finance business primarily represents
interest income and revenue from the Real Estate business primarily represents operating lease income.(3)Total
operating and interest expense includes provision for loan losses for the Finance business and operating costs on commercial property assets for the
Real Estate business, and interest expense and gain (loss) on early extinguishment of debt, specifically related to each segment. General and administrative expense is included in Corporate/Other for
all periods. Depreciation and amortization of $27,393 and $84,825 for the three and nine months ended September 30, 2009, respectively, is included in the amounts presented above.


20. Subsequent Events

On October 15, 2009, the Operating Partnership entered into an exchange agreement with certain affiliates of Taberna Capital Management, LLC (collectively, "Taberna"),
pursuant to which a subsidiary of the Operating Partnership and Taberna agreed to exchange $97,500 of the Junior Notes for $97,533 face amount of bonds previously issued by the Company's CDOs that the
Company had repurchased in the open market. The transaction will be accounted for as an exchange of debt whereby no gain or loss will be recorded as of the date of the exchange; however, the effective
interest rate will prospectively

64

---



Table of Contents

Gramercy Capital Corp.

Notes To Condensed Consolidated Financial Statements (Continued)

(Unaudited, amounts in thousands, except share and per share data)

September 30, 2009

20. Subsequent Events (Continued)

reflect
the lower cash flows that will be paid by the Company over the remaining life of the CDO bonds re-issued in the exchange. As a condition precedent to the exchange agreement,
certain indenture covenants which restrict the Company from declaring or paying dividends or distributions and taking certain other corporate actions during the 2009 calendar year, have been
eliminated from the remaining $52,500 of the Junior Notes outstanding.

65

---





Table of Contents

ITEM 2:    Management's Discussion and Analysis of Financial Condition and Results of Operations  (Unaudited amounts in thousands, except for share
and per share data)

Overview

Gramercy Capital Corp. is a self-managed, integrated commercial real estate finance and property investment company. We
were formed in April 2004 and commenced operations upon the completion of our initial public offering in August 2004. On April 1, 2008, we completed the acquisition of American Financial Realty
Trust (NYSE: AFR), or American Financial, in a transaction with a total value of approximately $3.3 billion, including the assumption of approximately $1.3 billion of American
Financial's secured debt.

We
conduct substantially all of our operations through our operating partnership, GKK Capital LP, or our Operating Partnership. We are the sole general partner of our Operating
Partnership. Prior to the internalization of our management in April 2009, we were externally managed and advised by GKK Manager LLC, or the Manager, a wholly-owned subsidiary of SL Green
Realty Corp. (NYSE: SLG), or SL Green. On April 24, 2009, we completed the internalization of our management through the direct acquisition of the Manager. As a result of the internalization,
beginning in May 2009, management and incentive fees payable by us to the Manager ceased, and we added 77 former employees of the Manager to our own staff. We expensed approximately
$5.0 million for costs incurred through September 30, 2009 in connection with our acquisition of the Manager.

We
have elected to be taxed as a real estate investment trust, or REIT, under the Internal Revenue Code of 1986, as amended, or the Internal Revenue Code, and generally will not be
subject to U.S. federal income taxes to the extent we distribute our income to our stockholders. We have in the past established, and may in the future establish taxable REIT subsidiaries, or TRSs, to
effect various taxable transactions. Those TRSs would incur U.S. federal, state and local taxes on the taxable income from their activities. Unless the context requires otherwise, all references to
"we," "our" and "us" mean Gramercy Capital Corp.

Since
our inception, we have completed debt investment transactions in a variety of markets and secured by a variety of property types. Until the second half of 2007, the market for
commercial real estate debt exhibited high relative returns and significant inflows of capital. However, due to continuing illiquidity in the credit markets and an overall slowing in macroeconomic
conditions, the default levels for commercial real estate have risen. Beginning in the second quarter of 2007, the sub-prime residential lending and single family housing markets in the
U.S. began to experience significant default rates, declining real estate values and increasing backlog of housing supply, and other lending markets experienced higher volatility and decreased
liquidity resulting from the poor credit performance in the residential lending markets. Concerns in the residential sector of the capital markets quickly spread more broadly into the asset-backed,
commercial real estate, corporate and other credit and equity markets. The factors described above have resulted in substantially reduced mortgage loan originations and securitizations, and caused
more generalized credit market dislocations and a significant contraction in available credit. As a result, most financial industry participants, including commercial real estate lenders and
investors, including us, continue to find it difficult to obtain cost-effective debt capital to finance new investment activity or to refinance maturing debt.

Credit
spreads on commercial mortgages (i.e., the interest rate spread over given benchmarks such as LIBOR or U.S. Treasury securities) are significantly influenced by:
(a) supply and demand for such mortgage loans; (b) perceived risk of the underlying real estate collateral cash flow; and (c) capital markets execution for the sale or financing
of such commercial mortgage assets. The number of potential lenders in the market place and the amount of funds they are willing to devote to commercial mortgage assets will impact credit spreads. As
liquidity increases, spreads on equivalent commercial mortgage loans will decrease. Conversely, a lack of liquidity results in credit spreads increasing. During periods of volatility, such as the
markets we are currently experiencing, the number of lenders

66

---



Table of Contents

participating
in the market may change at an accelerated pace. Further, many lenders depend on the capital markets to finance their portfolio of commercial loans. Lenders are forced to increase the
credit spread at which they are willing to lend as liquidity in the capital market decreases. As the market tightens, many warehouse lenders have requested additional collateral or repayments with
respect to their loans in order to maintain margins that are acceptable to them.

For
existing loans, when credit spreads widen, the fair value of these loans decreases. If a lender were to originate a similar loan today, such loan would carry a greater credit spread
than the existing loan. Even though a loan may be performing in accordance with its loan agreement and the underlying collateral has not changed, the fair value of the loan may be negatively impacted
by the incremental interest foregone from the widened credit spread. Accordingly, when a lender wishes to sell or finance the loan, the reduced value of the loan may reduce the total proceeds that the
lender will receive.

We
believe the current environment of rapidly changing and evolving markets will provide increasing challenges to both our industry and our company. We continue to believe the commercial
lending business can provide attractive risk-adjusted returns, however, it is being adversely affected by volatility in the credit and capital markets and due to these uncertainties, we
are experiencing the following: (i) sharply lower loan originations and acquisitions, (ii) reduced access to capital, and increased cost of financing, (iii) reduced cash available
for distribution to stockholders, particularly as our debt portfolio is reduced by scheduled maturities and prepayments and (iv) increased instances of defaults by borrowers and tenants.

During
2008 and to date in 2009, the global capital markets continued to experience tremendous volatility and a wide-ranging lack of liquidity. The impact of the global
credit crisis on our sector has been acute. Transaction volume has declined significantly, credit spreads for all forms of mortgage debt investments have reached all-time highs, issuance
levels of CMBS have ground to a halt, and other forms of financing from the debt markets have been dramatically curtailed. Financial institutions still hold significant inventories of unsold loans and
CMBS, creating a further overhang on the markets. We believe that the continuing dislocation in the debt capital markets, coupled with a recession in the U.S., has reduced property valuations and has
adversely impacted commercial real estate fundamentals. These developments can impact and have impacted the performance of our existing portfolio of financial and real property assets. Furthermore,
the volatility in the capital markets has caused stress to all financial institutions and, our business is dependent upon these counterparties for, among other things, financing, rental payments on
the majority of our owned properties and interest rate derivatives. We expect the general unavailability of credit to continue at
least through 2009 and perhaps beyond. It is difficult to predict when conditions in our business will improve. We expect that the adverse circumstances and trends in our business and securities will
begin to improve only as the credit markets and overall economy improve. Continued disruption in the global credit markets or further deterioration in those markets may have a material adverse effect
on our ability to repay or refinance our borrowings and our ability to grow and operate our business.

We
have responded to these difficult conditions by sharply decreasing investment activity when we observed deteriorating market conditions, increasing our liquidity, extending debt
maturities and restructuring certain of our debt facilities. In addition, beginning with the third quarter of 2008, our board of directors elected to not pay the dividend on common stock, which for
the second quarter of 2008 was $0.63 per share. Our board of directors also elected not to pay the Series A preferred stock dividend of $0.50781 per share beginning with the fourth quarter of
2008. The preferred stock dividend for the fourth quarter of 2008 and the first three quarters of 2009 has been accrued for as of September 30, 2009. Our board of directors will revisit our
dividend policy in 2010. We may elect to pay dividends on our common stock in cash or a combination of cash and shares of common stock as permitted under U.S. federal income tax laws governing REIT
distribution requirements.

67

---



Table of Contents

In
response to these market disruptions, legislators and financial regulators implemented a number of mechanisms designed to add stability to the financial markets, including the
provision of direct and indirect assistance to distressed financial institutions, assistance by the banking authorities in arranging acquisitions of weakened banks and broker-dealers and programs by
the Federal Reserve to provide liquidity to the commercial paper markets. On October 3, 2008, the Emergency Economic Stabilization Act of 2008, or the EESA was enacted into law. The EESA
authorized the U.S. Secretary of Treasury to create a Troubled Asset Relief Program, or TARP, to purchase from financial institutions up to $700 billion of residential or commercial mortgages
and any securities, obligations, or other instruments that are based on, or related to, such mortgages, that in each case was originated or issued on or before March 14, 2008. The ESSA also
provides for a program that would allow companies to insure their troubled assets. The U.S. Treasury has announced the establishment of the following programs under TARP: the Capital Purchase Program,
the Targeted Investment Program, the Systemically Failing Institutions Program, the Asset Guarantee Program, the Auto Industry Financing Program and the Homeowner Affordability and Stability Plan,
which is partially financed by TARP. In addition, the American Recovery and Reinvestment Act of 2009, or ARRA, was signed into law on February 17, 2009. ARRA includes a wide variety of programs
intended to stimulate the economy and provide for extensive infrastructure, energy, health and education needs. ARRA also imposes certain new executive compensation and corporate expenditure limits on
all current and future TARP recipients.

On
November 25, 2008, the U.S. Treasury and the Federal Reserve jointly announced the establishment of the Troubled Asset Loan Facility ("TALF"). Under the TALF, upon satisfaction
of certain terms and conditions, the Federal Reserve Bank of New York ("FRBNY") makes non-recourse loans to borrowers collateralized by certain eligible collateral, which initially
included certain highly rated asset-backed securities, but not non-agency mortgage backed securities or CMBS.
On March 23, 2009 the U.S. Treasury and the Federal Reserve announced preliminary plans to expand the TALF to include certain highly rated non-agency residential mortgage-backed
securities, as well as highly rated commercial mortgage-backed securities. As of July 2009, the Federal Reserve has expanded TALF to include CMBS created on or after January 1, 2009 and certain
high-quality CMBS issued before January 1, 2009. However, on August 17, 2009, the Federal Reserve Board and the U.S. Treasury announced that, unless economic developments cause them to
reconsider, TALF will not be expanded to non-agency residential mortgage-backed securities.

On
March 23, 2009, the U.S. Treasury, in conjunction with the Federal Deposit Insurance Corporation, or FDIC, and the Federal Reserve, announced the establishment of the
Public-Private Investment Program ("PPIP"). The PPIP has two primary components: a Legacy Loans Program and a Legacy Securities Program. The Legacy Loans Program component of the PPIP contemplates the
establishment of joint public and private investment funds ("Legacy Loans PPIFs") to purchase troubled loans from insured depository institutions with equity capital from both the U.S. Treasury and
private investors and non-recourse debt issued by the Legacy Loans PPIF and guaranteed by the FDIC. It is currently not clear whether and on what terms the Legacy Loans Program will
continue.

The
U.S. Treasury has selected nine asset managers under the Legacy Securities Program to raise investments for and manage joint public and private investment funds ("Legacy Securities
PPIFs") that will purchase certain non-agency residential mortgage-backed securities issued prior to January 1, 2009. Legacy Securities PPIF are eligible for equity and debt
financing from the U.S. Treasury.

The
overall effects of these and other legislative and regulatory efforts on the financial markets is uncertain, and they may not have the intended stabilization effects. Should these or
other legislative or regulatory initiatives fail to stabilize and add liquidity to the financial markets, our business, financial condition, results of operations and prospects could be materially and
adversely affected.

Even
if legislative or regulatory initiatives or other efforts successfully stabilize and add liquidity to the financial markets, we may need to modify our strategies, businesses or
operations, and we may

68

---



Table of Contents

incur
increased capital requirements and constraints or additional costs in order to satisfy new regulatory requirements or to compete in a changed business environment. It is uncertain what effects
recently enacted or future legislation or regulatory initiatives will have on us. Given the volatile nature of the current market disruption and the uncertainties underlying efforts to mitigate or
reverse the disruption, we may not timely anticipate or manage existing, new or additional risks, contingencies or developments, including regulatory developments and trends in new products and
services, in the current or future environment. Our failure to do so could materially and adversely affect our business, financial condition, results of operations and prospects.

The
recent credit crisis has put many borrowers and financial institutions, including many of our borrowers and tenants, under increasing amounts of financial and capital distress. This
has led to an increased incidence of defaults under loans and leases and could lead to increased vacancy rates in office properties servicing these institutions.

Our
commercial real estate finance business, which operates under the name Gramercy Finance, focuses on the direct origination and acquisition of whole loans, bridge loans, subordinate
interests in whole loans, mezzanine loans, preferred equity, commercial mortgage-backed securities, or CMBS, and other real estate related securities. Our property investment business, which operates
under the name Gramercy Realty, focuses on the acquisition and management of commercial properties leased primarily to regulated financial institutions and affiliated users throughout the United
States. These institutions are for the most part deposit taking commercial banks, thrifts and credit unions, which we generally refer to as "banks." Our portfolio of wholly-owned and jointly-owned
bank branches and office buildings is leased to large banks such as Bank of America, N.A., or Bank of America, Wachovia Bank National Association (now owned by Wells Fargo & Company, or Wells
Fargo), or Wachovia Bank, Regions Financial Corporation, or Regions Financial, and Citizens Financial Group, Inc., or Citizen Financial, and to mid-sized and community banks.
Neither Gramercy Finance nor Gramercy Realty is a separate legal entity but are divisions of us through which our commercial real estate finance and property investment businesses are conducted.

69

---



Table of Contents

The
aggregate carrying values, allocated by product type and weighted average coupons of our loans, and other lending investments and CMBS investments as of September 30, 2009 and
December 31, 2008, including loans held for sale, were as follows:

Carrying Value(1)

Allocation by
Investment Type

Fixed Rate:
Average Yield(2)

Floating Rate:
Average Spread over
LIBOR(3)2009

2008

2009

2008

2009

2008

2009

2008(in 000's)Whole loans, floating rate

$
904,774

$
1,222,991


60.5
%

55.3
%







403 bps


418 bpsWhole loans, fixed rate


122,839


189,946


8.2
%

8.6
%

6.89
%

7.17
%




Subordinate interests in whole loans, floating rate


77,761


80,608


5.2
%

3.6
%







259 bps


564 bpsSubordinate interests in whole loans, fixed rate


44,900


63,179


3.0
%

2.9
%

8.85
%

9.22
%




Mezzanine loans, floating rate


218,825


396,190


14.6
%

17.9
%







597 bps


654 bpsMezzanine loans, fixed rate


86,037


248,558


5.8
%

11.2
%

7.99
%

10.21
%




Preferred equity, floating rate


28,198





1.9
%

0.0
%







1,064 bps


Preferred equity, fixed rate


12,247


12,001


0.8
%

0.5
%

7.20
%

10.22
%




Subtotal/Weighted average


1,495,581


2,213,473


100.0
%

100.0
%

7.59
%

8.96
%

444 bps


480 bpsCMBS, floating rate


71,078


70,893


7.2
%

8.1
%







315 bps


945 bpsCMBS, fixed rate


912,289


799,080


92.8
%

91.9
%

7.75
%

6.26
%




Subtotal/Weighted average


983,367


869,973


100.0
%

100.0
%

7.75
%

6.26
%

315 bps


945 bpsTotal

$
2,478,948

$
3,083,446


100.0
%

100.0
%

7.71
%

7.32
%

437 bps


498 bps


(1)Loans
and other lending investments and CMBS investments are presented after scheduled amortization payments and prepayments, and are net of unamortized
fees, discounts, unfunded commitments, reserves for possible loan losses, and other adjustments.(2)Weighted
average effective yield and weighted average effective spread calculations include loans classified as non-performing. The schedule
includes non-performing loans classified as whole loansfloating rate of approximately $73,366 with an effective spread of 638 basis points and non-performing loans
classified as mezzanine loansfloating rate of approximately $12,881 with an effective spread of 858 basis points.(3)Spreads
over an index other than 30 day-LIBOR have been adjusted to a LIBOR based equivalent. In some cases, LIBOR is floored, giving
rise to higher current effective spreads.


All of our term CDO liabilities are in their reinvestment periods which means when the underlying assets repay we are able to reinvest the
proceeds (assuming we are in compliance in our CDOs with certain financial covenants) in new assets without having to repay the liabilities. Because credit spreads are currently much wider than when
we issued these liabilities, we currently expect to earn a higher return on equity on capital redeployed in this market. Approximately $254.6 million, or 17.0%, of our loans have maturity dates
in the remainder of 2009. However, many of these loans contain extension options of at least six months (many subject to performance criteria) and we expect that substantially all loans that qualify
will be extended, so it is difficult to estimate how much capital from initial maturities or early pre-payments may be recycled into higher earning investments.

As
of September 30, 2009, Gramercy Finance also held interests in two credit tenant net lease investments, or CTL investments, two interests in joint ventures holding fee
positions on properties subject to long-term ground leases and a 100% fee interest in a property subject to a long-term ground lease.

70

---



Table of Contents

As
of September 30, 2009, Gramercy Realty owned a portfolio comprised of 638 bank branches, 327 office buildings and six land parcels, of which 54 bank branches and one office
building were partially-owned through joint ventures. Our wholly-owned properties aggregated approximately 26.0 million rentable square feet and our partially-owned properties aggregated
approximately 0.6 million rentable square feet, including 0.3 million rentable square feet in an unconsolidated joint venture. As of September 30, 2009, the occupancy of our
wholly-owned properties was 85.9% and the occupancy for our partially-owned properties was 99.8%. Our two largest tenants are Bank of America and Wachovia Bank, and, for the nine months ended
September 30, 2009, they represented approximately 41.6% and 15.5%, respectively, of the rental income of our portfolio and occupied approximately 44.2% and 17.2%, respectively, of our total
rentable square feet.

Summarized
in the table below are our key property portfolio statistics as of September 30, 2009 and December 31, 2008:

Number of Properties

Rentable Square Feet

OccupancyPortfolio

September 30,
2009

December 31,
2008

September 30,
2009

December 31,
2008

September 30,
2009

December 31,
2008Core


643


644


20,132,213


20,018,305


92.7
%

95.7
%ValueAdd


212


205


4,789,824


4,561,161


65.6
%

66.6
%Subtotal


855


849


24,922,037


24,579,466


87.5
%

90.3
%Held for Sale


62


84


1,470,420


1,832,235


63.4
%

59.9
%Total(1)


917


933


26,392,457


26,411,701


86.1
%

88.2
%


(1)Excludes
investments in unconsolidated joint ventures.


Due
to the nature of the business of our tenant base, which places a high premium on serving its customers from a well established distribution network, we typically enter into
long-term leases with our financial institution tenants. As of September 30, 2009, the weighted average remaining term of our leases was 9.5 years and approximately 79.1% of
our base revenue was derived from long-term leases with financial institution tenants. With in-house capabilities in acquisitions, asset management, property management and
leasing, we are focused on maximizing the value of our portfolio through strategic sales and through effective and efficient property management and leasing operations.

We
rely on the credit and equity markets to finance and grow our business. Beginning the second half of 2007 severe credit and liquidity issues in the sub-prime residential
lending and single
family housing sectors negatively impacted the asset-backed and corporate fixed income markets, and the equity securities of financial institutions and real estate companies. As the severity of
residential sector issues increased, nearly all securities markets experienced reduced liquidity and greater risk premiums as concerns about the outlook for the U.S. and world economic growth
increased. These concerns continue and risk premiums in many capital and credit markets remain at or near all-time highs with liquidity extremely low compared to historical standards or
virtually non-existent. As a result, most commercial real estate finance and financial services industry participants, including us, have reduced new investment activity until the capital
and credit markets become more stable, the macroeconomic outlook becomes clearer and market liquidity increases. In this environment, we are focused on actively managing portfolio credit, generating
and recycling liquidity from existing assets, leasing vacant space, extending debt maturities and reducing capital expenses.

Liquidity
is a measurement of the ability to meet cash requirements, including ongoing commitments to repay borrowings, fund and maintain loans and other investments, pay dividends and
other general business needs. In addition to cash on hand, our primary sources of funds for short-term liquidity requirements, including working capital, distributions, if any, debt
service and additional investments, if any, consists of (i) cash flow from operations; (ii) proceeds and management fees from

71

---



Table of Contents

our
existing CDOs; (iii) proceeds from principal and interest payments and rents on our investments; (iv) proceeds from potential loan and asset sales; and, to a lesser extent,
(v) new financings or additional securitization or CDO offerings and (vi) proceeds from additional common or preferred equity offerings. We believe these sources of financing will be
sufficient to meet our short term liquidity requirements. Due to continued market turbulence, we do not anticipate having the ability in the near term to access new equity or debt capital through new
warehouse lines, CDO issuances, term or credit facilities or trust preferred issuances, although we continue to explore capital raising options. In the event we are not able to successfully secure
financing, we will rely primarily on cash on hand, cash flows from operations, principal, interest and lease payments on our investments and proceeds from asset and loan sales to satisfy our liquidity
requirements. If we (i) are unable to renew, replace or expand our sources of financing, (ii) are unable to execute asset and loan sales in a timely manner or to receive anticipated
proceeds from them or (iii) fully utilize available cash, it may have an adverse effect on our business, results of operations and ability to make distributions to our stockholders.

The
majority of our loan and other investments and CMBS are pledged as collateral for our CDO bonds and the income generated from these investments is used to fund interest obligations
of our CDO bonds and the remaining income, if any, is retained by us. Our CDO bonds contain minimum interest coverage and asset over collateralization covenants that must be met in order for us to
receive such payments and to receive the subordinate collateral management fee earned. If we fail these covenants in some or all of our CDOs, all cash flows from the applicable CDO, other than senior
collateral management fees, would be diverted to repay principal and interest on the most senior outstanding CDO bonds and we may not receive any payments in respect of some or all CDO bonds we own,
our equity in the CDOs and the subordinate management fee until that CDO regained compliance with such tests. While we were in compliance with all such covenants as of September 30, 2009, our
compliance margin was narrow and relatively small declines in our performance and credit metrics could cause us to fall out of compliance in the future. In the event of non-compliance,
cash flows from the CDOs to us as a bondholder and holder of the
preferred shares may be reduced or eliminated. The chart below is a summary of our CDO compliance tests as of the most recent distribution date (October 25, 2009 for CDOs 2005-1 and
2006-1 and August 15, 2009 for CDO 2007-1):

Cash Flow Triggers

CDO 2005-1

CDO 2006-1

CDO 2007-1Overcollateralization(1)Current


118.29%


107.82%


102.12%Limit


117.85%


105.15%


102.05%Pass/Fail


Pass


Pass


PassInterest Coverage(2)Current


699.70%


725.64%


N/ALimit


132.85%


105.15%


N/APass/Fail


Pass


Pass


N/A


(1)The
overcollateralization ratio divides the total principal balance of all collateral in the CDO by the total bonds outstanding for the classes senior to
those retained by us. To the extent an asset is considered a defaulted security, the asset's principal balance is multiplied by the asset's recovery rate which is determined by the rating agencies.(2)The
interest coverage ratio divides interest income by interest expense for the classes senior to those retained by us.


We
expect that the overcollateralization test for the 2007 CDO will fail at the November 2009 distribution date. However, as we do not currently receive cash flows from the preferred
shares of the CDO 2007-1, there will be no significant incremental loss of cash flow to us.

72

---



Table of Contents

In
the event of a breach of our CDO covenants that we could not cure in the near term, we would be required to fund our non-CDO expenses, with (i) cash on hand,
(ii) income from any CDO not in default, (iii) income from our real property and unencumbered loan assets, (iv) sale of assets, (v) or accessing the equity or debt capital
markets, if available.

The
following discussion related to our consolidated financial statements should be read in conjunction with the financial statements appearing in Item 1 of this Quarterly Report
on Form 10-Q.

Critical Accounting Policies

Our discussion and analysis of financial condition and results of operations is based on our financial statements, which have been
prepared in accordance with accounting principles generally accepted in the United States, known as GAAP. These accounting principles require us to make some complex and subjective decisions and
assessments. Our most critical accounting policies involve decisions and assessments, which could significantly affect our reported assets, liabilities and contingencies, as well as our reported
revenues and expenses. We believe that all of the decisions and assessments upon which our financial statements are based were reasonable at the time and made based upon information available to us at
that time. We evaluate these decisions and assessments on an ongoing basis. Actual results may differ from these estimates under different assumptions or conditions. We have identified our most
critical accounting policies to be the following:

Variable Interest Entities

Our ownership of the subordinated classes of CMBS from a single issuer may provide us with the right to control the foreclosure/workout
process on the underlying loans. An investor that holds a variable interest in a qualifying special-purpose entity, or QSPE, does not consolidate that entity unless the investor has the unilateral
ability to cause the entity to liquidate. GAAP provides the requirements for an entity to qualify as a QSPE. To maintain the QSPE exception, the special-purpose entity must initially meet the QSPE
criteria and must continue to satisfy such criteria in subsequent periods. A special-purpose entity's QSPE status can be affected in future periods by activities by its transferors or other involved
parties, including the manner in which certain servicing activities are performed. To the extent that our CMBS investments were issued by a special-purpose entity that meets the QSPE requirements, we
record those investments at the purchase price paid. To the extent the underlying special-purpose entities do not satisfy the QSPE requirements, we evaluate for consolidation of the special-purpose
entities that would be determined to be VIEs. We have analyzed the pooling and servicing agreements governing each of our controlling class CMBS investments and we believe that the terms of those
agreements conform to industry standards and are consistent with the QSPE criteria.

In
June 2009, the FASB issued new guidance that eliminates the qualifying special purpose entity concept including the exemption under which we exclude certain CMBS investments from
consolidation. Accordingly, in January 2010, we anticipate we will be required to consolidate these CMBS investments. We are currently evaluating the impact of the new standards.

At
September 30, 2009, we owned securities of three controlling class CMBS trusts with a carrying value of $39,481. The total par amount of CMBS issued by the three CMBS trusts
was $921,654. Using the fair value approach to calculate expected losses or residual returns, we have concluded that we would not be the primary beneficiary of any of the underlying special-purpose
entities. At September 30, 2009, our maximum exposure to loss as a result of our investment in these QSPEs totaled $39,481, which equals the book value of these investments as of
September 30, 2009.

The
financing structures that we offer to the borrowers on certain of our real estate loans involve the creation of entities that could be deemed VIEs. Our management has evaluated these
entities and has concluded that none of these such entities are VIEs that would require evaluation for consolidation.

73

---



Table of Contents

Real Estate and CTL Investments

We record acquired real estate and CTL investments at cost. Costs directly related to the acquisition of such investments are
capitalized. Certain improvements are capitalized when they are determined to increase the useful life of the building. Depreciation is computed using the straight-line method over the
shorter of the estimated useful life of the capitalized item or 40 years for buildings, five to ten years for building equipment and fixtures, and the lesser of the useful life or the remaining
lease term for tenant improvements and leasehold interests. Maintenance and repair expenditures are expensed as incurred. Results of operations of properties acquired are included in the consolidated
statements of operations from the date of acquisition.

In
leasing office space, we may provide funding to the lessee through a tenant allowance. In accounting for tenant allowances, we determine whether the allowance represents funding for
the construction of leasehold improvements and evaluates the ownership, for accounting purposes, of such improvements. If we are considered the owner of the leasehold improvements for accounting
purposes, we capitalize the amount of the tenant allowance and depreciate it over the shorter of the useful life of the leasehold improvements or the lease term. If the tenant allowance represents a
payment for a purpose
other than funding leasehold improvements, or in the event we are not considered the owner of the improvements for accounting purposes, the allowance is considered to be a lease incentive and is
recognized over the lease term as a reduction of rental revenue. Factors considered during this evaluation usually include (i) who holds legal title to the improvements, (ii) evidentiary
requirements concerning the spending of the tenant allowance, and (iii) other controlling rights provided by the lease agreement (e.g. unilateral control of the tenant space during the
build-out process). Determination of the accounting for a tenant allowance is made on a case-by-case basis, considering the facts and circumstances of the
individual tenant lease.

We
also review the recoverability of the property's carrying value when circumstances indicate a possible impairment of the value of a property. The review of recoverability is based on
an estimate of the future undiscounted cash flows, excluding interest charges, expected to result from the property's use and eventual disposition. These estimates consider factors such as expected
future operating income, market and other applicable trends and residual value, as well as the effects of leasing demand, competition and other factors. If management determines impairment exists due
to the inability to recover the carrying value of a property, an impairment loss is recorded in the consolidated statement of operations in the period the determination is made to the extent that the
carrying value exceeds the estimated fair value of the property for properties to be held and used, and for assets held for sale, an impairment loss is recorded to the extent that the carrying value
exceeds the fair value less estimated cost to dispose for assets held for sale.

We
allocate the purchase price of real estate to land, building and improvements, and intangibles, such as the value of above-, below- and at-market leases, and origination
costs associated with the in-place leases. We depreciate the amount allocated to building and other intangible assets over their estimated useful lives, which generally range from three to
40 years. The values of the above- and below-market leases are amortized and recorded as either an increase (in the case of below-market leases) or a decrease (in the case of above-market
leases) to rental income over the remaining term of the associated lease. The value associated with in-place leases is amortized over the expected term of the respective lease. If a tenant
vacates its space prior to the contractual termination of the lease and no rental payments are being made on the lease, any unamortized balance of the related intangible will be written off. The
tenant improvements and origination costs are amortized as an expense over the remaining life of the lease (or charged against earnings if the lease is terminated prior to its contractual expiration
date). We assess fair value of the leases based on estimated cash flow projections that utilize appropriate discount and capitalization rates and available market information. Estimates of future cash
flows are based on a number of factors including the historical operating results, known trends, and market/economic conditions that may affect the property.

74

---



Table of Contents

Leasehold Interests

Leasehold interest assets and liabilities are recorded based on the difference between the fair value of our estimate of the net
present value of cash flows expected to be paid and earned from the subleases over the non-cancelable lease terms and any payments received in consideration for assuming the leasehold
interests. Factors used in determining the net present value of cash flows include contractual rental amounts, costs of tenant improvements, costs of capital expenditures and amounts due under the
corresponding operating lease assumed. Amounts allocated to leasehold interests, based on their respective fair values, are amortized on a straight-line basis over the remaining lease
term.

Investments in Unconsolidated Joint Ventures

We account for our investments in unconsolidated joint ventures under the equity method of accounting since we exercise significant
influence, but do not unilaterally control the entities, and we are not considered to be the primary beneficiary. In the joint ventures, the rights of
the other investors are protective and participating. Unless we are determined to be the primary beneficiary, these rights preclude us from consolidating the investments. The investments are recorded
initially at cost as an investment in unconsolidated joint ventures, and subsequently are adjusted for equity in net income (loss) and cash contributions and distributions. Any difference between the
carrying amount of the investments on our balance sheet and the underlying equity in net assets is amortized as an adjustment to equity in net income (loss) of unconsolidated joint ventures over the
lesser of the joint venture term or 40 years. None of the joint venture debt is recourse to us. As of September 30, 2009 and December 31, 2008 we had investments of $106,803 and
$93,919 in unconsolidated joint ventures, respectively.

Assets Held for Sale

Loans and Other Lending Investments Held for Sale

Loans held for investment are intended to be held to maturity and, accordingly, unless deemed to be impaired, such loans are carried at
cost, net of unamortized loan origination fees, discounts, repayments, unfunded commitments, and other adjustments. Loans held for sale are carried at the lower of cost or market value using available
market information obtained through consultation with dealers or other originators of such investments. As of September 30, 2009 and December 31, 2008, we had loans and other lending
investments held for sale of $43,878 and $0, respectively. For the three and nine months ended September 30, 2009, we recorded an impairment charge of $12,191 and $138,570, respectively,
related to the mark-to-market of the loans designated as held for sale.

Real Estate and CTL Investments Held for Sale

Real estate investments or CTL investments to be disposed of are reported at the lower of carrying amount or estimated fair value, less
cost to sell. Once an asset is classified as held for sale, depreciation expense is no longer recorded and current and prior periods are reclassified as Discontinued Operations. As of
September 30, 2009 and December 31, 2008, we had real estate investments held for sale of $103,018 and $192,780, respectively.

Commercial Mortgage-Backed Securities

We designate our CMBS investments on the date of acquisition of the investment. Held to maturity investments are stated at cost plus
any premiums or discounts which are amortized through the consolidated statements of operations using the level yield method. CMBS securities that we do not hold for the purpose of selling in the
near-term but may dispose of prior to maturity, are designated as available-for-sale and are carried at estimated fair value with the net unrealized gains or losses
recorded as a component of accumulated other comprehensive income (loss) in stockholder's equity.

75

---



Table of Contents

Unrealized
losses that are, in the judgment of management, an other-than-temporary impairment are bifurcated into (i) the amount related to credit losses, and
(ii) the amount related to all other factors. The portion of the other-than-temporary impairment related to credit losses is computed by comparing the amortized cost of
the investment to the present value of cash flows expected to be collected, discounted at the investment's current yield, and is charged against earnings on the consolidated statement of operations.
The portion of the other-than-temporary impairment related to all other factors is recognized as a component of other comprehensive loss on the consolidated balance sheet. The
determination of an other-than-temporary impairment is a subjective process, and different judgments and assumptions could affect the timing of loss realization. In November
2007, subsequent to financing our CMBS investments in our CDOs, we redesignated all of our available-for-sale CMBS investments with a book value of approximately $43,600 to
held to maturity. As of September 30, 2009 and December 31, 2008, the unrealized loss on the redesignated CMBS investments included in other comprehensive income was $4,363 and $4,986,
respectively.

On
a quarterly basis, when significant changes in estimated cash flows from the cash flows previously estimated occur due to actual prepayment and credit loss experience, and the present
value of the revised cash flow is less then the present value previously estimated, an other-than-temporary impairment is deemed to have occurred. The security is written down
to fair value with the resulting charge against earnings and a new cost basis is established. We calculate a revised yield based on the current amortized cost of the investment (including any
other-than-temporary impairments recognized to date) and the revised yield is then applied prospectively to recognize interest income. In January 2009, the FASB clarified the
guidance for impairment by removing the requirement to place exclusive reliance on market participants' assumptions about future cash flows when evaluating an asset for
other-than-temporary impairment. The standard now requires that assumptions about future cash flows consider reasonable management judgment about the probability that the
holder of an asset will be unable to collect all amounts due. During the three months ended September 30, 2009, we recognized an other-than-temporary impairment of
$1,360 due to an adverse change in expected cash flows related to credit losses for one CMBS investment which is recorded in impairment on loans held for sale and CMBS in our Consolidated Statement of
Operations.

We
determine the fair value of CMBS based on the types of securities in which we have invested. For liquid, investment-grade securities, we consult with dealers of such securities to
periodically obtain updated market pricing for the same or similar instruments. For non-investment grade securities, we actively monitor the performance of the underlying properties and
loans and update our pricing model to reflect changes in projected cash flows. The value of the securities is derived by applying discount rates to such cash flows based on current market yields. The
yields employed are obtained from our own experience in the market, advice from dealers and/or information obtained in consultation with other investors in similar instruments. Because fair value
estimates when available, may vary to some degree, we must make certain judgments and assumptions about the appropriate price to use to calculate the fair values for financial reporting purposes.
Different judgments and assumptions could result in materially different presentations of value.

Pledged Government Securities

We maintain a portfolio of treasury securities that are pledged to provide principal and interest payments for mortgage debt previously
collateralized by properties in our real estate portfolio. We do not intend to sell the securities and believe it is more likely than not that it will realize the full amortized cost basis of the
securities over their remaining life. These securities had a carrying value of $98,337, a fair value of $100,524 and unrealized gains of $2,187 at September 30, 2009, and have maturities that
extend through November 2013.

76

---



Table of Contents

Tenant and Other Receivables

Tenant and other receivables are primarily derived from the rental income that each tenant pays in accordance with the terms of its
lease, which is recorded on a straight-line basis over the initial term of the lease. Since many leases provide for rental increases at specified intervals, straight-line basis
accounting requires us to record a receivable, and include in revenues, unbilled rent receivables that will only be received if the tenant makes all rent payments required through the expiration of
the initial term of the lease. Tenant and other receivables also include receivables related to tenant reimbursements for common area maintenance expenses and certain other recoverable expenses that
are recognized as revenue in the period in which the related expenses are incurred.

Tenant
and other receivables are recorded net of the allowances for doubtful accounts, which as of September 30, 2009 and December 31, 2008 were $5,720 and $6,361,
respectively. We continually review receivables related to rent, tenant reimbursements and unbilled rent receivables and determines collectability by taking into consideration the tenant's payment
history, the financial condition of the tenant, business conditions in the industry in which the tenant operates and economic conditions in the area in which the property is located. In the event that
the collectability of a receivable is in doubt, we increase the allowance for uncollectible accounts or record a direct write-off of the receivable in the consolidated statements of
operations.

Intangible Assets

We follow the purchase method of accounting for business combinations. We allocate the purchase price of acquired properties to
tangible and identifiable intangible assets acquired based on their respective fair values. Tangible assets include land, buildings and improvements on an as-if-vacant basis.
We utilize various estimates, processes and information to determine the as-if-vacant property value. Estimates of value are made using customary methods, including data from
appraisals, comparable sales, discounted cash flow analysis and other methods. Identifiable intangible assets include amounts allocated to acquired leases for above- and below-market lease rates and
the value of in-place leases.

Above-market,
below-market and in-place lease values for properties acquired are recorded based on the present value (using an interest rate which reflects the risks
associated with the leases acquired) of the difference between the contractual amount to be paid pursuant to each in-place lease and management's estimate of the fair market lease rate for
each such in-place lease, measured over a period equal to the remaining non-cancelable term of the lease. The capitalized above-market lease values are amortized as a reduction
of rental income over the remaining non-cancelable terms of the respective leases. The capitalized below-market lease values are amortized as an increase to rental income over the initial
term and any fixed-rate renewal periods in the respective leases.

The
aggregate value of intangible assets related to in-place leases is primarily the difference between the property valued with existing in-place leases adjusted
to market rental rates and the property valued as-if-vacant. Factors considered by management in its analysis of the in-place lease intangibles include an estimate
of carrying costs during the expected lease-up period for each property taking into account current market conditions and costs to execute similar leases. In estimating carrying costs, we
include real estate taxes, insurance and other operating expenses and estimates of lost rentals at market rates during the anticipated lease-up period, which is expected to average six
months. We also estimate costs to execute similar leases including leasing commissions, legal and other related expenses.

The
value of in-place leases is amortized to expense over the initial term of the respective leases, which range primarily from one to 20 years. In no event does the
amortization period for intangible assets exceed the remaining depreciable life of the building. If a tenant terminates its lease, the unamortized portion of the in-place lease value is
charged to expense.

77

---



Table of Contents

In
making estimates of fair values for purposes of allocating purchase price, we utilize a number of sources, including independent appraisals that may be obtained in connection with the
acquisition or financing of the respective property and other market data. We also consider information obtained about each property as a result of its pre-acquisition due diligence, as
well as subsequent marketing and leasing activities, in estimating the fair value of the tangible and intangible assets acquired and intangible liabilities assumed.

Revenue Recognition

Real Estate and CTL Investments

Rental income from leases is recognized on a straight-line basis regardless of when payments are contractually due. Certain
lease agreements also contain provisions that require tenants to reimburse us for real estate taxes, common area maintenance costs and the amortized cost of capital expenditures with interest. Such
amounts are included in both revenues and operating expenses when we are the primary obligor for these expenses and assume the risks and rewards of a principal under these arrangements. Under leases
where the tenant pays these expenses directly, such amounts are not included in revenues or expenses.

Deferred
revenue represents rental revenue and management fees received prior to the date earned. Deferred revenue also includes rental payments received in excess of rental revenues
recognized as a result of straight-line basis accounting.

Other
income includes fees paid by tenants to terminate their leases, which are recognized when fees due are determinable, no further actions or services are required to be performed by
us, and collectability is reasonably assured. In the event of early termination, the unrecoverable net book values of the assets or liabilities related to the terminated lease are recognized as
depreciation and amortization expense in the period of termination.

We
recognize sales of real estate properties only upon closing. Payments received from purchasers prior to closing are recorded as deposits. Profit on real estate sold is recognized
using the full accrual method upon closing when the collectability of the sale price is reasonable assured and we are not obligated to perform significant activities after the sale. Profit may be
deferred in whole or part until the sale meets the requirements of profit recognition on sale of real estate.

Finance Investments

Interest income on debt investments is recognized over the life of the investment using the effective interest method and recognized on
the accrual basis. Fees received in connection with loan commitments are deferred until the loan is funded and are then recognized over the term of the loan using the effective interest method.
Anticipated exit fees, whose collection is expected, are also recognized over the term of the loan as an adjustment to yield. Fees on commitments that expire unused are recognized at expiration. Fees
received in exchange for the credit enhancement of another lender, either subordinate or senior to us, in the form of a guarantee are recognized over the term of that guarantee using the
straight-line method.

Income
recognition is generally suspended for debt investments at the earlier of the date at which payments become 90 days past due or when, in our opinion, a full recovery of
income and principal becomes doubtful. Income recognition is resumed when the loan becomes contractually current and performance is demonstrated to be resumed.

We
designate loans as non-performing at such time as: (1) the loan becomes 90 days delinquent or (2) the loan has a maturity default. All
non-performing loans are placed on non-accrual status and income is recognized only upon actual cash receipt. At September 30, 2009, we had four first mortgage loans
with an aggregate carrying value of $73,366, four mezzanine loans with a carrying value of

78

---



Table of Contents

$12,881,
one second lien of loan with a carrying value of $0 and one third lien loan with a carrying value of $0, which were classified as non-performing loans. At December 31,
2008, we had three first mortgage loans with an aggregate carrying value of $164,809, one second lien loan with
a carrying value of $0 and one third lien loan with a carrying value of $0, which were classified as non-performing loans.

We
classify loans as sub-performing if they are not performing in material accordance with their terms, but they do not qualify as non-performing loans, and the
specific facts and circumstances of these loans may cause them to develop into non-performing loans should certain events occur in the normal passage of time, which we consider to be
90 days from the measurement date. At September 30, 2009, four first mortgage loans with an aggregate carrying value of $160,633, one subordinate interest in a whole loan with a carrying
value of $36,770, and two mezzanine loans with a carrying value of $22,115 were classified as sub-performing. At December 31, 2008, five first mortgage loans with a carrying value
of $216,597 were classified as sub-performing loans.

Reserve for Possible Loan Losses

Specific valuation allowances are established for possible loan losses on loans in instances where it is deemed possible that we may be
unable to collect all amounts of principal and interest due according to the contractual terms of the loan. We consider the estimated value of the collateral securing the loan, and compare it to the
carrying value of the loan. The estimated value of the collateral is determined by selecting the most appropriate valuation methodology, or methodologies, among several generally available and
accepted in the commercial real estate industry. The determination of the most appropriate valuation methodology is based on the key characteristics of the collateral type, collateral location,
quality and prospects of the sponsor, the amount and status of any senior debt, and other factors. These methodologies include the evaluation of operating cash flow from the property during the
projected holding period, and the estimated sales value of the collateral computed by applying an expected capitalization rate to the stabilized net operating income of the specific property, less
selling costs, all of which are discounted at market discount rates. Because the determination of estimated value is based upon projections of future economic events, which are inherently subjective,
amounts ultimately realized from loans and investments may differ materially from the carrying value at the balance sheet date.

If,
upon completion of the valuation, the estimated fair value of the underlying collateral securing the loan is less than the net carrying value of the loan, an allowance is created
with a corresponding charge to the provision for possible loan losses. The allowance for each loan is maintained at a level we believe is adequate to absorb possible losses. Realized losses are
recognized as a direct write-down of the loan investment with a corresponding charge-off to the allowance. As of September 30, 2009, we incurred charge offs totaling
$112,647 relating to realized losses on 12 loans. We maintained a reserve for possible loan losses of $402,037 against 17 separate investments with a carrying value of $525,070 as of
September 30, 2009 and a reserve for possible loan loses of $88,992 against 13 separate investments with a carrying value of $424,177 as of December 31, 2008.

Rent Expense

Rent expense is recognized on a straight-line basis regardless of when payments are due. Accrued expenses and other
liabilities in the accompanying consolidated balance sheets as of September 30, 2009 and December 31, 2008 includes an accrual for rental expense recognized in excess of amounts due at
that time. Rent expense related to leasehold interests is included in property operating expenses, and rent expense related to office rentals is included in marketing, general and administrative
expense.

79

---



Table of Contents

Stock Based Compensation Plans

We have a stock-based compensation plan, described more fully in Note 14. We account for this plan using the fair value
recognition provisions.

The
Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition,
option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because our plan has characteristics significantly different from those of
traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in our opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of our stock options.

Prior
to amending and restating the management agreement in October 2008, which was subsequently terminated in April 2009 employees of the Manager who provided services to us pursuant to
the then-existing management agreement were characterized as co-leased employees. Stock option awards granted to such persons under our 2004 Equity Incentive Plan were valued
at the time of grant using the Black-Scholes option pricing model, which value was amortized over the option vesting period. The amended management agreement that we executed in October 2008 resulted
in the re-characterization of such employees of the Manager, and they were no longer classified as our co-leased employees. Consequently, we determined fair value of the stock
options granted to such persons using a mark-to-market model until April 2009 when we completed the internalization of management through the direct acquisition of the Manager.
Stock option awards were
re-valued at the date of the internalization and such value will be amortized over the remaining vesting period of the award for employees that remained with the Manager.

Compensation
cost for stock options, if any, is recognized ratably over the vesting period of the award. Our policy is to grant options with an exercise price equal to the quoted closing
market price of our stock on the business day preceding the grant date. Awards of stock or restricted stock are expensed as compensation on a current basis over the benefit period.

The
fair value of each stock option granted is estimated on the date of grant for options issued to employees, and quarterly for options issued to non-employees, using the
Black-Scholes option pricing model with the following weighted average assumptions for grants in 2009 and 2008.

2009

2008Dividend yield


14.0%


8.8%Expected life of option


5.0 years


5.8 yearsRisk-free interest rate


1.72%


3.21%Expected stock price volatility


90.0%


35.0%


Incentive Distribution (Class B Limited Partner Interest)

Prior to the internalization, the Class B limited partner interests were entitled to receive an incentive return equal to 25% of
the amount by which funds from operations, or FFO, plus certain accounting gains (as defined in the partnership agreement of our Operating Partnership) exceed the product of our weighted average
stockholders equity (as defined in the partnership agreement of our Operating Partnership) multiplied by 9.5% (divided by four to adjust for quarterly calculations). We recorded any distributions on
the Class B limited partner interests as an incentive distribution expense in the period when earned and when payment of such amounts became probable and reasonably estimable in accordance with
the partnership agreement. These cash distributions reduced the amount of cash available for distribution to our common unit holders in our Operating Partnership and to our common stockholders. In
October 2008, we entered into a letter agreement with the Class B limited partners to waive the incentive distribution that would have otherwise been earned for the period

80

---



Table of Contents

July 1,
2008 through December 31, 2008 and provide that starting January 1, 2009, the incentive distribution could be paid, at our option, in cash or shares of common stock. In December 2008,
we entered into a letter agreement with the Manager and SL Green, pursuant to which the Manager agreed to pay $2,750 in cash and SL Green transferred 1.9 million shares of our
common stock to us, in full
satisfaction of all potential obligations that the holders of the Class B limited partner interests may have had to our Operating Partnership, and our Operating Partnership may have had to the
holders, each in accordance with the amended operating partnership agreement of our Operating Partnership, in respect of the recalculation of the distribution amount to the holders at the end of the
2008 calendar year. In April 2009, we completed the internalization of our management through the direct acquisition of the Manager. Accordingly, beginning in May 2009, management and incentive fees
payable by us to the Manager ceased and we now own all of the Class B limited partner interests (which have been cancelled) and all of the interests in the Manager. No incentive distribution
was earned for the three and nine months ended September 30, 2009, respectively. We incurred approximately $0 and $5,100 with respect to incentive distributions on such Class B limited
partner interests for the three and nine months ended September 30, 2008, respectively.

Derivative Instruments

In the normal course of business, we use a variety of derivative instruments to manage, or hedge, interest rate risk. We require that
hedging derivative instruments be effective in reducing the interest rate risk exposure that they are designated to hedge. This effectiveness is essential for qualifying for hedge accounting.
Instruments that meet these hedging criteria are formally designated as hedges at the inception of the derivative contract. We use a variety of commonly used derivative products that are considered
"plain vanilla" derivatives. These derivatives typically include interest rate swaps, caps, collars and floors. We expressly prohibit the use of unconventional derivative instruments and using
derivative instruments for trading or speculative purposes. Further, we have a policy of only entering into contracts with major financial institutions based upon their credit ratings and other
factors.

To
determine the fair value of derivative instruments, we use a variety of methods and assumptions that are based on market conditions and risks existing at each balance sheet date. For
the majority of financial instruments including most derivatives, long-term investments and long-term debt, standard market conventions and techniques such as discounted cash
flow analysis, option-pricing models, replacement cost, and termination cost are used to determine fair value. All methods of assessing fair value result in a general approximation of value, and such
value may never actually be realized.

In
the normal course of business, we are exposed to the effect of interest rate changes and limit these risks by following established risk management policies and procedures including
the use of derivatives. To address exposure to interest rates, we use derivatives primarily to hedge cash flow variability caused by interest rate fluctuations of our liabilities. Each of our CDOs
maintain a minimum amount of allowable unhedged interest rate risk. The 2005 CDO permit 20% of the net outstanding principal balance and the 2006 CDO and the 2007 CDO permit 5% of the net outstanding
principal balance to be unhedged.

We
recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If a derivative is a hedge, depending on
the nature of the hedge, changes in the fair value of the derivative will either be offset against the change in fair value of the hedged asset, liability, or firm commitment through earnings, or
recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings.
Derivative accounting may increase or decrease reported net income and stockholders' equity prospectively, depending on future levels of LIBOR, swap spreads and other variables affecting the fair
values of derivative instruments and hedged items, but will have no effect on cash flows, provided the contract is carried through to full term.

81

---



Table of Contents

All
hedges held by us are deemed effective based upon the hedging objectives established by our corporate policy governing interest rate risk management. The effect of our derivative
instruments on our financial statements is discussed more fully in Note 17 to our Consolidated Financial Statements.

Income Taxes

We elected to be taxed as a REIT, under Sections 856 through 860 of the Internal Revenue Code, beginning with our taxable year
ended December 31, 2004. To qualify as a REIT, we must meet certain organizational and operational requirements, including a requirement to distribute at least 90% of our ordinary taxable
income, if any, to stockholders. As a REIT, we generally will not be subject to U.S. federal income tax on taxable income that we distribute to our stockholders. If we fail to qualify as a REIT in any
taxable year, we will then be subject to U.S. federal income taxes on our taxable income at regular corporate rates and we will not be permitted to qualify for treatment as a REIT for U.S. federal
income tax purposes for four years following the year during which qualification is lost unless the Internal Revenue Service grants us relief under certain statutory provisions. Such an event could
materially adversely affect our net income and net cash available for distributions to stockholders. However, we believe that we will be organized and operate in such a manner as to qualify for
treatment as a REIT and we intend to operate in the foreseeable future in such a manner so that we will qualify as a REIT for U.S. federal income tax purposes. We may, however, be subject to certain
state and local taxes.

For
the three and nine months ended September 30, 2009, we recorded $88 and $2,489 of income tax expense, respectively. For the three and nine months ended September 30,
2008, we recorded $36 and $47 of income tax expense, respectively. Included in tax expense for the nine months ended September 30, 2009 is $2,100 of state income taxes on the gain of
extinguishment of debt of $107,229. Under federal tax law, we are allowed to defer this gain until 2014, however, not all states follow this federal rule.

Results of Operations

Comparison of the three months ended September 30, 2009 to the three months ended September 30, 2008

Revenues

2009

2008

$ ChangeRental revenue

$
79,831

$
75,437

$
4,394Investment income


42,222


60,552


(18,330
)Operating expense reimbursement


30,315


31,760


(1,445
)Gain on sales and other income


1,262


5,432


(4,170
)Total revenues

$
153,630

$
173,181

$
(19,551
)Equity in net income of joint ventures

$
2,397

$
1,752

$
645Gain on extinguishment of debt

$


$
11,681

$
(11,681
)


Rental
revenue for the three months ended September 30, 2009 is primarily comprised of revenue earned on our portfolio of 855 properties owned in our Gramercy Realty division. The
increase in rental revenue of $4,394 is primarily due to new third party tenants that previously were sub-tenants of Bank of America, received as part of a space reduction required by
their lease and is due to higher non-cash market lease amortization reflecting the impact of purchase price allocation adjustments finalized in the first quarter of 2009.

Investment
income is generated on our whole loans, subordinate interests in whole loans, mezzanine loans, preferred equity interests and CMBS. For the three months ended
September 30,

82

---



Table of Contents

2009,
$22,505 was earned on fixed rate investments while the remaining $19,717 was earned on floating rate investments. The decrease of $18,330 over the prior period is primarily due to an increase in
non-performing loans, the suspension of interest income accruals on certain payment-in-kind loans, a decrease in a size of our portfolio of loans and other leading
instruments by approximately $717,892, and a decline in LIBOR interest rates in 2009 compared to 2008.

Operating
expense reimbursement of $30,315 for the three months ended September 30, 2009 decreased by $1,445 compared to the three months ended September 30, 2008,
primarily due to lower operating expenses.

Gains
on sales and other income of $1,262 for the three months ended September 30, 2009 is primarily composed of interest on restricted cash balances in our three CDOs and other
cash balances held by us.

The
income on investments in unconsolidated joint ventures of $2,397 for the three months ended September 30, 2009 represents our proportionate share of the income generated by
our joint venture interests including $1,082 of real estate-related depreciation and amortization, which when added back, results in a contribution to Funds from Operations, or FFO, of $3,479. The
income on investments in unconsolidated joint ventures of $1,752 for the three months ended September 30, 2008 represents our proportionate share of income generated by our joint venture
interests including $104 of real estate-related depreciation and amortization, which when added back, results in a contribution to FFO of $1,856. Our use of FFO as an important non-GAAP
financial measure is discussed in more detail below.

During
the three months ended September 30, 2008, we repurchased at a discount investment grade notes issued by our three CDOs, generating net gains on early extinguishment of
debt of $11,681. There were no repurchases during the three months ended September 30, 2009.

Expenses

2009

2008

$ ChangeProperty operating expenses

$
46,379

$
47,679

$
(1,300
)Interest expense


55,933


76,592


(20,659
)Depreciation and amortization


27,393


20,752


6,641Marketing, general and administrative


8,478


6,201


2,277Management fees





8,025


(8,025
)Impairment on loans held for sale


13,551





13,551Provision for loan loss


205,508


18,875


186,633Provision for taxes


88


36


52Total expenses

$
357,330

$
178,160

$
179,170


Property
operating expenses for the three months ended September 30, 2009 decreased $1,300 from the $47,679 recorded in the three months ended September 30, 2008 to $46,379
recorded in the three months ended September 30, 2009. The decrease primarily reflects lower utility and other property operating costs compared to the prior period, partially offset by
increased property operating expenses we incurred in connection with a space reduction Bank of America was required to relinquish pursuant to their lease.

Interest
expense was $55,933 for the three months ended September 30, 2009 compared to $76,592 for the three months ended September 30, 2008. The decrease of $20,659 is
primarily attributed to reductions in the interest rate indexes, primarily LIBOR-based, charged on our variable rate debt over the three months ended September 30, 2009 compared to the three
months ended September 30, 2008; as well as lower average principal balances outstanding over the same periods.

83

---



Table of Contents

We
recorded depreciation and amortization expenses of $27,393 for the three months ended September 30, 2009, compared to $20,752 for the three months ended September 30,
2008. The increase of $6,641 is primarily due to higher amortization expense on in-place lease intangible assets reflecting the impact of purchase price allocation adjustments finalized in
the first quarter of 2009.

Marketing,
general and administrative expenses were $8,478 for the three months ended September 30, 2009, compared to $6,201 for the same period in 2008. The increase of $2,277
includes salaries, benefits and other administrative costs previously borne by SL Green.

No
management fees were earned for the three months ended September 30, 2009. We recorded $8,025 for the three months ended September 30, 2008. The decrease is due
primarily to the internalization of
the Manager, which took place on April 24, 2009. The internalization was completed through a direct acquisition of the Manager, which was previously a wholly-owned subsidiary of
SL Green. Upon completion of the internalization, all management fees and incentive management fees payable by us to the Manager were eliminated.

During
the three months ended September 30, 2008, we recorded impairment charges of $12,191 on six loans previously classified as held-for-sale and an
other-than-temporary impairment of $1,360 due to an adverse change in expected cash flows related to credit losses for one CMBS investment. Impairment charges on loans were
taken to reduce the carrying value of loans held for sale to their fair value based upon anticipated selling prices.

Provision
for loan losses was $205,508 for the three months ended September 30, 2009, compared to $18,875 for the three months ended September 30, 2008, an increase of
$186,633. The provision was based upon periodic credit reviews of our loan portfolio, and reflects the challenging economic conditions, severe illiquidity in the capital markets, and a difficult
operating environment.

Comparison of the nine months ended September 30, 2009 to the nine months ended September 30, 2008

Revenues

2009

2008

$ ChangeRental revenue

$
242,943

$
151,663

$
91,280Investment income


140,014


197,882


(57,868
)Operating expense reimbursement


89,682


61,512


28,170Gain on sales and other income


3,778


14,420


(10,642
)Total revenues

$
476,417

$
425,477

$
50,940Equity in net income of joint ventures

$
6,584

$
7,154

$
(570
)Gain on extinguishment of debt

$
107,229

$
33,378

$
73,851


Rental
revenue of $242,943 for the nine months ended September 30, 2009 is primarily comprised of revenue earned on properties acquired as a result of the American Financial
acquisition. Rental revenue is included in income beginning on the date of acquisition. Accordingly, rental revenue of $151,663 for the nine months ended September 30, 2008 only includes rental
revenue from the American Financial acquisition beginning April 1, 2008, the closing date of the transaction.

Investment
income is generated on our whole loans, subordinate interests in whole loans, mezzanine loans, preferred equity interests and CMBS. For the three months ended
September 30, 2009, $64,182 was earned on fixed rate investments while the remaining $75,832 was earned on floating rate investments. The decrease of $57,868 over the prior period is primarily
due to an increase in non-performing loans to $86,247 at September 30, 2009, the suspension of interest income accruals on certain payment-in-kind loans, a
decrease in a size of our portfolio of loans and other lending

84

---



Table of Contents

instruments
by approximately $717,892, and a decline in LIBOR interest rates in 2009 compared to 2008.

Operating
expense reimbursement of $89,682 for the nine months ended September 30, 2009 is attributable to the portfolio of operating real estate acquired in the American
Financial acquisition. Operating expense reimbursement is included in income beginning on the date of acquisition. Accordingly, operating expense reimbursement of $61,512 for the nine months ended
September 30, 2008 only includes revenue from the American Financial acquisition beginning April 1, 2008, the closing date of the transaction.

Gains
on sales and other income totaled $3,778 for the nine months ended September 30, 2009 compared to $14,420 for the nine months ended September 30, 2008, a decrease of
$10,642. Gains on sales and other income is primarily composed of interest on restricted cash balances in our three CDOs and other cash balances held by us.

The
income on investments in unconsolidated joint ventures of $6,584 for the nine months ended September 30, 2009 represents our proportionate share of the income generated by our
joint venture interests including $3,370 of real estate-related depreciation and amortization, which when added back, results in a contribution to FFO of $9,954. The income on investments in
unconsolidated joint ventures of $7,154 for the nine months ended September 30, 2008 represents our proportionate share of income generated by our joint venture interests including $469 of real
estate-related depreciation and amortization, which when added back, results in a contribution to FFO of $7,623. Our use of FFO as an important non-GAAP financial measure is discussed in
more detail below.

In
March 2009, we entered into an amendment and compromise agreement with KeyBank, National Association, or Key Bank, to settle and satisfy the existing loan obligations under the
$175,000 unsecured facility at a discount for a cash payment of $45,000, and a future maximum cash payment of up to $15,000 from 50% of all cash distributions received by us after May 2009 from
certain junior tranches and preferred classes of securities under our CDOs. We recorded a net gain of $107,229 as a result of this agreement. During the nine months ended September 30, 2008, we
repurchased at a discount, investment grade notes issued by our three CDOs, generating net gains on early extinguishment of debt of $33,378.

Expenses

2009

2008

$ ChangeProperty operating expenses

$
136,274

$
91,429

$
44,845Interest expense


179,511


192,434


(12,923
)Depreciation and amortization


84,825


42,764


42,061Marketing, general and administrative


26,812


13,087


13,725Management fees


7,787


24,275


(16,488
)Incentive fee





5,100


(5,100
)Impairment on loans held for sale


139,930





139,930Provision for loan loss


425,692


50,089


375,603Total expenses

$
1,000,831

$
419,178

$
581,653


85

---



Table of Contents

Property operating expenses of $136,274 for the nine months ended September 30, 2009 is attributed to the portfolio of operating real estate acquired in
the American Financial acquisition. Property operating expenses are included in expenses beginning on the date of acquisition. Accordingly, property operating expenses for the nine months ended
September 30, 2008 of $91,429 only include expenses from the American Financial acquisition beginning April 1, 2008, the closing date of the transaction.

Interest
expense was $179,511 for the nine months ended September 30, 2009 compared to $192,434 for the three months ended September 30, 2008. The decrease of $12,923 is
primarily attributed to the reductions in the interest rate indexes, primarily LIBOR-based, charged on our variable rate debt over the nine months ended September 30, 2009 compared to the nine
months ended September 30, 2008. This was partially offset by the $2,500,000 of additional debt incurred as a result of the American Financial acquisition.

We
recorded depreciation and amortization expenses of $84,825 for the nine months ended September 30, 2009. The increase of $42,061 compared to the comparable period in the prior
year is primarily attributable to the portfolio of operating real estate acquired in the American Financial acquisition. Depreciation and amortization is included in expense beginning on the date of
acquisition. Accordingly, depreciation and amortization of $42,764 for the nine months ended September 30, 2008 only includes expense from the American Financial acquisition beginning
April 1, 2008, the closing date of the transaction.

Marketing,
general and administrative expenses were $26,812 for the nine months ended September 30, 2009, compared to $13,087 for the same period in 2008. The increase of $13,725
primarily reflects $5,010 of expense for costs incurred in connection with the internalization of the Manager. Acquisition costs were expensed in the period incurred. The change in marketing, general
and administrative expense also includes higher legal and professional fees related to loan enforcement and restructurings during the nine months ended September 30, 2009 compared to the same
period in the prior year.

Management
fees decreased $16,488 for the nine months ended September 30, 2009 to $7,787 compared to $24,275 for the same period in 2008, due primarily to an amendment to the
amended management agreement executed in October of 2008 that reduced or eliminated certain management fee expenses. Additionally, on April 24, 2009, we completed the internalization of our
management. The internalization was completed through a direct acquisition of the Manager, which was previously a wholly-owned subsidiary of SL Green. Upon completion of the internalization, all
management fees and incentive management fees payable by us to the Manager were eliminated.

No
incentive distribution was earned for the nine months ended September 30, 2009. We recorded an incentive fee expense of $5,100 during the nine months ended September 30,
2008 in accordance with requirements of the partnership agreement of our Operating Partnership which entitled owners of Class B limited partner interests in our Operating Partnership to an
incentive return equal to 25% of the amount by which FFO plus certain accounting gains (as defined in the partnership agreement of our Operating Partnership) exceed the product of our weighted average
stockholders equity (as defined in the partnership agreement of our Operating Partnership) multiplied by 9.5% (divided by four to adjust for quarterly calculations).

During
the nine months ended September 30, 2009, we recorded impairment charges of $138,570 on ten loans previously classified as held-for-sale and an
other-than-temporary impairment of $1,360 due to an adverse change in expected cash flows related to credit losses for one CMBS investment. Impairment charges were taken to
reduce the value of loans held-for-sale to their fair value based upon anticipated selling prices.

86

---



Table of Contents

Provision
for loan losses was $425,692 for the nine months ended September 30, 2009, compared to $50,089 for the nine months ended September 30, 2008, an increase of
$375,603. The provision was based upon periodic credit reviews of our loan portfolio, and reflects the challenging economic conditions, severe illiquidity in the capital markets, and a difficult
operating environment.

Liquidity and Capital Resources

Liquidity is a measurement of the ability to meet cash requirements, including ongoing commitments to repay borrowings, fund and
maintain loans and other investments, pay dividends and other general business needs. In addition to cash on hand, our primary sources of funds for short-term liquidity requirements,
including working capital, distributions, if any, debt service and additional investments, if any, consist of: (i) cash flow from operations; (ii) proceeds and management fees from our
existing CDOs; (iii) proceeds from principal and interest payments and rents on our investments; (iv) proceeds from potential loan and asset sales; and, to a lesser extent;
(v) new financing or additional securitizations or CDO offerings; and (vi) proceeds from additional common or preferred equity offerings. We believe these sources of financing will be
sufficient to meet our short-term liquidity requirements. Due to continued market turbulence, we do not anticipate having the ability in the near-term to access equity or debt
capital through new warehouse lines, CDO issuances, term or credit facilities or trust preferred issuances, although we continue to explore capital raising options. In the event we are not able to
successfully secure financing, we will rely primarily on cash on hand, cash flows from operations, principal, interest and lease payments on our investments, and proceeds from asset and loan sales to
satisfy our liquidity requirements. If we (i) are unable to renew, replace or expand our sources of financing, (ii) are unable to execute asset and loan sales in a timely manner or to
receive anticipated proceeds from them or (iii) fully utilize available cash, it may have an adverse effect on our business, results of operations and ability to make distributions to our
stockholders.

Our
ability to fund our short-term liquidity needs, including debt service and general operations (including employment related benefit expenses), through cash flow from
operations can be evaluated through the consolidated statement of cash flows provided in our financial statements. However, the net cash from operations or net cash used in operations disclosed on the
statement of cash flows should be adjusted to exclude the effect of loans originated for sale and the proceeds of loans sold during any respective reporting period. These activities are included in
cash flow from operations in accordance with GAAP, but constitute an integral part of our investment activity. Consequently, net cash flow from operations is not necessarily reflective of our true
recurring operating activities and our ability to fund our required distributions to stockholders and other liquidity requirements through our operating activities.

Further,
our short-term liquidity requirements could be affected by a potential change in our dividend policy. Beginning with the third quarter of 2008 our board of directors
elected not to pay a dividend to common stockholders, which for the second quarter of 2008 was $0.63 per share. Additionally our board of directors elected not to pay the Series A preferred
stock dividend of $0.50781 per share beginning with the fourth quarter of 2008. As of September 30, 2009 and December 31, 2008 we accrued $9,317 and $2,325, respectively, for the
preferred stock dividends. Our board of directors will revisit our dividend policy in 2010.

Our
ability to meet our long-term liquidity and capital resource requirements will be subject to obtaining additional debt financing and equity capital. Our inability to
renew, replace or expand our sources of financing on substantially similar terms, or any at all may have an adverse effect
on our business and results of operations. Any indebtedness we incur will likely be subject to continuing or more restrictive covenants and we will likely be required to make continuing
representations and warranties in connection with such debt.

87

---



Table of Contents

Our
current and future borrowings may require us, among other restrictive covenants to keep uninvested cash on hand to maintain a certain portion of our assets free from liens and to
secure such borrowings without assets. These conditions could limit our ability to do further borrowings. We were in compliance with all such covenants as of September 30, 2009. If we are
unable to make required payments under such borrowings, breach any representation or warranty in the loan documents or violate any covenant contained in a loan document lenders may accelerate the
maturity of our debt. If we are unable to retire our borrowings in such a situation, (i) we may need to prematurely sell the assets securing such debt, (ii) the lenders could accelerate
the debt and foreclose on our assets that pledged as collateral to such lenders, (iii) such lenders could force us into bankruptcy, (iv) such lenders could force us to take other actions
to protect the value of their collateral and/or (v) our other debt financings could become immediately due and payable. Any such event would have a material adverse effect on our liquidity, the
value of our common stock, our ability to make distributions to our stockholders and our ability to continue as a going concern.

The
majority of our loan and other investments are pledged as collateral for our CDO bonds and the income generated from these investments is used to fund interest obligations of our CDO
bonds and the remaining income, if any, is retained by us. Our CDO bonds contain minimum interest coverage and asset over collateralization covenants that must be met in order for us to receive such
payments and to receive the subordinate collateral management fee earned. If we fail these covenants in some or all of our CDOs, all cash flows from the applicable CDO, other than senior collateral
management fees, would be diverted to repay principal and interest on the most senior outstanding CDO bonds and we may not receive some or all payments in respect of any CDO bonds, our equity in the
CDOs and the subordinate management fee until that CDO regained compliance with such tests. While we were in compliance with all such covenants as of September 30, 2009, our compliance margin
was narrow and relatively small declines in our performance and credit metrics could cause us to fall out of compliance in the future. In the event of a breach of our CDO covenants that we could not
cure in the near term, we would be required to fund our non-CDO expenses, including debt coverage, interest on our Junior Notes and other expenses with (i) cash on hand,
(ii) income from any CDO not in default, (iii) income from our real property and unencumbered loan assets, (iv) sale of assets, (v) or accessing the equity or debt capital
markets, if available.

To
maintain our qualification as a REIT under the Internal Revenue Code, we must distribute annually at least 90% of our taxable income if any. This distribution requirement limits our
ability to retain earnings and thereby replenish or increase capital for operations. We may elect to pay dividends on our common stock in cash or a combination of cash and shares of common stock as
permitted under U.S. federal income tax laws governing REIT distribution requirements.

Cash Flows

Net cash provided by operating activities totaled $35,318 for the nine months ended September 30, 2009 compared to cash provided
by operating activities of $121,290 for same period in 2008, a decrease of $87,057. Operating cash flow is generated primarily by net interest income from our commercial real estate finance segment
and net rental income from our property investment segment. During the nine months ended September 30, 2009 compared to the same period in 2008, lower net investment income from our commercial
finance segment was offset by net rental income generated by our property investment segment. The decrease in operating cash flows for the nine months ended September 30, 2009 compared to the
same period in 2008 primarily reflects changes in working capital items, primarily tenant and other receivables and deferred revenue which include the impact of annual rent income received on the Dana
portfolio.

Net
cash provided by investing activities for the nine months ended September 30, 2009 was $73,749 compared to cash used in investing activities of $558,645 during the same period
in 2008, an increase in cash provided of $632,394. This increase in cash provided by investing activities primarily

88

---



Table of Contents

reflects
the impact of cash paid for the acquisition of American Financial of $586,900 and $108,199 of transaction costs during the nine months ended September 30, 2008. Other changes in cash
provided in investing activities reflect the impact of the sale of real estate assets and the origination and sale of loan assets.

Net
cash used in financing activities totaled $149,150 for the nine months ended September 30, 2009 compared to cash provided by financing activities of $239,424 in the nine
months ended September 30, 2008. The increase in cash used for financing activities primarily reflects the financing related to the American Financial acquisition, partially offset by the
repayment of mortgage notes and the deferral of the dividend payments.

Capitalization

Our authorized capital stock consists of 125,000,000 shares, $0.001 par value, of which we have authorized the issuance of up to
100,000,000 shares of common stock, $0.001 par value per share, and 25,000,000 shares of preferred stock, par value $0.001 per share. As of September 30, 2009, 49,859,322 shares of common stock
and 4,600,000 shares of preferred stock were issued and outstanding.

Preferred Stock

In April 2007, we issued 4,600,000 shares of our 8.125% Series A cumulative redeemable preferred stock (including the
underwriters' over-allotment option of 600,000 shares) with a mandatory liquidation preference of $25.00 per share. Holders of the Series A cumulative redeemable preferred shares
are entitled to annual dividends of $2.03125 per share on a quarterly basis and dividends are cumulative, subject to certain provisions. On or after April 18, 2012, we may at our option redeem
the Series A cumulative redeemable preferred stock at par for cash. Net proceeds (after deducting underwriting fees and expenses) from the offering were approximately $111,205. Beginning with
the fourth quarter of 2008, our board of directors elected not to pay the quarterly Series A preferred stock dividend of $0.50781 per share. As of September 30, 2009 and
December 31, 2008 we accrued preferred stock dividends of $9,317 and $2,325, respectively.

Common Stock

In April 2008, we issued approximately 15,634,854 shares of common stock in connection with the American Financial acquisition. These
shares had a value of approximately $378,672 on the date the merger agreement was executed. Also as a result of the American Financial acquisition, an affiliate of SL Green was granted 644,787 shares
of common stock for services rendered, subject to a one-year vesting period. These shares had a value of approximately $11,213 on the date of issuance. Subsequent to the issuance, SL Green
OP owned approximately 15.8% of the outstanding shares of our common stock.

In
December 2008, we entered into a letter agreement with the Manager and SL Green, pursuant to which the Manager agreed to pay $2,750 in cash and SL Green transferred to us,
1.9 million shares of our common stock, in full satisfaction of all potential obligations that the holders of the Class B limited partner interests may have had to our Operating
Partnership, and our Operating Partnership may have had to the holders, each in accordance with the amended operating partnership agreement of our Operating Partnership, in respect of the
recalculation of the distribution amount to the holders at the end of the 2008 calendar year. The shares of common stock were cancelled upon receipt by us. Subsequent to the letter agreement, SL Green
OP. owned approximately 12.5% of the outstanding shares of our common stock.

89

---



Table of Contents

Outperformance Plan

In June 2005, the compensation committee of the board of directors approved a long-term incentive compensation program, the
2005 Outperformance Plan. Participants in the 2005 Outperformance Plan, were to share in a "performance pool" if our total return to stockholders for the period from June 1, 2005 through
May 31, 2008 exceeded a cumulative total return to stockholders of 30% during the measurement period over a base share price of $20.21 per share. We recorded the expense of the LTIP Units of
our Operating Partnership, or the LTIP Units, award in accordance with GAAP. Compensation expense of $308 and $926 was recorded for the three and nine months ended September 30, 2008,
respectively, related to the 2005 Outperformance Plan. Based on our total return to stockholders as of the May 31, 2008 measurement period conclusion date, we did not meet the minimum 30%
return threshold and accordingly, the plan participants automatically forfeited the LTIP Units that they had been granted and the 2005 Outperformance Plan expired as of that date.

Deferred Stock Compensation Plan for Directors

Under our Independent Director's Deferral Program, which commenced April 2005, our independent directors may elect to defer up to 100%
of their annual retainer fee, chairman fees and meeting fees. Unless otherwise elected by a participant, fees deferred under the program shall be credited in the form of phantom stock units. The
phantom stock units are convertible into an equal number of shares of common stock upon such directors' termination of service from the Board of Directors or a change in control by us, as defined by
the program. Phantom stock units are credited to each independent director quarterly using the closing price of our common stock on the applicable dividend record date for the respective quarter. Each
participating independent director who elects to receive fees in the form of phantom stock units has the option to have their account credited for an equivalent amount of phantom stock units based on
the dividend rate for each quarter or have dividends paid in cash.

As
of September 30, 2009, there were approximately 247,961 phantom stock units outstanding, of which 235,961 units are vested.

Market Capitalization

At September 30, 2009, our CDOs and borrowings under our term loan, credit facility, repurchase facility, junior subordinated
notes, and mortgage loans (including the Goldman Mortgage and Senior and Junior Mezzanine Loans), represented 96% of our consolidated market capitalization of $5.4 billion (based on a common
stock price of $2.43 per share, the closing price of our common stock on the New York Stock Exchange on September 30, 2009). Market capitalization includes our consolidated debt and common and
preferred stock.

90

---



Table of Contents

Indebtedness

The table below summarizes secured and other debt at September 30, 2009 and December 31, 2008, including our junior
subordinated debentures and excluding debt related to assets held for sale:

September 30,
2009

December 31,
2008Mortgage notes payable

$
1,754,946

$
1,833,005Mezzanine notes payable


566,442


580,462Unsecured credit facility





172,301Term loan, credit facility and repurchase facility


48,881


95,897Collateralized debt obligations


2,608,230


2,608,065Junior subordinated notes


150,000


Junior subordinated debentures





150,000Total

$
5,128,499

$
5,439,730Cost of debt


LIBOR + 2.45
%

LIBOR + 2.54
%


Term Loan, Credit Facility and Repurchase Facility

The facility with Wachovia Capital Markets, LLC or one or more of its affiliates, or Wachovia, was initially established as a
$250,000 facility in 2004, and was subsequently increased to $500,000 effective April 2005. In July 2008, the original facility was terminated and a new credit facility was executed to provide for a
total credit availability of $215,680, comprised of a term loan equal to $115,680 and a revolving credit facility equal to $100,000 with a credit spread of 242.5 basis points (which would have been
increased to 267.5 basis points upon an extension of the maturity of the credit facility). The term of the credit facility was two years and the borrowers were able to extend the term for an
additional twelve-month period if certain conditions are met. Advance rates for assets acquired pursuant to the credit facility varied from 50% to 80% of purchase price, depending on the type and
structure of the asset. In April 2009, we entered into an amendment with Wachovia, pursuant to which the maturity date of the credit facility was extended to March 31, 2011 and the interest
rate remained unchanged. The amendment also eliminated all financial covenants, eliminated Wachovia's right to impose future margin calls, reduced the recourse guarantee to be no more than $10,000,
and eliminated cross default provisions with respect to the our other indebtedness. We made a $13,000 cash deposit and provided other credit support to backstop letters of credit Wachovia issued in
connection with our mortgage debt obligations of certain of our subsidiaries. We also agreed to attempt to divest of certain loan investments in the future in order to further deleverage the credit
facility and forego additional borrowing under the facility. Borrowings under the Wachovia Facility at September 30, 2009 and December 31, 2008 were secured by mezzanine loans with a
carrying value of $55,055 and $202,823, respectively. We had accrued no interest and borrowings of $44,542 at a weighted average spread to LIBOR of 1.68% as of September 30, 2009, and no
accrued interest and borrowings of $72,254 on the repurchase facility at a weighted average spread to LIBOR of 2.68% as of December 31, 2008.

The
Wachovia credit facility requires that borrowings under the facility be repaid as principal payments on the loans and investments pledged are received or as proceeds from the sale of
those investments are received.

Our
subsidiaries entered into a repurchase facility with Goldman Sachs Mortgage Company, or Goldman. In October 2006 this facility was increased from $200,000 to $400,000 and its
maturity date was extended until September 2009. In August 2008, the facility was amended to reduce the borrowing capacity to $200,000 and to provide for an extension of the maturity to December 2010,
for a fee, provided that no event of default has occurred. The facility bore interest at spreads of 2.00% to 2.30% over one-month LIBOR and provides for advance rates that vary from 65% to
75% based upon the

91

---



Table of Contents

collateral
provided under a borrowing base calculation. In April 2009, we entered into an amendment to the amended and restated master repurchase agreement and amended guaranty with Goldman, pursuant
to which all financial covenants in the amended and restated master repurchase agreement
and the amended guaranty were eliminated and certain other provisions of the amended and restated master repurchase agreement and the amended guaranty were amended or deleted, including, among other
things, the elimination of the existing recourse liability and a relaxation of certain affirmative and negative covenants. Borrowings under the Goldman Repurchase Facility at September 30, 2009
and December 31, 2008 were secured by mezzanine loans with a carrying value of $29,467 and $64,960, respectively. We had no accrued interest and borrowings of $4,339 at a weighted average
spread to LIBOR of 2.5% as of September 30, 2009, and no accrued interest and borrowings of $23,643 at a weighted average spread to LIBOR of 2.5% under this facility at December 31,
2008. On October 27, 2009, we repaid the borrowings in full and terminated the Goldman facility.

In
January 2009, we closed a master repurchase facility with JP Morgan Chase Bank, N.A. or JP Morgan, in the amount of $9,500. The term of the facility was through
July 23, 2010, the interest rate was 30-day LIBOR plus 175 basis points, the facility was recourse to us for 30% of this facility amount, and the facility was subject to normal
mark-to-market provisions after March 2009. Proceeds under the facility, which was fully drawn at closing, were used to retire certain borrowings under the Wachovia credit
facility. This facility was secured by a perfected security interest in a single debt investment. In March 2009, we terminated the JP Morgan master repurchase facility by making a cash payment
of approximately $1,880 pursuant to the recourse guarantee and transferring the full ownership and control of, and responsibility for, this related loan collateral to JP Morgan. We recorded an
impairment charge of $8,843 in connection with the collateral transfer.

Unsecured Credit Facility

In May 2006, we closed on a $100,000 senior unsecured revolving credit facility with KeyBank, with an initial term of three years and a
one-year extension option. In June 2007 the facility was increased to $175,000. The facility was supported by a negative pledge of an identified asset base. In March 2009, we entered into
an amendment and compromise agreement with KeyBank to settle and satisfy the loan obligations at a discount for a cash payment of $45,000 and a maximum amount of up to $15,000 from 50% of all payments
from distributions after May 2009 from certain junior tranches and preferred classes of securities under our CDOs. The remaining balance of $8,451 in potential cash distribution is recorded in other
liabilities on our balance sheet as of September 30, 2009. We recorded a gain on extinguishment of debt of $107,229 as a result of this agreement. We had accrued interest of $1,405 and
borrowings of $172,301 as of December 31, 2008.

Mortgage Loans

Certain real estate assets are subject to mortgage liens. As of September 30, 2009, 715 of our real estate assets were
encumbered with mortgage and mezzanine loans
with a cumulative outstanding balance of $2,356,093. Our mortgage notes payable typically require that specified loan-to-value and debt service coverage ratios be maintained
with respect to the financed properties before we can exercise certain rights under the loan agreements relating to such properties. If the specified criteria are not satisfied, in addition to other
conditions that we may have to observe, our ability to release properties from the financing may be restricted and the lender may be able to "trap" portfolio cash flow until the required ratios are
met on an ongoing basis.

On
June 30, 2009, First States Investors 225, LLC, our indirect wholly-owned subsidiary ("First States 225") executed a first amendment of note, deed of trust and other
loan documents (the "Amendment") with Wells Fargo Bank, N.A., as trustee under a pooling and servicing agreement. First States 225 is the borrower under a $52,601 mortgage loan secured by a
Class A high rise office tower located in St. Louis, Missouri, designated as held for sale. The Amendment extends the original

92

---



Table of Contents

maturity
of the mortgage from July 1, 2009 to January 1, 2010. In addition, the Amendment establishes a monthly principal reserve requirement of $90 and implements monthly financial and
operational reporting requirements. We paid a 50 basis point extension fee totaling $263 as well as lender's legal fees to secure the extension.

Goldman Mortgage Loan

On April 1, 2008, certain of our subsidiaries, collectively, the Goldman Loan Borrowers entered into a mortgage loan agreement,
the Goldman Mortgage Loan, with Goldman Sachs Commercial Mortgage Capital, L.P., or GSCMC, Citicorp North America, Inc., or Citicorp, and SL Green in connection with a mortgage loan in
the amount of $250,000, which is secured by certain properties owned or ground leased by the Goldman Loan Borrowers. The Goldman Mortgage Loan matures on March 9, 2010, with a single
one-year extension option. The terms of the Goldman Mortgage Loan were negotiated between the Goldman Borrower and GSCMC and Citicorp. The Goldman Mortgage Loan bore interest at 4.35% over
one-month LIBOR. The Goldman Mortgage Loan provides for customary events of default, the occurrence of which could result in an acceleration of all amounts payable under the Goldman
Mortgage Loan. The Goldman Mortgage Loan allows for prepayment under the terms of the agreement, subject to a 1.00% prepayment fee during the first six months, payable to the lender, as long as
simultaneously therewith a proportionate prepayment of the Goldman Mezzanine Loan (discussed below) shall also be made on such date. In August 2008, an amendment to the loan agreement was entered into
for the Goldman Mortgage Loan in conjunction with the bifurcation of the Goldman Mezzanine loan into two separate mezzanine loans. Under this loan agreement amendment, the Goldman Mortgage Loan bears
interest at 1.99% over LIBOR. We had accrued interest of $239 and borrowings of $241,324 as of September 30, 2009 and accrued interest of $367 and borrowings of $242,568 as of
December 31, 2008.

Secured Term Loan

On April 1, 2008 First States Group 3300 B, L.P., an indirect wholly-owned subsidiary of ours, or the PB Loan Borrower,
entered into a loan agreement, the PB Loan Agreement, with PB Capital Corporation, as agent for itself and other lenders, in connection with a secured term loan in the amount of $240,000 or the PB
Loan in part to refinance a portion of a portfolio of American Financial's properties known as the WBBD Portfolio. The PB Loan matures on April 1, 2013 and bears interest at 1.65% over
one-month LIBOR. The PB Loan is secured by mortgages on the 48 properties owned by the PB Loan Borrower and all other assets of the PB Loan Borrower. The PB Loan Agreement provides for
customary events of default, the occurrence of which could result in an acceleration of all amounts payable under the PB Loan Agreement. The PB Loan Borrower may prepay the PB Loan, in whole or in
part (in amounts equal to at least $1,000), on any date. We had accrued interest of $379 and borrowings of $238,103 as of September 30, 2009 and accrued interest of $657 and borrowings of
$240,000 as of December 31, 2008.

The
PB Loan requires us to enter into an interest rate protection agreement within five days of the tenth consecutive LIBOR banking day on which the strike rate exceeds 6.00% per annum.
The interest rate protection agreement must protect the PB Loan Borrower against upward fluctuations of interest rates in excess of 6.25% per annum.

Certain
of our mortgage notes payable related to assets held for sale contain provisions that require us to compensate the lender for the early repayment of the loan.

The
PB Loan Agreement contains certain semi-annual covenants relating to liquidity and tangible net worth. As of June 30, 2009 and December 31, 2008, the last
testing dates, we were in compliance with these covenants.

93

---



Table of Contents

Goldman Senior and Junior Mezzanine Loans

On April 1, 2008, certain of our subsidiaries, collectively, the Mezzanine Borrowers, entered into a mezzanine loan agreement
with GSCMC, Citicorp and SL Green in
connection with a mezzanine loan in the amount of $600,000, or the Goldman Mezzanine Loan, which is secured by pledges of certain equity interests owned by the Mezzanine Borrowers and any amounts
receivable by the Mezzanine Borrowers whether by way of distributions or other sources. The Goldman Mezzanine Loan matures on March 9, 2010, with a single one-year extension option.
The terms of the Goldman Mezzanine Loan were negotiated between the Mezzanine Borrowers and GSCMC and Citicorp. The Goldman Mezzanine Loan bore interest at 4.35% over one-month LIBOR. The
Goldman Mezzanine Loan provides for customary events of default, the occurrence of which could result in an acceleration of all amounts payable under the Goldman Mezzanine Loan. The Goldman Mezzanine
Loan allows for prepayment under the terms of the agreement, subject to a 1.00% prepayment fee during the first six months, payable to the lender, as long as simultaneously therewith a proportionate
prepayment of the Goldman Mortgage Loan shall also be made on such date. In addition, under certain circumstances the Goldman Mezzanine Loan is cross-defaulted with events of default under the Goldman
Mortgage Loan and with other mortgage loans, pursuant to which an indirect wholly-owned subsidiary of ours is the mortgagor. In August 2008, the $600,000 mezzanine loan was bifurcated into two
separate mezzanine loans (the Junior Mezzanine Loan and the Senior Mezzanine Loan) by the lenders. Additional loan agreement amendments were entered into for the Goldman Mezzanine Loan and Goldman
Mortgage Loan. Under these loan agreement amendments, the Junior Mezzanine Loan bears interest at 6.00% over LIBOR and the Senior Mezzanine Loan bears interest at 5.20% over LIBOR, and the Goldman
Mortgage Loan bears interest at 1.99% over LIBOR. The weighted average of these interest rate spreads is equal to the combined weighted average of the interest rates spreads on the initial loans. We
had accrued interest of $1,475 and borrowings of $566,442 as of September 30, 2009 and accrued interest of $1,821 and borrowings of $580,462 as of December 31, 2008.

Collateralized Debt Obligations

During 2005 we issued approximately $1,000,000 of CDO bonds through two indirect subsidiaries, Gramercy Real Estate CDO
2005-1 Ltd., or the 2005 Issuer, and Gramercy Real Estate CDO 2005-1 LLC, or the 2005 Co-Issuer. At issuance the CDO consisted of $810,500 of
investment grade notes, $84,500 of non-investment grade notes, which were co-issued by the 2005 Issuer and the 2005 Co-Issuer, and $105,000 of preferred shares,
which were issued by the 2005 Issuer. The investment grade notes were issued with floating rate coupons with a combined weighted average rate of three-month LIBOR plus 0.49%. We incurred approximately
$11,957 of costs related to Gramercy Real Estate CDO 2005-1, which are amortized on a level- yield basis over the average life of the CDO.

During
2006 we issued approximately $1,000,000 of CDO bonds through two newly-formed indirect subsidiaries, Gramercy Real Estate CDO 2006-1 Ltd., or the 2006 Issuer,
and Gramercy Real Estate CDO 2006-1 LLC, or the 2006 Co-Issuer. At issuance the CDO consisted of $903,750 of investment grade notes, $38,750 of
non-investment grade notes, which were co-issued by the 2006 Issuer and the 2006 Co-Issuer, and $57,500 of preferred shares, which were issued by the 2006 Issuer.
The investment grade notes were issued with floating rate coupons with a combined weighted average rate of three-month LIBOR plus 0.37%. We incurred approximately $11,364 of costs related to Gramercy
Real Estate CDO 2006-1, which are amortized on a level-yield basis over the average life of the CDO.

In
August 2007, we issued $1,100,000 of CDO bonds through two newly-formed indirect subsidiaries, Gramercy Real Estate CDO 2007-1 Ltd., or the 2007 Issuer and Gramercy
Real Estate CDO 2007-1 LLC, or the 2007 Co-Issuer. At issuance the CDO consisted of $1,045,550 of investment grade notes, $22,000 of non-investment grade
notes, which were co-issued by the 2007 Issuer and the 2007 Co-Issuer, and $32,450 of preferred shares, which were issued by the 2007 Issuer. The investment grade notes were
issued with floating rate coupons with a combined weighted average rate of three-

94

---



Table of Contents

month
LIBOR plus 0.46%. We incurred approximately $16,816 of costs related to Gramercy Real Estate CDO 2007-1, which are amortized on a level-yield basis over the average life of the CDO.

During
the three and nine months ended September 30, 2008, we repurchased, at a discount, CDO bonds with a par value of $21,000 and $72,300 respectively, of investment grade notes
previously issued by our CDOs. We recorded a net gain on the early extinguishment of debt of $11,681 and $33,378 for the three and nine months ended September 30, 2008, respectively, in
connection with the repurchase of such notes.

We
retained all non-investment grade securities, the preferred shares and the common shares in the Issuer of each CDO. The Issuers and Co-Issuers in each CDO
holds assets, consisting primarily of whole loans, subordinate interests in whole loans, mezzanine loans, preferred equity investments and CMBS, which serve as collateral for the CDO. Each CDO may be
replenished, pursuant to certain rating agency guidelines relating to credit quality and diversification, with substitute collateral for loans that are repaid during the first five years of the CDO.
Thereafter, the CDO securities will be retired in sequential order from senior-most to junior-most as loans are repaid. The financial statements of the Issuer of each CDO are
consolidated in our financial statements. The investment grade notes are treated as a secured financing, and are non-recourse to us. Proceeds from the sale of the investment grade notes
issued in each CDO were used to repay substantially all outstanding debt under our repurchase agreements and to fund additional investments. Loans and other investments are owned by the Issuers and
the Co-Issuers, serve as collateral for our CDO bonds, and the income generated from these investments is used to fund interest obligations of our CDO bonds and the remaining income, if
any, is retained by us. Our CDO bonds contain minimum interest coverage and asset over collateralization covenants that must be satisfied in order for us to receive cash flow on the interests retained
by us in our CDOs and to receive the subordinate collateral management fee earned. If we fail these covenants in some or all of our CDOs, all cash flows from the applicable CDO other than senior
collateral management fees would be diverted to repay principal and interest on the most senior outstanding CDO bonds and we may not receive some or all residual payments or the subordinate collateral
management fee until that CDO regained compliance with such tests. We were in compliance with all such covenants as of September 30, 2009 and December 31, 2008, however, our compliance
margin was narrow and relatively small declines in our performance and credit metrics could cause us to fall out of compliance.

Junior Subordinated Notes

In May 2005, August 2005 and January 2006, we completed issuances of $50,000 each in unsecured trust preferred securities through three
Delaware Statutory Trusts, or DSTs, Gramercy Capital Trust I, or GCTI, Gramercy Capital Trust II, or GCTII, and Gramercy Capital Trust III, or GCT III, that were also wholly-owned subsidiaries of our
Operating Partnership. The securities issued in May 2005 bore interest at a fixed rate of 7.57% for the first ten years ending June 2015 and the securities issued in August 2005 bore interest at a
fixed rate of 7.75% for the first ten years ending October 2015. Thereafter the rates were to float based on the three-month LIBOR plus 300 basis points. The securities issued in January 2006 bore
interest at a fixed rate of 7.65% for the first ten years ending January 2016, with an effective rate of 7.43% when giving effect to the swap arrangement previously entered into in contemplation of
this financing. Thereafter the rate was to float based on the three-month LIBOR plus 270 basis points.

In
January 2009, our Operating Partnership entered into an exchange agreement with the holders of the securities, pursuant to which we and the holders agreed to exchange all of the
previously issued trust preferred securities for newly issued unsecured junior subordinated notes, or our Junior Notes, in the aggregate principal amount of $150,000. Our Junior Notes will mature on
June 30, 2035, or the Maturity Date, and will bear (i) a fixed interest rate of 0.50% per annum for the period beginning on January 30, 2009 and ending on January 29, 2012
and (ii) a fixed interest rate of 7.50% per annum for

95

---



Table of Contents

the
period commencing on January 30, 2012 through and including the Maturity Date. We may redeem our Junior Notes in whole at any time, or in part from time to time, at a redemption price equal
to 100% of the principal amount of the Junior Notes. The optional redemption of our Junior Notes in part must be made in at least $25,000 increments. The Junior Notes also contain additional covenants
restricting, among other things, our ability to declare or pay any dividends during the calendar year 2009 (except to maintain our REIT qualification), or make any payment or redeem any debt
securities ranked pari passu or junior to the Junior Notes. In connection with the exchange agreement, the final payment on the trust preferred securities for the period October 30, 2008
through January 29, 2009 was revised to be at a reduced interest rate of 0.50% per annum. On October 15, 2009, a subsidiary of the Operating Partnership exchanged $97,500 of our Junior
Notes for $97,533 face amount of the bonds issued by our CDOs that we had repurchased in the open market. Certain indenture covenants restricting us from declaring or paying dividends and taking
certain other corporate actions during the 2009 calendar year have been eliminated for the remaining $52,500 of our Junior Notes.

Contractual Obligations

Combined aggregate principal maturities of our CDOs, Wachovia credit facility and term loan and Goldman repurchase facility, junior
subordinated notes, mortgage loans (including the Goldman Mortgage and Senior and Junior Mezzanine Loans), unfunded loan commitments, and operating leases as of September 30, 2009 are as
follows:

CDOs

Term Loan,
Credit Facility
and Repurchase
Facility

Junior
Subordinated
Notes

Mortgage
and
Mezzanine
Loans(1)

Unfunded
Loan
Commitments(2)

Interest
Payments

Operating
Leases

Total2009 (October 1
December 31)

$


$
4,339

$


$
7,412

$
7,000

$
49,388

$
4,768

$
72,9072010











896,511


20,624


166,182


19,197


1,102,5142011





44,542





25,220


10,667


164,119


19,027


263,5752012











80,407





154,623


18,583


253,6132013











621,190





134,794


18,457


774,441Thereafter


2,608,230





150,000


725,354





622,863


152,370


4,258,817Above/Below Market Interest











17,061











17,061Total

$
2,608,230

$
48,881

$
150,000

$
2,373,155

$
38,291

$
1,291,969

$
232,402

$
6,742,928


(1)As
of September 30, 2009, the mortgage and mezzanine loans' balances ranged in amount from approximately $421 to $472,562 and had maturity dates
ranging from three months to 14 years. As of September 30, 2009, 25 of the loans had fixed interest rates ranging 4.55% to 8.29% and four variable rate loans had interest rates ranging
from 1.91% to 6.25%.(2)Based
on loan budgets and estimates.


Lease Agreements

Our properties are leased and subleased to tenants under operating leases with expiration dates extending through the year 2027. These
leases generally contain rent increases and renewal options. As of September 30, 2009, we also leased bank branches and office buildings from third parties with expiration dates extending to
the year 2085 and have various ground leases with expiration dates extending through 2087. These lease obligations generally contain rent increases and renewal options.

96

---



Table of Contents

Future minimum rental payments under non-cancelable leases, excluding reimbursements for operating expenses, as of September 30, 2009 are as
follows:

2009 (October 1December 31)

$
63,0912010


243,0142011


205,1252012


189,1962013


177,6882014 and thereafter


1,321,448Total minimum lease payments

$
2,199,562


Off-Balance-Sheet Arrangements

We have several off-balance-sheet investments, including joint ventures and structured finance investments. These
investments all have varying ownership structures. Substantially all of our joint venture arrangements are accounted for under the equity method of accounting as we have the ability to exercise
significant influence, but not control over the operating and financial decisions of these joint venture arrangements. Our off-balance-sheet arrangements are discussed in Note 6,
"Investments in Unconsolidated Joint Ventures" in the accompanying financial statements.

Dividends

To maintain our qualification as a REIT, we must pay annual dividends to our stockholders of at least 90% of our REIT taxable income,
if any, determined before taking into consideration the dividends paid deduction and net capital gains. Before we pay any dividend, whether
for U.S. federal income tax purposes or otherwise, which would only be paid out of available cash to the extent permitted under our unsecured and secured credit and repurchase facilities, and our term
loans, we must first meet both our operating requirements and scheduled debt service on our mortgages and loans payable. We may elect to pay dividends on our common stock in cash or a combination of
cash and shares of common stock as permitted under U.S. federal income tax laws governing REIT distribution requirements.

Beginning
with the third quarter of 2008 our board of directors elected not to pay a dividend to common stockholders, which for the second quarter of 2008 was $0.63 per share. Our board
of directors also elected not to pay the Series A preferred stock dividend of $0.50781 per share beginning with the fourth quarter of 2008. As of September 30, 2009 and
December 31, 2008, we accrued $9,317 and $2,325 respectively, for preferred stock dividends. Covenants in our credit facility with Wachovia restrict our ability to declare or pay dividends on
our common and preferred stock other than as may be required to maintain REIT status.

Inflation

A majority of our assets and liabilities are interest rate sensitive in nature. As a result, interest rates and other factors influence
our performance more so than inflation. Changes in interest rates do not necessarily correlate with inflation rates or changes in inflation rates. Further, our financial statements are prepared in
accordance with GAAP and our distributions are determined by our board of directors based primarily on our net income as calculated for tax purposes, in each case, our activities and balance sheet are
measured with reference to historical costs or fair market value without considering inflation.

97

---



Table of Contents

Related Party Transactions

On April 24, 2009, in connection with the internalization, we and our Operating Partnership entered into that certain securities
transfer agreement with SL Green OP, GKK Manager Member Corp or Manager Corp. and SL Green, pursuant to which (i) SL Green OP and Manager Corp. agreed to transfer to our
Operating Partnership membership interests in the Manager and (ii) SL Green OP agreed to transfer to the Operating Partnership its Class B limited partner interests in the
Operating Partnership, in exchange for certain de minimis cash consideration. The securities
transfer agreement contains standard representations, warranties, covenants and indemnities. No distributions were due on the Class B limited partner interests for the period ended
September 30, 2009 or otherwise in connection with the internalization.

Concurrently
with the execution of the securities transfer agreement, we also entered into that certain special rights agreement with SL Green OP and SL Green, pursuant to
which SL Green and SL Green OP agreed to provide us certain management information systems services from April 24, 2009 through the date that is 90 days thereafter and we
agreed to pay SL Green OP a monthly cash fee of $25 in connection therewith. We also agreed to use our best efforts to operate as a REIT during each taxable year and to cause our tax counsel to
provide legal opinions to SL Green relating to our REIT status. Other than with respect to the transitional services provisions of the special rights agreement as set forth therein, the special
rights agreement will terminate when SL Green OP ceases to own at least 7.5% of the shares of our common stock.

In
connection with our initial public offering, we entered into a management agreement with the Manager, which was subsequently amended and restated in April 2006. The management
agreement was further amended in September 2007, and amended and restated in October 2008 and was subsequently terminated in connection with the internalization. The management agreement provided for
a term through December 2009 with automatic one-year extension options and was subject to certain termination rights. We paid the Manager an annual management fee equal to 1.75% of our
gross stockholders equity (as defined in the management agreement) inclusive of our trust preferred securities. In October 2008, we entered into the second amended and restated management agreement
with the Manager which generally contained the same terms and conditions as the amended and restated management agreement, as amended, except for the following material changes: (1) reduced the
annual base management fee to 1.50% of the our gross stockholders equity; (2) reduces the termination fee to an amount equal to the management fee earned by the Manager during the
12 months preceding the termination date; and (3) commencing July 2008, all fees in connection with collateral management agreements were to be remitted by the Manager. We incurred
expense to the Manager under this agreement of an aggregate of $0 and $7,787 for the three and nine months ended September 30, 2009, respectively, and $5,978 and $15,934 for the three and nine
months ended September 30, 2008, respectively.

Prior
to the internalization, to provide an incentive to enhance the value of the our common stock, the holders of the Class B limited partner interests of our Operating
Partnership were entitled to an incentive return equal to 25% of the amount by which FFO plus certain accounting gains and losses (as defined in the partnership agreement of our Operating Partnership)
exceed the product of the weighted average stockholders equity (as defined in the partnership agreement of our Operating Partnership) multiplied by 9.5% (divided by four to adjust for quarterly
calculations). We recorded any distributions on the Class B limited partner interests as an incentive distribution expense in the period when earned and when payments of such became probable
and reasonably estimable in accordance with the partnership agreement. In October 2008, we entered into a letter agreement with the Class B limited partners to waive the incentive distribution
that would have otherwise been earned for the period July 1, 2008 through December 31, 2008 and provided that starting January 1, 2009, the incentive distribution could have been
paid, at our option, in cash or shares of common stock. In December 2008, we entered into a letter agreement with the Manager and SL Green, pursuant to which the

98

---



Table of Contents

Manager
agreed to pay $2,750 in cash and SL Green transferred to us, 1.9 million shares of the our common stock, in full satisfaction of all potential obligations that the holders of the
Class B limited partner interests of the Operating Partnership may have had to the Operating Partnership, and the Operating Partnership may have to the holders, each in accordance with the
amended operating partnership agreement of the Operating Partnership, in respect of the recalculation of the distribution amount to the holders at the end of the 2008 calendar year. We incurred
approximately $0 and $5,100 with respect to such Class B limited partner interests for the three and nine months ended September 30, 2008, respectively.

Prior
to the internalization, we were obligated to reimburse the Manager for its costs incurred under an asset servicing agreement between the Manager and an affiliate of SL Green
OP and a separate outsource agreement between the Manager and SL Green OP. The asset servicing agreement, which was amended and restated in April 2006, provided for an annual fee payable to
SL Green OP by us of 0.05% of the book value of all credit tenant lease assets and non-investment grade bonds and 0.15% of the book value of all other assets. The outsource
agreement provided for an annual fee payable by us, which became $2,814 per year subsequent to the closing of the American Financial merger to reflect higher costs resulting from the increased size
and number of assets of the combined company, increasing 3% annually over the prior year on the anniversary date of the outsource agreement in August of each year. For the three and nine months ended
September 30, 2008, we realized expense of $697 and $1,721, to the Manager under the outsource agreement. For the three and nine months ended September 30, 2009, we realized expense of
$(617) and $868, respectively, to the Manager under the asset servicing agreement. For the three and nine months ended September 30, 2000, we realized expense of $1,350 and $4,022 to the
Manager under the asset servicing agreement. In October 2008, each of the asset servicing agreement and outsource agreement was terminated, effective as of September 30, 2008. In October 2008,
the outsource agreement was terminated and the asset servicing agreement was replaced with that certain interim asset servicing agreement between the Manager and an affiliate of SL Green,
pursuant to which we were obligated to reimburse the Manager for its costs incurred thereunder from October 2008 until April 24, 2009 when such agreement was terminated in connection with the
internalization. Pursuant to that agreement, the SL Green affiliate acted as the rated special servicer to our CDOs, for a fee equal to two basis points per year on the carrying value of the
specially serviced loans assigned to it. Concurrent with the internalization, the interim asset servicing agreement was terminated and the Manager entered into a special servicing agreement with an
affiliate of SL Green, pursuant to which the SL Green affiliate agreed to act as the rated special servicer to our CDOs for a period beginning on April 24, 2009 through the date
that is the
earlier of (i) 60 days thereafter and (ii) a date on which a new special servicing agreement is entered into between the Manager and a rated third-party special servicer. The
SL Green affiliate will be entitled to a servicing fee equal to (i) 25 basis points per year on the outstanding principal balance of assets with respect to certain specially serviced
assets and (ii) two basis points per year on the outstanding principal balance of assets with respect to certain other assets. The April 24, 2009 agreement was terminated effective
June 23, 2009; however, we previously entered into new special servicing arrangements with Situs Serve, L.P., which became the rated special servicer for our CDOs. An affiliate of
SL Green continues to provide special servicing services with respect to a limited number of loans owned by us that are secured by properties in New York City, or in which we and
SL Green are co-investors.

On
October 27, 2008, we entered into a services agreement with SL Green and SL Green OP which was subsequently terminated in connection with the internalization.
Pursuant to the services agreement, SL Green agreed to provide consulting and other services to us. SL Green would make Marc Holliday, Andrew Mathias and David Schonbraun available in
connection with the provision of the services until the earliest of (i) September 30, 2009, (ii) the termination of the management agreement or (iii) with respect to a
particular executive, the termination of any such executive's employment with SL Green. In consideration for the consulting services, we paid a fee to SL Green of

99

---



Table of Contents

$200
per month, payable, at its option, in cash or, if permissible under applicable law or the requirements of the exchange on which the shares of our common stock trade, shares of its common stock.
SL Green also provided us with certain other services described in the services agreement for a fee of $100 per month in cash and for a period terminating at the earlier of (i) three
months after the date of the services agreement, subject to a one-time 30-day extension, or (ii) the termination of the management agreement.

In
connection with the closing of our first CDO in July 2005, the 2005 Issuer, entered into a collateral management agreement with the Manager. Pursuant to the collateral management
agreement, the Manager has agreed to provide certain advisory and administrative services in relation to the collateral debt securities and other eligible investments securing the CDO notes. The
collateral management agreement provides for a senior collateral management fee, payable quarterly in accordance with the priority of payments as set forth in the indenture, equal to 0.15% per annum
of the net outstanding portfolio balance, and a subordinate collateral management fee, payable quarterly in accordance with the priority of payments as set forth in the indenture, equal to 0.25% per
annum of the net outstanding portfolio balance. Net outstanding portfolio balance is the sum of the (i) aggregate principal balance of the collateral debt securities, excluding defaulted
securities, (ii) aggregate principal balance of all principal proceeds held as cash and eligible investments in certain accounts, and (iii) with respect to the defaulted securities, the
calculation amount of such defaulted securities. As compensation for the performance of its obligations as collateral manager under our 2005 CDO, our board of directors had allocated to the Manager
the subordinate collateral management fee paid on the CDO notes not held by us. In October 2008, pursuant to the second amended and restated management agreement, the Manager had, commencing
July 1, 2008, agreed to remit this amount to us. At September 30, 2009, we owned all of the non-investment grade bonds, preferred equity and equity in the 2005 CDO. The
senior collateral management fee and balance of the subordinate collateral management fee is allocated to us. For the three and nine months ended September 30, 2008, we realized expense of $0
and $1,024, respectively, to the Manager under such collateral management agreement.

Prior
to the internalization, fees payable in connection with CDOs or other securitization vehicles, except for the 2005 CDO, were governed by the management agreement. Pursuant to the
management agreement, if a collateral manager is retained as part of the formation of a CDO or other securitization vehicle, the Manager or an affiliate will be the collateral manager and will receive
the following fees: (i) 0.25% per annum of the principal amount outstanding of bonds issued by a managed transitional CDO that are owned by third-party investors unaffiliated with us or the
Manager, which CDO is structured to own loans secured by transitional properties, (ii) 0.15% per annum of the book value of the principal amount outstanding of bonds issued by a managed
non-transitional CDO that are owned by third-party investors unaffiliated with us or the Manager, which CDOs structured to own loans secured by non-transitional properties,
(iii) 0.10% per annum of the principal amount outstanding of bonds issued by a static CDO that are owned by third-party investors unaffiliated with us or the Manager, which CDO is structured to
own non-investment grade bonds, and (iv) 0.05% per annum of the principal amount outstanding of bonds issued by a static CDO that are owned by third-party investors unaffiliated us
or the Manager, which CDO is structured to own investment grade bonds. For the purposes of the management agreement, a "managed transitional" CDO means a CDO that is actively managed, has a
reinvestment period and is structured to own debt collateral secured primarily by non-stabilized real estate assets that are expected to experience substantial net operating income growth,
and a "managed non-transitional" CDO means a CDO that is actively managed, has a reinvestment period and is structured to own debt collateral secured primarily by stabilized real estate
assets that are not expected to experience substantial net operating income growth. Both "managed transitional" and "managed non-transitional" CDOs may at any given time during the
reinvestment period of the respective vehicles invest in and own non-debt collateral (in limited quantity) as defined by the respective indentures. If any fees are paid to the collateral
manager in excess of the fee

100

---



Table of Contents

structure
provided for above, such fees are paid to us. In October 2008, pursuant to the second amended and restated management agreement, the Manager, commencing July 1, 2008, agreed to remit
this amount to us. For the three and nine months ended September 30, 2008, we realized expense of approximately $0 and $1,442 respectively, to the Manager under this agreement. With respect to
the CDO which closed in August, 2007, we realized expense to the Manager of $0 and $432 for the three and nine months ended September 30, 2008, respectively.

In
connection with the internalization, the management agreement was terminated and the fees payable in connection with our 2006 and 2007 CDOs will be governed by their respective
collateral management agreements. The collateral management agreement for our 2006 CDO provides for a senior collateral management fee, payable quarterly in accordance with the priority of payments as
set forth in the indenture, equal to 0.15% per annum of the net outstanding portfolio balance, and a subordinate collateral management fee, payable quarterly in accordance with the priority of
payments as set forth in the indenture, equal to 0.25% per annum of the net outstanding portfolio balance. Net outstanding portfolio balance is the sum of the (i) aggregate principal balance of
the collateral debt securities, excluding defaulted securities, (ii) aggregate principal balance of all principal proceeds held as cash and eligible investments in certain accounts, and
(iii) with respect to the defaulted securities, the calculation amount of such defaulted securities. The collateral management agreement for our 2007 CDO provides for a senior collateral
management fee, payable quarterly in accordance with the priority of payments as set forth in the indenture, equal to (i) 0.05% per annum of the aggregate principal
balance of the CMBS securities, (ii) 0.10% per annum of the aggregate principal balance of loans, preferred equity securities, cash and certain defaulted securities, and (iii) a
subordinate collateral management fee, payable quarterly in accordance with the priority of payments as set forth in the indenture, equal to 0.15% per annum of the aggregate principal balance of the
loans, preferred equity securities, cash and certain defaulted securities.

Commencing
in May 2005, we are party to a lease agreement with SLG Graybar Sublease LLC, an affiliate of SL Green, for our corporate offices at 420 Lexington Avenue, New
York, New York. The lease is for approximately 7,300 square feet and carries a term of 10 years with rents of approximately $249 per annum for year one rising to $315 per annum in year ten. In
May and June 2009, we amended our lease with SLG Graybar Sublease LLC to increase the leased premises by approximately 2,260 square feet. The additional premises is leased on a co-terminus
basis with the remainder of our leased premises and carries rents of approximately $103 per annum during the initial year and $123 per annum during the final lease year. For the three and nine months
ended September 30, 2009, we paid $30 and $315 under this lease, respectively. For the three and nine months ended September 30, 2008, we paid $118 and $247 under this lease,
respectively.

In
July 2005, we closed on the purchase from an SL Green affiliate of a $40,000 mezzanine loan which bears interest at 11.20%. As part of that sale, the seller retained an
interest-only participation. The mezzanine loan is secured by the equity interests in an office property in New York, New York. As of September 30, 2009 and December 31,
2008, the loan had a book value of $39,350 and $39,520, respectively.

In
March 2006, we closed on the purchase of a $25,000 mezzanine loan, which bears interest at one-month LIBOR plus 8.00%, to a joint venture in which SL Green is an
equity holder. The mezzanine loan was repaid in full on May 9, 2006, when we originated a $90,287 whole loan, which bears interest at one-month LIBOR plus 2.75%, to the joint
venture. The whole loan is secured by office and industrial properties in northern New Jersey and had a book value of $78,630 and $90,595 as of September 30, 2009 and December 31, 2008,
respectively.

In
June 2006, we closed on the acquisition of a 49.75% TIC interest in 55 Corporate Drive, located in Bridgewater, New Jersey with a 0.25% interest to be acquired in the future. The
remaining 50% of the property was owned as a TIC interest by an affiliate of SL Green OP. The property was

101

---



Table of Contents

comprised
of three buildings totaling approximately 670,000 square feet which was 100% net leased to an entity whose obligations were guaranteed by Sanofi-Aventis Group through April 2023. The
transaction was valued at $236,000 and was financed with a $190,000, 10-year, fixed-rate first mortgage loan. In January 2009, we and SL Green sold 100% of the
respective interests in 55 Corporate.

In
December 2006, we acquired from a financial institution a pari-passu interest of $125,000 in a $200,000 mezzanine loan, which bears interest at 6.384% and is secured by a
multi-family portfolio in New York, New York. An affiliate of SL Green simultaneously acquired the remaining $75,000 pari-passu interest in the mezzanine loan. As of
September 30, 2009 and December 31, 2008, the loan had a book value of $0 and $118,702, respectively.

In
January 2007, we originated two mezzanine loans totaling $200,000. The $150,000 loan was secured by a pledge of cash flow distributions and partial equity interests in a portfolio of
multi-family properties and bore interest at one-month LIBOR plus 6.00%. The $50,000 loan was initially secured by cash flow distributions and partial equity interests in an office
property. On March 8, 2007 the $50,000 loan was increased by $31,000 when the existing mortgage loan on the property was defeased, upon which event our loan became secured by a first mortgage
lien on the property and was reclassified as a whole loan. The whole loan currently bears interest at one-month LIBOR plus 6.00% for the initial funding and one-month LIBOR
plus 1.00% for the subsequent funding. At closing, an affiliate of SL Green acquired from us and held a 15.15% pari-passu interest in the mezzanine loan and the whole loan. As of
September 30, 2009 and December 31, 2008, our interest in the whole loan had a carrying value of $63,236 and $66,607, respectively. The investment in the mezzanine loan was repaid in
full in September 2007.

In
April 2007, we purchased for $103,200 a 45% TIC interest to acquire the fee interest in a parcel of land located at 2 Herald Square, located along 34th Street in
New York, New York. The acquisition was financed with a $86,063 10-year fixed rate mortgage loan. The property is subject to a long-term ground lease with an unaffiliated third
party for a term of 70 years. The remaining TIC interest is owned by a wholly-owned subsidiary of SL Green. The TIC interests are pari-passu. As of September 30, 2009
and December 31, 2008, the investment had a carrying value of $30,163 and $26,118, respectively. We recorded our pro rata share of net income of $1,237 and $3,750 for the three and nine months
ended September 30, 2009, respectively. We recorded its pro rata share of net income of $1,238 and $3,990 for the three and nine months ended September 30, 2008, respectively.

In
July 2007, we purchased for $144,240 an investment in a 45% TIC interest to acquire a 79% fee interest and 21% leasehold interest in the fee position in a parcel of land located at
885 Third Avenue, on which is situated The Lipstick Building. The transaction was financed with a $120,443 10-year fixed rate mortgage loan. The property is subject to a
70-year leasehold ground lease with an unaffiliated third party. The remaining TIC interest is owned by a wholly-owned subsidiary of SL Green. The TIC interests are pari passu. As
of September 30, 2009 and December 31, 2008, the investment had a carrying value of $43,558 and $37,070, respectively. We recorded our pro rata share of net income of $1,477 and $4,493
for the three and nine months ended September 30, 2009, respectively. We recorded our pro rata share of net income of $1,476 and $4,815 for the three and nine months ended September 30,
2008, respectively.

Our
agreements with SL Green in connection with our commercial property investments in 885 Third Avenue and Two Herald Square, contain a buy-sell provision that
can be triggered by us in the event it and SL Green are unable to agree upon a major decision that would materially impair the value of the assets. Such major decisions involve the sale or
refinancing of the assets, any extensions or modifications to the leases with the tenant therein or any material capital expenditures.

In
September 2007, we acquired a 50% interest in a $25,000 senior mezzanine loan from SL Green. Immediately thereafter we, along with SL Green, sold all of its interests in
the loan to an unaffiliated third party. Additionally, we acquired from SL Green a 100% interest in a $25,000 junior

102

---



Table of Contents

mezzanine
loan associated with the same properties as the preceding senior mezzanine loan. Immediately thereafter we participated 50% of its interest in the loan back to SL Green. As of
September 30, 2009 and December 31, 2008, the loan has a book value of $12,881 and $11,925, respectively. In October 2007, we acquired a 50% pari-passu interest in $57,795 of
two additional tranches in the senior mezzanine loan from an unaffiliated third party. At closing, an affiliate of SL Green simultaneously acquired the other 50% pari-passu interest
in the two tranches. As of September 30, 2009 and December 31, 2008 the loan had a book value of $12,881 and $28,026, respectively.

In
November 2007, we acquired from a syndicate comprised of financial institutions a $25,000 interest in a $100,000 junior mezzanine investment secured by a hotel portfolio and franchise
headquarters. An affiliate of SL Green simultaneously acquired and owns another $25,000 interest in the investment. The investment was purchased at a discount and bears interest at an effective
spread to one-month LIBOR of 9.50%. As of September 30, 2009 and December 31, 2008, the loan had a book value of $0 and $15,655, respectively.

In
December 2007, we acquired a $52,000 interest in a senior mezzanine loan from a financial institution. Immediately thereafter, we participated 50% of our interest in the loan to an
affiliate of SL Green. The investment, which is secured by an office building in New York, New York, was purchased at a discount and bears interest at an effective spread to
one-month LIBOR of 5.00%. In July 2009, we sold our remaining interest in the loan to an affiliate of SL Green for $16,120 pursuant to purchase rights established when the loan was
acquired. The loan was originally funded under our credit facility with Wachovia, as amended in April 2009. Accordingly, terms of the sale were subject to approval by Wachovia. The sale includes
contingent participation in future net proceeds from SL Green of up to $1,040 in excess of the purchase price upon their ultimate disposition of the loan. As of September 30, 2009 and
December 31, 2008, the loan had a book value of $0 and $24,599, respectively.

In
December 2007, we acquired a 50% interest in a $200,000 senior mezzanine loan from a financial institution. Immediately thereafter, we participated 50% of our interest in the loan to
an affiliate of SL Green. The investment was purchased at a discount and bears interest at an effective spread to one-month LIBOR of 6.50%. As of September 30, 2009 and
December 31, 2008, the loan had a book value of $28,198 and $46,488, respectively.

In
connection with the closing of the acquisition of American Financial, we, as part of a larger financing, received financing of $50,000 from SL Green, which is described more
fully in Note 8. An
affiliate SL Green was granted 644,787 shares of common stock for services rendered, subject to a one-year vesting period. These shares had a value of approximately $11,213 on the
date of issuance.

In
August 2008, we closed on the purchase from an SL Green affiliate of a $9,375 pari-passu participation interest in a $18,750 first mortgage. The loan is secured by
a retail shopping center located in Staten Island, New York. The investment bears interest at a fixed rate of 6.50%. As of September 30, 2009 and December 31, 2008, the loan had a book
value of $9,921 and $9,324, respectively.

In
September 2008, we closed on the purchase from an SL Green affiliate of a $30,000 interest in a $135,000 mezzanine loan. The loan is secured by the borrower's interests in a
retail condominium located New York, New York. The investment bears interest at an effective spread to one-month LIBOR of 10.00%. As of September 30, 2009 and December 31,
2008, the loan had a book value of $29,467 and $30,367, respectively.

Funds from Operations

We present FFO because we consider it an important supplemental measure of our operating performance and believe that it is frequently
used by securities analysts, investors and other interested

103

---



Table of Contents

parties
in the evaluation of REITS. We also use FFO as one of several criteria to determine performance-based incentive compensation for members of our senior management, which may be payable in cash
or equity awards. The revised White Paper on FFO approved by the Board of Governors of the National Association of Real Estate Investment Trusts, or NAREIT, in April 2002 defines FFO as net income
(loss) (computed in accordance with GAAP, inclusive of the impact of straight line rents), excluding gains (or losses) from items which are not a recurring part of our business, such as sales of
properties, plus real estate-related depreciation and amortization and after adjustments for unconsolidated partnerships and joint ventures. We consider gains and losses on the sales of debt
investments to be a normal part of our recurring operations and therefore include such gains and losses when arriving at FFO. FFO does not represent cash generated from operating activities in
accordance with GAAP and should not be considered as an alternative to net income (determined in accordance with GAAP), as an indication of our financial performance, or to cash flow from operating
activities (determined in accordance with GAAP) as a measure of our liquidity, nor is it entirely indicative of funds available to fund our cash needs, including our ability to make cash
distributions. Our calculation of FFO may be different from the calculation used by other companies and, therefore, comparability may be limited.

FFO
for the three and nine months ended September 30, 2009 and 2008 are as follows (in thousands, except per share data):

For the Three Months Ended

For the Nine Months EndedSeptember 30,
2009

September 30,
2008

September 30,
2009

September 30,
2008Net income (loss) available to common shareholders

$
(203,116
)
$
7,323

$
(428,549
)
$
40,518Add:Depreciation and amortization


29,328


25,677


92,456


55,988FFO adjustments for unconsolidated joint ventures


1,082


104


3,370


469Less:Non real estate depreciation and amortization


(2,450
)

(2,489
)

(8,098
)

(9,402
)Gain on sale of real estate


(3,020
)




(4,974
)

Funds from operations

$
(178,176
)
$
30,615

$
(345,795
)
$
87,573Funds from operations per sharebasis

$
(3.57
)
$
0.60

$
(6.94
)
$
1.92Funds from operations per sharediluted

$
(3.57
)
$
0.60

$
(6.94
)
$
1.91


Cautionary Note Regarding Forward-Looking Information

This report contains "forward-looking statements" within the meaning of Section 27A of the Securities Act and Section 21E
of the Securities Exchange Act of 1934, as amended, or the Exchange Act. You can identify forward-looking statements by the use of forward-looking expressions such as "may," "will," "should,"
"expect," "believe," "anticipate," "estimate," "intend," "plan," "project," "continue," or any negative or other variations on such expressions. Forward-looking statements include information
concerning possible or assumed future results of our operations, including any forecasts, projections, plans and objectives for future operations. Although we believe that our plans, intentions and
expectations as reflected in or suggested by those forward-looking statements are reasonable, we can give no assurance that the plans, intentions or expectations will be achieved. We have listed below
some important risks, uncertainties and contingencies which could cause our actual results, performance

104

---



Table of Contents

or
achievements to be materially different from the forward-looking statements we make in this report. These risks, uncertainties and contingencies include, but are not limited to, the
following:



105

---



Table of Contents



We
assume no obligation to update publicly any forward-looking statements, whether as a result of new information, future events, or otherwise. In evaluating forward-looking statements,
you should consider these risks and uncertainties, together with the other risks described from time-to-time in our reports and documents which are filed with the SEC, and you
should not place undue reliance on those statements.

The
risks included here are not exhaustive. Other sections of this report may include additional factors that could adversely affect our business and financial performance. Moreover, we
operate in a very competitive and rapidly changing environment. New risk factors emerge from time to time and it is not possible for management to predict all such risk factors, nor can it assess the
impact of all such risk factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking
statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results.

Recently Issued Accounting Pronouncements

In January 2009, the FASB issued clarification guidance on impairment of securities by removing the requirement to place exclusive
reliance on market participants' assumptions about future cash flows when evaluating an asset for other-than-temporary impairment. The standard now requires that assumptions
about future cash flows consider reasonable management judgment about the probability that the holder of an asset will be unable to collect all amounts due. The new guidance is effective for interim
and annual reporting periods ending after December 15, 2008. We have adopted the new guidance and it did not have a material impact on our consolidated financial statements.

In
April 2009, the FASB issued guidance that requires fair value disclosures to be included for interim reporting periods. We have adopted this new accounting standard effective
April 1, 2009. We have made the appropriate disclosures in the September 30, 2009 financial statements.

In
April 2009, the FASB issued guidance on other-than-temporary-impairments that amends the impairment guidance relating to certain debt securities and will
require a company to assess the likelihood of selling the security prior to recovering its cost basis. Additionally, when a company meets the criteria for impairment, the impairment charges related to
credit losses would be recognized in

106

---



Table of Contents

earnings,
while non-credit losses would be reflected in other comprehensive income. We adopted this standard effective April 1, 2009. Adoption of the new guidance did not have a
material impact on our consolidated financial statements.

In
April 2009, the FASB issued clarifying guidance on determining when the trading volume and activity for an asset or liability has significantly decreased, which may indicate an
inactive market, and on measuring the fair value of an asset or liability in inactive markets. We adopted this new accounting
standard effective April 1, 2009. Adoption of the new guidance did not have a material impact on our consolidated financial statements.

In
April 2009, the FASB issued guidance that requires that an acquirer to recognize at fair value, at the acquisition date, an asset acquired or a liability assumed in a business
combination that arises from a contingency if the acquisition-date fair value of the asset or liability can be determined during the measurement period. We adopted this new accounting
standard on January 1, 2009. Adoption of the new guidance did not have a material impact on the consolidated financial statements.

In
May 2009, the FASB issued new guidance that incorporates into authoritative accounting literature certain guidance that already existed within generally accepted auditing standards
relative to the reporting of subsequent events, with the requirements concerning recognition and disclosure of subsequent events remaining essentially unchanged. This guidance addresses events which
occur after the balance sheet date but before the issuance of financial statements. Under the new guidance, as under previous practice, an entity must record the effects of subsequent events that
provide evidence about conditions that existed at the balance sheet date and must disclose but not record the effects of subsequent events which provide evidence about conditions that did not exist at
the balance sheet date. This standard added an additional required disclosure relative to the date through which subsequent events have been evaluated and whether that is the date on which the
financial statements were issued. We adopted this standard effective beginning April 1, 2009. The additional disclosures required by this standard are included in Note 1.

In
June 2009, the FASB issued guidance amending the guidance on transfers of financial assets to, among other things, eliminate the qualifying special-purpose entity concept, include a
new unit of account definition that must be met for transfers of portions of financial assets to be eligible for sale accounting, clarify and change the derecognition criteria for a transfer to be
accounted for as a sale, and require significant additional disclosure. This standard is effective January 1, 2010. We are currently evaluating the impact of this standard.

In
June 2009, the FASB issued new guidance which revised the consolidation guidance for variable-interest entities. The modifications include the elimination of the exemption for
qualifying special purpose entities, a new approach for determining who should consolidate a variable-interest entity, and changes to when it is necessary to reassess who should consolidate a
variable-interest entity. This standard is effective January 1, 2010. We are currently evaluating the impact of this standard.

In
June 2009, the FASB issued guidance and approved the FASB Accounting Standards Codification (Codification) as the single source of authoritative nongovernmental
US GAAP. The Codification does not change current US GAAP, but is intended to simplify user access to all authoritative US GAAP by providing all the authoritative literature
related to a particular topic in one place. All existing accounting standard documents will be superseded and all other accounting literature not included in the Codification will be considered
non-authoritative. Codification is effective July 1, 2009 and requires future references to authoritative US GAAP to coincide with the appropriate section of the
Codification. Accordingly, this standard will not have an impact our consolidated results of operations or financial condition.

107

---





Table of Contents

ITEM 3.    Quantitative and Qualitative Disclosure About Market Risk

Market Risk

Market risk includes risks that arise from changes in interest rates, commodity prices, equity prices and other market changes that
affect market sensitive instruments. In pursuing our business plan, we expect that the primary market risks to which we will be exposed are real estate, interest rate, liquidity and credit risks.

During
2007 and continuing through 2009, the global capital markets experienced unprecedented volatility, resulting in dramatic changes in credit spreads, prices of financial assets,
liquidity and the availability and cost of debt and equity capital. The impact has been most severe in the single-family residential real estate mortgage markets in the United States, but has more
recently affected the commercial real estate debt markets in which we invest. In particular, subsequent to the issuance of our third CDO in August 2007, the commercial real estate securitization
markets have experienced severe declines in transaction activity, reductions in short-term and long-term liquidity, and widening credit spreads. We have historically relied on
the securitization markets as a source of efficient match-funded financing structures for our portfolio of commercial loans and CMBS investment portfolio. Currently, the new issue market for
structured finance transactions including commercial real estate CDOs is dormant. This capital markets environment has led to increased cost of funds and reduced availability of efficient debt
capital, factors which have caused us to reduce our investment activity. These conditions have also adversely impacted the ability of commercial property owners to service their debt and refinance
their loans as they mature, and for our tenants to service their leases.

Real Estate Risk

Commercial and multi-family property values and net operating income derived from such properties are subject to volatility and may be
affected adversely by a number of factors, including, but not limited to, national, regional and local economic conditions (which may be adversely affected by industry slowdowns and other factors),
local real estate conditions (such as an oversupply of retail, industrial, office or other commercial or multi-family space), changes or continued weakness in specific industry segments, construction
quality, age and design, demographic factors, retroactive changes to building or similar codes, and increases in operating expenses (such as energy costs). In the event net operating income decreases,
a borrower may have difficulty repaying our loans, which could result in losses to us. In addition, decreases in property values reduce the value of the collateral and the potential proceeds available
to a borrower to repay our loans, which could also cause us to suffer losses. Even when a property's net operating income is sufficient to cover the property's debt service at the time a loan is made,
there can be no assurance that this will continue in the future. We employ careful business selection, rigorous underwriting and credit approval processes and attentive asset management to mitigate
these risks. These same factors pose risks to the operating income we receive from our portfolio of real estate investments, the valuation of our portfolio of owned properties, and our ability to
refinance existing mortgage and mezzanine borrowings supported by the cash flow and value of our owned properties.

Interest Rate Risk

Interest rate risk is highly sensitive to many factors, including governmental monetary and tax policies, domestic and international
economic and political considerations and other factors beyond our control.

Our
operating results will depend in large part on differences between the income from our assets and our borrowing costs. Most of our commercial real estate finance assets and
borrowings are variable-rate instruments that we finance with variable rate debt. The objective of this strategy is to minimize the impact of interest rate changes on the spread between
the yield on our assets and our

108

---



Table of Contents

cost
of funds. We enter into hedging transactions with respect to all liabilities relating to fixed rate assets. If we were to finance fixed rate assets with variable rate debt and the benchmark for
our variable rate debt increased, our net income would decrease. Some of our loans are subject to various interest rate floors. As a result, if interest rates fall below the floor rates, the spread
between the yield on our assets and our cost of funds will increase, which will generally increase our returns. Because we generate income principally from the spread between the yields on our assets
and the cost of our borrowing and hedging activities, our net income will generally increase if LIBOR increases and decreases if LIBOR decreases, but this may not always be true in the future. A
hypothetical 100 basis point increase in interest rates along the entire interest rate curve for the three and nine months ended September 30, 2009 would have increased our interest cost by
approximately $19,249 offset by an increase in our investment income of approximately $13,149.

Our
exposure to interest rates will also be affected by our overall corporate leverage, which may vary depending on our mix of assets.

In
the event of a significant rising interest rate environment and/or economic downturn, delinquencies and defaults could increase and result in loan losses to us, which could adversely
affect our liquidity and operating results. Further, such delinquencies or defaults could have an adverse effect on the spreads between interest-earning assets and interest-bearing liabilities.

109

---



Table of Contents

ITEM 4.    CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange
Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure based closely on the definition of "disclosure controls and
procedures" in Rule 13a-15(e). Notwithstanding the foregoing, a control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that
it will detect or uncover failures within our company to disclose material information otherwise required to be set forth in our periodic reports. Also, we may have investments in certain
unconsolidated entities. As we do not control these entities, our disclosure controls and procedures with respect to such entities are necessarily substantially more limited than those we maintain
with respect to our consolidated subsidiaries.

As
of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive
Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon that evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting identified in connection with the evaluation of such internal
control that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

110

---





Table of Contents

PART II OTHER INFORMATION

ITEM 1.    LEGAL PROCEEDINGS

None

ITEM 1A.    RISK FACTORS

None

ITEM 2.    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None

ITEM 3.    DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None

ITEM 5.    OTHER INFORMATION

None

111

---





Table of Contents

ITEM 6.

Exhibit No.

Description3.1

Articles of Incorporation of the Company (incorporated by reference to Exhibit 3.1 of the Company's Amendment No. 5 to its Registration Statement on Form S-11/A (No. 333-114673), which was filed with
the Commission on July 26, 2004 and declared effective by the Commission on July 27, 2004).3.2

Amended and Restated Bylaws of the Company (incorporated by reference to Exhibit 3.2 of the Company's Current Report on Form 8-K which was filed with the Commission on December 14, 2007).3.3

Articles Supplementary designating the Company's 8.125% Series A Cumulative Redeemable Preferred Stock, liquidation preference $25.00 per share, par value $0.001 per share (incorporated by reference to
Exhibit 3.1 of the Company's Current Report on Form 8-K which was filed with the Commission on April 18, 2007).4.1

Form of specimen stock certificate evidencing the common stock of the Company, par value $.001 per share (incorporated by reference to Exhibit 4.1 of the Company's Current Report on Form 8-K which was filed
with the Commission on April 18, 2007).4.2

Form of stock certificate evidencing the 8.125% Series A Cumulative Redeemable Preferred Stock of the Company, liquidation preference $25.00 per share, par value $0.001 per share (incorporated by reference to
Exhibit 4.2 of the Company's Current Report on Form 8-K which was filed with the Commission on April 18, 2007).31.1

Certification by the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.31.2

Certification by the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.32.1

Certification by the Chief Executive Officer pursuant to 18 U.S.C. section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.32.2

Certification by the Chief Financial Officer pursuant to 18 U.S.C. section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.


112

---





Table of Contents

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.

GRAMERCY CAPITAL CORP.By:

/s/ JON W. CLARK Name: Jon W. Clark
Title:Chief Financial Officer


Dated:
November 9, 2009

113

---